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Participation in adaptive sports—sports that have been specifically adapted or created for persons with disabilities—has been recognized by experts as an important means of rehabilitation for people with physical and other disabilities, including veterans and members of the armed services. In 2008, federal law authorized VA to establish a grant program to fund adaptive sports for veterans and members of the armed services with disabilities. First operated using fiscal year 2010 funds, the program is authorized to support activities that will facilitate, encourage, and sustain participation in adaptive sports activities. Under the program, grants are made to qualifying organizations, referred to in the law as eligible entities, that will plan, develop, manage and implement programs to provide adaptive sports opportunities. To be eligible for a grant, an organization must be a non-federal entity with significant experience in managing a large-scale adaptive sports program. Such experience must be with programs that are either (1) affiliated with a National Paralympic Committee or a National Governing Body authorized to provide Paralympic sports, (2) an adaptive sports program of a National Governing Body that meets certain other requirements, or (3) an adaptive sports program in which at least 50 persons with disabilities participate or in which the participants with disabilities reside in at least five different congressional districts. Since fiscal year 2010, VA has allocated $8 million per year for the program. During the program’s first four fiscal years—2010 through 2013—the USOC served an intermediary role in program management, receiving grant funds from VA and sub-granting them to organizations that provided adaptive sports opportunities and events. In 2012, we reported on the program’s actual or planned activities in fiscal years 2010 to 2012, when USOC was involved. At that time, we found several shortcomings in program reporting and oversight practices. For example, we found that expenditure reporting practices for grantees were not consistent with federal internal control standards, and that VA was not performing on-site or remote monitoring to verify how funds were being used. In addition, we reported that in fiscal year 2011 $3.1 million of the $7.5 million annually provided by VA—about 40 percent—was absorbed by USOC for its operations, personnel, and administrative costs. We made several recommendations aimed at improving grantee reporting and encouraged VA to review implementation of USOC’s monitoring plan. VA’s implementation of the program substantially addresses these recommendations. As appropriate, we refer to these recommendations and related VA actions to address them later in this report. In December 2013, the program was reauthorized with a number of changes. The reauthorization eliminated USOC’s role and instead provides that VA can award grants to eligible entities. In addition, the law placed specific limits on grantees’ use of grant funds for administrative and personnel costs. For grants supporting adaptive sports opportunities taking place during fiscal year 2015, grantees can allocate no more than 7.5 percent to such costs; in fiscal year 2016 and thereafter, grantees will be limited to 5 percent. Law and regulation include other requirements for VA and grantees. For example, the adaptive sports program’s authorizing statute and regulations outline a number of criteria that guide grant application review and selection, including requirements that applicants clearly state the sports activities to be provided, clearly define program objectives, and describe the adequacy of their program management structure. In addition, applications must include detailed descriptions of any partnerships and the grant funds that will be provided to any partners; the anticipated personnel, travel, and administrative costs paid for with grant funding; and the performance metrics to be used to evaluate the effectiveness of the activities carried out with grant funds. VA grant programs are also subject to government-wide grants management requirements. In its first two years of awarding grants, VA has awarded grants near the end of the fiscal year for use by grantees to support activities to be carried out in the following fiscal year. For example, organizations that were awarded grants in fiscal year 2014 have used fiscal year 2014 funds to support adaptive sports activities during fiscal year 2015. Similarly, grantees will use grants awarded in fiscal year 2015 to support adaptive sports activities that will occur primarily during fiscal year 2016. Except where specifically noted, this report refers only to activities and events pertaining to grants awarded in fiscal year 2014. In fiscal year 2014, the first year VA was responsible for selecting eligible entities to receive grants under the adaptive sports grant program, VA officials reported challenges because of tight time frames to obtain and review grant applications and the lack of a standard application form tailored for the adaptive sports grant program. (See fig. 1 for a timeline of events.) Proposed program based in facts, good reasoning, sound judgment (20 points) Considerations: Likelihood of success in aiding rehabilitation; appropriateness of funding requested; measurability of objectives; benefits for disabled veterans. low risk and high potential return. For example, it sought to ensure that proposed activities were occurring in areas with a large population of veterans with disabilities. In some cases, some aspects of a proposal were accepted and others rejected to make the proposed grant amount smaller. At the end of this process, VA selected 69 applications to which the $8 million allocated for the program in fiscal year 2014 was awarded. Sufficiency of management structure (20 points) Considerations: Sufficient experience in providing activity; certification of key personnel; evidence of community outreach; clear description of infrastructure to support planned activities. Geographic coverage (15 points) Considerations: Cost-effective filling of adaptive sports needs in area; appropriate for region and potential participants. Conformance with VA program goals and objectives (15 points) Considerations: Proposed activities advance program goals, fall within spectrum of adaptive sports, and have positive impacts. Strength of program concept and objectives (10 points) Considerations: Concepts clearly linked to objectives; likely to benefit health of disabled veterans. VA officials told us that completing all tasks necessary to award the grants before the end of fiscal year 2014 was very challenging—in part because of the limited time frame and because managing the solicitation and selection of grant applicants was a new experience for the responsible VA unit. However, VA officials explained that the alternative would have been that no program activities would have been funded with fiscal year 2014 dollars. Officials told us that developing and publishing the interim final rule to govern the program within about 6 months required considerable effort. VA officials also told us that development and authorization of an application form tailored to the program was not possible within the deadlines they faced in fiscal year 2014. Instead they opted to use a standard federal grant applications form—SF-424— developed by OMB. Because law and regulation required the program’s grant applications to include information that the SF-424 forms are not designed to include—such as a description of the roles of any partner organization—VA required narrative attachments to this standard application form. These narratives varied greatly in length, detail, and format. According to one VA official, they ranged from about 7 pages to about 60 pages. Financial capability and value for funding (10 points) As a result, according to VA officials, the review and approval process for fiscal year 2014 was very labor-intensive, and VA officials said staff had to engage in extensive communications and negotiations with applicants. For example, VA officials told us they conducted extensive negotiations with some applicants regarding the cost and scope of their proposals, with the aim of controlling costs and maximizing the benefits that program funds would provide to participants. In addition, VA officials said that, despite repeated VA communication, some applicants did not understand the limitation on administrative expenses. Under this limitation, for activities taking place during fiscal year 2015, grantees could allocate no more than 7.5 percent of the grant amount to administrative expenses, including any costs associated with employees other than those who directly provided coaching and training for participants. This misunderstanding may have been unintentionally reinforced by the budget categories used in the standard federal application form, which do not distinguish between these two types of personnel costs. For example, the standard form includes a line for personnel expenses, but does not distinguish between costs attributable to coaching and instruction, and other types of personnel costs. Federal law, VA regulation, and grant management principles dictate that a number of requirements be followed during the application and selection process. For example, the program statute and VA regulations require that an applicant submit a detailed description of its financial controls, including methods to track expenditure of grant funds, that a grantee observe the applicable percent limit on administrative expenses, and that any partnerships be described, including the amount of funds that will be made available to each partner. Despite VA’s efforts to ensure completeness of grant applications, our review of 16 fiscal year 2014 grant files and other VA documentation found that in some cases aspects of grant applications were not well documented. For example, VA developed a standard checklist—the VA Administrative and Financial Review Questionnaire for Grantees— for applicants to attest to various aspects of their administrative and financial policies and procedures. While this checklist was not required, VA officials told us that they treated the satisfactory completion of this form as sufficient evidence that the grantee could adequately safeguard and account for grant funds. However, 3 of 16 grant files we reviewed contained neither this form nor any other documentation of the administrative and financial capabilities of the grantee. The forms of 3 others indicated that these grantees lacked certain administrative and financial policies and procedures. For example, one grantee indicated on its form that it did not have a written accounting manual or written policies and procedures for managing finances. Other aspects of some grantee applications were also limited. For example, 7 of the 16 grant applications we reviewed lacked clear documentation that the 7.5 percent limit on administrative expenses had been observed in proposed budgets. Similarly, we found that in 3 cases, full documentation of intended grantee partnerships was not clear. For example, one grantee’s application narrative referred to partners but did not specify the role of the partner organizations. As discussed in the next subsection, VA subsequently took action to keep instances of such documentation issues from recurring in future grant application and award processes. The fiscal year 2015 application process differed in significant ways from the fiscal year 2014 process. Importantly, VA developed a new application form tailored to the adaptive sports grant program. As summarized in table 1, our review indicates that this new form addresses the review difficulties and documentation limitations the program experienced in fiscal year 2014. For example, whereas the fiscal year 2014 application form did not require applicants to distinguish between the two types of personnel costs so as to meet the limit on total administrative costs, the new form does. Similarly, the new form requires that applicants explicitly identify partner organizations, including their locations and roles. In addition to the new form, other aspects of the fiscal year 2015 application process increased the likelihood that VA would receive more complete application packages and conduct a more efficient review. While applicants had 5 weeks to prepare and submit grant applications after publication of the Notice of Funding Availability in fiscal year 2014, in fiscal year 2015 they had 9 weeks. In fiscal year 2015 VA also required applicants to submit the Administrative and Financial Review Questionnaire, which was optional in fiscal year 2014 and which inquires about an applicant’s administrative and financial policies, procedures, accounting, and management of grants. Because VA was reviewing fiscal year 2015 grant applications at the time we were completing our audit work, we did not review the applications or accompanying documentation and cannot independently assess their quality compared to those submitted in fiscal year 2014. However, VA officials told us in July 2015 that the new application resulted in a much improved and more efficient application and review process. Specifically, the application form instructs applicants to provide required information or leave a visible blank, and so VA officials noted that the fiscal year 2015 applications have been more consistently complete and the rate of rejection of incomplete applications much lower. Also, they said VA’s review has been much less laborious in fiscal year 2015. Finally, according to VA, the new form facilitated a more comprehensive approach to comparing proposed budgets among the grant applications. VA’s approach to monitoring grantees, as outlined in VA grants management policy and an agency memorandum on monitoring techniques, includes regular grantee reporting, supplemented with monitoring through detailed site visits and desk audits of selected grantees. This approach is consistent with the Uniform Guidance, and is intended to help ensure that grantees are providing adaptive sports opportunities to veterans and service members, according to the terms of their grant agreements with VA. It is also intended to help ensure that VA grant funds are being managed according to federal requirements, as reflected in the grant agreements. In addition, grantee monitoring can provide VA with useful information to measure the grant program’s performance and for reporting to the Congress and the public. VA requires that all grantees submit quarterly and annual reports. VA reviews these reports to ensure that grantees are operating according to the terms of their grant agreements. While only annual reports are required under the program’s statute, VA requires grantees to report on performance quarterly because, according to VA officials, this helps to provide for more frequent monitoring of grantees. To ensure that grantees’ quarterly reports include consistent information in accordance with statutory and regulatory requirements, VA created a standard quarterly report template, adapted from a USOC template. As summarized in table 2, VA’s quarterly report template contains data required from grantees under VA’s program regulations. For each grant, VA customized the template to show the activities the grantee agreed to provide; and a budget showing the amount awarded, broken out into several categories. According to VA officials, they identified the activities and budget amounts by reviewing each grantee’s application. Grantees are expected to submit an updated report each quarter to VA. The quarterly report format is consistent with GAO’s 2012 recommendations, in that it (1) requires reporting of the expenditure of VA grant program funds, excluding funds from other sources; and (2) is formatted to provide consistent and non-duplicative reporting of activities and numbers of participants. Table 2 summarizes how VA translated the information required of grantees into the quarterly report format. As indicated in table 2, VA’s quarterly report template did not require grantees to provide all of the information required by program regulations. For example, VA program regulations require grantees to include in their reports detailed records of the time involved in providing adaptive sports activities through direct personal interaction with adaptive sports participants, such as coaching or instruction, versus time spent on other adaptive sports activities. However, during fiscal year 2015, VA did not require grantees to add this information to the quarterly reports. We pointed out this omission to VA staff, and in August 2015, they provided a draft revised quarterly report format, where grantees are to provide information on time spent providing direct instruction to participants. A VA official indicated that they intended to further revise the template so that it also required grantees to report staff time spent on matters other than direct personal interaction with participants, as required by regulations. They expected to complete the template revision before the start of fiscal year 2016. VA’s program regulations also require grantees to identify the locations of their adaptive sports activities. However, VA did not provide a specific place for grantees to report the locations of their activities. VA has revised its quarterly report format to have grantees identify locations of their activities. Improved information from grantees could help VA assess the extent of geographic coverage of adaptive sports opportunities. In addition to quarterly reporting by all grantees, VA’s grantee monitoring approach calls for monitoring of selected grantees through conducting site visits and desk audits, although the reporting format for the latter has not been established. A site visit involves a visit to a grantee’s offices to review financial and other records, a visit to a grantee’s adaptive sports event, or both. The reviewing official is to assess the extent to which the grantee is providing activities according to the grant agreement. Also, the reviewer is to assess the soundness of the grantee’s financial management of VA grant funds, as well as the grantee’s financial controls. To record the results of the assessments for use by VA program officials, the reviewer prepares a site visit report using a standard VA format. A desk audit (also known as a remote audit), according to VA officials, involves asking the grantee to provide documentation to support an assessment of grantee financial management issues that might be of concern. VA may, for example, ask to see receipts for equipment or transportation ticket purchases or ask for documentation of how the calculation of staff days spent on providing services is made. A VA official stated that desk audits will likely be tailored to the circumstances as appropriate. For both site visits and desk audits, VA employs a selective monitoring approach—based on risk—to help focus its limited resources on grantees at highest risk of failing to perform or mismanaging funds. Such an approach is consistent with our prior work, which found that risk-based monitoring can help agencies identify grantees that need additional attention; for example, using limited resources to visit higher-risk grantees. According to VA officials, one criterion for assessing risk is the awarded amount. Officials said that they tend to select grantees receiving less funding for desk audits, and grantees receiving more funding for site visits, because those receiving larger grants are at risk of losing more dollars in case of financial mismanagement. VA also said that they use information from application reviews, such as assessments of financial controls, and grantees’ previous experience providing adaptive sports programs, in deciding whether a desk audit or site visit is warranted. Another consideration is the scope of a grantee’s event. A VA official said that a site visit may be scheduled to a multi-sport event, such as one of the regional Valor Games, where a grantee may be collaborating with other adaptive sports providers, including other VA grantees. To economize on monitoring costs, VA uses geographic considerations as well. For example, VA officials said that a site visit may be planned if it would cover several grantees headquartered in the same area. Although VA officials provided us their policy on monitoring of grant funded activities, for most of fiscal year 2015 they did not have a written monitoring plan. Best practices in grants management suggest that risk- based monitoring helps agencies ensure adequate grantee financial management and performance. Also, planning is part of an agency’s internal control system, which helps program managers achieve desired results through effective stewardship of public resources, such as grant funds. For example, by documenting and using written criteria for determining which grantees need closer monitoring, VA could be better positioned to help prevent mismanagement of funds and poor program performance. We discussed this issue with VA staff earlier in our review, and in August 2015, they provided us with their draft monitoring plan. According to a VA official, VA expects to complete this plan early in fiscal year 2016. VA’s draft plan describes a monitoring approach consistent with VA grants management policy. However, the draft plan lacks certain elements, such as information on the number and frequency of site visits and desk audits. Promising practices in ensuring adequate grantee financial systems and proper use of grant funds include an agency reviewing a target number of grantees each year. For example, one agency requires reviews of 10 percent of all of its grantees each year as a mechanism to enhance grantee accountability. A grantee monitoring plan that addresses the number and frequency of reviews throughout the year can help VA ensure that it is monitoring grantees on an ongoing basis, to prevent, and promptly detect, misuse of grant funds. At the time of our review, VA was implementing two main methods of its monitoring approach—quarterly grantee reporting and VA site visits. Almost all of the grantees whose files we reviewed submitted their quarterly reports on time. For 13 of the 16 grants, the grantees submitted their first quarter fiscal year 2015 reports on time, and all submitted their second quarter reports on time. We found that, in general, the grantees provided the information VA requested. Also, in our review of the selected grantee files, we found evidence that VA reviewed the quarterly reports to ensure that grantees were operating according to the terms of their grant agreements with VA. For 6 of the first-quarter and 12 of the second-quarter reports we reviewed, we found that VA identified issues for follow up, and requested additional information from grantees. Table 3 describes examples of the types of issues VA identified in the quarterly reports we reviewed. We reviewed reports on the results of 8 VA site visits, covering 9 of its 69 grants, conducted from November 2014 through June 2015. Six of the 8 site visits occurred at grantees’ adaptive sports events; the remaining 2 visits occurred at grantees’ headquarters. As summarized in table 4, the reports identified several types of issues, although none of the issues reflected grantee noncompliance. In each of the 8 reports we reviewed, VA officials provided notes on how grantees operated their events and the financial management of VA grant funds. Several of the reports also made suggestions for improvements in these areas. Through July 2015, VA officials told us that the agency had not conducted any desk audits of fiscal year 2014 grantees. VA officials explained that at the start of fiscal year 2015, desk audits were intended to form a portion of the monitoring strategy, but they have been deferred due primarily to a large workload. In August 2015, a VA official stated that they had initiated a desk audit of one grantee. The 69 adaptive sports grants awarded by VA in fiscal year 2014 supported a wide range of activities, with cycling, boating, snow skiing, and archery among the most frequent (see fig. 2). Some grants were focused on activities in a single location and/or sport, while others planned to support a variety of sports events. For example, one grant targeted recreational rowing for veterans with disabilities in five locations across the country, while another grant aimed to provide a variety of physical fitness activities in one state. Another grantee committed to provide more than seven different sports for paralyzed veterans in more than 30 locations across the country. The activities supported by these 69 grants also targeted athletes with a range of disabilities (see table 5). A sport or an adaptation may be aimed at participants with a specific type of disability, or may be suitable for participants with a range of disabilities. To support these activities, grantees planned to spend grant funds in various budget categories. The largest categories for the 69 fiscal year 2014 grants were travel, including transportation, lodging, and subsistence for athletes, coaches, and other officials involved in meeting program objectives; operations, including such expenses as facility rentals and ski lift tickets; and supplies, including purchase of adaptive bicycles, watercraft, and bows and arrows (see fig. 3). Importantly, a total of about $459,000—about 5.7 percent of the total $8 million awarded— was budgeted as administrative costs. This included both normal administrative costs as well as personnel costs associated with grant activities but not attributable to time spent coaching or training participants. The amount was below the 7.5 percent statutory limit for activities carried out in fiscal year 2015. Participants, grantee officials, and coaches we interviewed generally said that adaptive sports activities are beneficial to veterans and service members in multiple ways (see table 6.) These benefits include improved family and social relationships, emotional health, levels of independence and life skills, and physical well-being. Several interviewees—including participants and grantee officials—said adaptive sports can have a transformative effect on a veteran with disabilities. One official said he sees disabled veterans who have been inactive for many years participate in adaptive sports, resulting in a significant life change. Another official said some veterans with disabilities get accustomed to being taken care of, which can amplify their disabilities. He recalled that at one sports clinic funded by the grant program, a blind veteran asked to be guided to another part of the sports facility and, after some good- natured ribbing by his teammates, was convinced he could navigate on his own. Several experts we spoke with stressed the importance of sustained involvement in adaptive sports as the key to long-term benefits. According to one adaptive sports expert familiar with the grant program, the important thing is whether or not the event helps fuel a persistent participation in the sport and thereby contributes to a balanced and active life. One of the grantees we visited considered the opportunity that applicants would have to continue their participation in a sport when selecting participants. A grantee official said that in reviewing applications from veterans and service members wishing to join an event, they consider the proximity of the applicant to ongoing programs offering the same adaptive sport. The aim is to ensure that veterans participating in the grant-funded event also stay involved in the sport for their ongoing well-being and health. VA officials agreed with this aim and said in the future they may consider grant applications, for example, that propose purchasing adaptive sports supplies and equipment to help benefit veterans over a number of years. Some grantee officials who we interviewed spoke of a high incidence of veteran no-shows at adaptive sports activities and events as an impediment to program success. At one of our site visits—a sports clinic in which 7 of 10 registered participants attended—an official said some veterans may cancel on short notice, which deprives other interested veterans from participating. In addition, the official was concerned that excessive no-shows may mean there are not enough athletes to form teams or hold an effective practice session. Another official said considerable time and money has been lost when veterans register but do not participate. The official said some no-shows are understandable, such as when a veteran’s plans are affected by a medical condition. Nonetheless, adaptive sports are about more than athletics and are aimed at strengthening “mind and heart” of participants as well, the official said. Some veterans can be victims of learned helplessness after they return from service, the official said, and goal-setting and an insistence on accountability can counter this. Another official said that while non- attendance of registered athletes at their high-profile summer sports camp is not a problem, it can be an issue at less prominent events, such as weeknight archery training sessions. Some grantees noted that asking participants to have a financial stake in an event could encourage attendance. For example, one official suggested that registrants pay a refundable deposit of perhaps $250 so that they have some “skin in the game” and event sponsors have greater assurance of their attendance. Another grantee official explained that in her organization’s experience, requiring an up-front financial commitment is effective. At a 2013 multi-sport event, about 35 of the registered athletes did not attend, resulting in a huge waste of federal funds and missed opportunities for other veterans, she said. To combat this, the organization required a credit card number from registrants for the 2014 event, and informed them they would be charged the cost of one-night’s lodging if they failed to attend without prior notice. Under this policy, she said, 82 of the 84 registrants—98 percent—took part. Another grantee official said that while requesting a deposit of some kind might have merit, it could also cause cash flow difficulties for some veterans. He said some participants in weeknight training sessions have a hard time paying public transit fare, so the additional cost of a refundable deposit might be a barrier to participation. VA officials confirmed that no-shows are a problem. They explained that while its regulations require that adaptive sports events supported by the grants be free of charge for eligible veterans, having strategies to incentivize attendance for those who register—such as charging for a first night’s hotel expenses—are permissible. They also said that they have provided informal guidance to some fiscal year 2014 grant recipients on ways to reduce no-show rates—typically this information has been shared with grantees sponsoring large scale events that involve travel. However, VA has not systematically gathered and disseminated permissible techniques for reducing no-show rates to all of its grantees. According to federal internal control standards, program management is responsible for identifying, analyzing, and responding to risks it faces in achieving program objectives. A systematic effort to gather and disseminate techniques to address the no-show issue would be consistent with this requirement. In fiscal year 2014, VA assumed responsibility for selecting and overseeing grantees under the adaptive sports grant program and, despite challenges, awarded 69 grants supporting a wide variety of adaptive sports opportunities for veterans and members of the armed services with disabilities. Our review indicates that through the first half of fiscal year 2015, grantees were substantially complying with reporting requirements and that site visits to selected grantees have identified opportunities for improvement. Further, VA is amending its quarterly reporting template so that it will require a report of staff time spent on direct personal interaction with participants, and time spent on other matters, as required by program regulations. However, VA’s draft monitoring plan does not include a regular schedule for site visits or desk audits, which risks the possibility that none will be performed in some years, or that they will be performed very late in the year. Promising practices in ensuring adequate grantee financial systems and proper use of grant funds include review of a certain number of grantees each year, and irregular scheduling risks the possibility that mismanagement or misuse of grant funds will not be promptly detected. Finally, a significant no-show factor means that program dollars may not be used to their fullest potential. VA officials are aware of this issue, and have taken some steps to address it. However, they have not systematically gathered or disseminated techniques to reduce the no- show rate. Further attention to this matter could better enable VA and grantees to serve as many eligible veterans as there are slots available in funded activities. To help ensure the best use of the VA Adaptive Sports Grant program funds, we recommend the Secretary of Veterans Affairs direct the Undersecretary for Public and Intergovernmental Affairs to take the following two actions: Revise the draft monitoring plan to include guidance on the number and frequency of annual site visits and desk audits. Systematically gather and disseminate, to all its grantees, techniques that can reduce the no-show rate at funded events. We provided a draft of this report to the Department of Veterans Affairs for review. We received formal written comments, which are reproduced in appendix II. VA concurred with our conclusions and both of our recommendations. With regard to the first recommendation, VA indicated that it had established a requirement that a minimum of 10 percent of grantees would be subject to site visits and/or desk audits each fiscal year. Regarding the second recommendation, VA stated that the agency plans to systematically gather and disseminate techniques from a variety of sources to reduce no-show rates. VA also provided several technical comments which we incorporated as appropriate. We are sending copies of this report to appropriate congressional committees, the Secretary of Veterans Affairs, the Assistant Secretary for Public and Intergovernmental Affairs, and other interested parties. In addition, this 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) 512-7215 or [email protected]. 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 found in appendix III. The objectives of this engagement were to determine (1) how the VA adaptive sports grant program selected grantees to provide adaptive sports programs and activities for veterans and service members with disabilities; (2) how VA monitors grantees’ use of funds; and (3) what programs and activities have been supported with fiscal year 2014 funds, and what is known about how veterans and service members with disabilities have benefited from these programs and activities. Our work was limited to program grants using fiscal year 2014 funds, which supported grantee activities that were to take place in fiscal year 2015. Because our audit work began and ended during VA’s first year of monitoring grantees, our work on VA’s grantee monitoring generally covered the first two quarters of fiscal year 2015—October 2014 through March 2015. We addressed the first objective in several steps. To determine how VA reviewed and selected fiscal year 2014 adaptive sports grant applications, we reviewed key VA documents—including relevant federal laws, program regulations, VA’s fiscal year 2014 Notice of Funding Availability, and application instructions—and interviewed VA officials. We also reviewed relevant grants management criteria, including VA’s agency- wide grants management policies, and best grants management practices that had been identified by members of the Domestic Working Group. Second, to determine how VA staff followed program policies and key criteria, we reviewed the files of 16 fiscal year 2014 grants and examined available documents such as the grant applications and proposals, proposed budgets, evidence of grantees’ financial and administrative capability, VA’s scoring of grantee proposals, and the grant agreement. We selected grants based on type of organization, amount of grant funding and geography. We selected grants to ensure that we obtained eight from national, four from regional and four from community- based organizations. We selected all grants valued at $250,000 or more—seven from national organizations, three from regional organizations. We then selected the remaining six sample grants randomly—one from a national organization, one from a regional organization, and all four from community-based organizations. Also, we ensured that selected grantees included representation of different geographic regions. Although this sample size does not allow us to project to the universe of the 69 fiscal year 2014 grants, it is nonetheless a substantial sample, representing $3.7 million, or 46 percent, of the $8 million granted in fiscal year 2014. In addition to our review of the 2014 application process, we reviewed relevant documents and interviewed VA officials regarding changes to the grant application and review process in fiscal year 2015. To address the second objective, we interviewed VA officials, reviewed relevant VA policy documents and relevant grant oversight criteria, and reviewed selected VA oversight documentation. Specifically, we reviewed VA’s standard quarterly report template to ensure it conformed to the reporting requirements contained in program regulations. We also reviewed the quarterly reports for the 16 grants selected as described in the preceding paragraph for the first two quarters of fiscal year 2015—the 3-month periods ending December 31, 2014 and March 31, 2015. We also identified issues that VA had raised with the quarterly reports and, in selected instances, followed up with VA on how its review comments were addressed. We also obtained and reviewed reports of 8 VA site visits that had been conducted by the end of June 2015. To address the third objective, we obtained data from VA on the types of sports events to be provided by each fiscal year 2014 grantee and interviewed VA program officials; USOC officials who had been involved in administering sub-grants prior to December 2013; and representatives of three veterans service organizations—Disabled American Veterans, The American Legion, and Veterans of Foreign Wars. We also obtained VA data on grantee budgets and proposed activities. We interviewed VA officials about this data and determined that it was sufficiently reliable for our purposes. To obtain further perspectives on the value of adaptive sports for veterans and service members, we attended three adaptive sports events funded through VA grants. We selected them in consultation with VA program officials. Specifically, we selected events that were occurring during our review and also considered regional diversity and travel considerations. The events selected, listed below, did not provide a representative sample of all VA-funded adaptive sports activities. February 2015 goalball camp conducted by the U.S. Association of Blind Athletes in Fort Wayne, Indiana; March 2015 archery camp conducted by the Rehabilitation Institute of Chicago, in Chicago, Illinois; and May 2015 multi-sport event conducted by Bridge II Sports in Chapel Hill and Durham, North Carolina. At each event, we interviewed event organizers, coaches and trainers and event participants; and observed the events. We also interviewed event organizers prior to or during their events. In addition to the contact named above, Brett Fallavollita (Assistant Director), Michael Hartnett (Analyst-in-Charge), Greg Whitney, and Nyree Ryder Tee made key contributions to this report. In addition, key support was provided by Susan Aschoff, James Bennett, Sheila McCoy, Walter Vance, and Craig Winslow. | VA's adaptive sports grant program distributes $8 million annually to organizations that provide sports activities for veterans and service members with disabilities. The U.S. Olympic Committee (USOC) played an intermediary role from fiscal year 2010, when the program was implemented, through 2013. USOC received funds from VA and subgranted them to selected grantees. VA is now responsible for selecting grantees and program administration. Congress included a provision in statute for GAO to review VA's program management. GAO reviewed (1) how VA selected grantees to provide activities for veterans and service members with disabilities; (2) how VA monitors grantees' use of funds; and (3) what programs and activities were supported with fiscal year 2014 funds, and what is known about its benefits. GAO reviewed a nongeneralizable sample of 16 of the 69 grant files accounting for about $3.7 million of the $8 million awarded in fiscal year 2014; and interviewed VA officials, as well as grantee officials and adaptive sports participants during site visits to adaptive sports events in three states, selected in part to ensure regional diversity. From December 2013 through September 2014, VA developed implementing regulations, announced availability of funding, and selected grantees—ultimately awarding 69 grants from a pool of 161 applications to receive funding under its adaptive sports grant program. VA selected grantees in three steps, including (1) eliminating non-qualifying applications, (2) scoring and ranking qualifying applications using nine criteria, such as strength of the proposed program concept, and (3) a final step that included, among other things, eliminating unnecessary costs from proposed budgets. VA officials said limited available time necessitated the use of a standard federal grant application form rather than one tailored for the program. Because the form did not include some information needed to assess applications—such as the roles of partner organizations—VA asked for narrative attachments. These attachments varied greatly in length and detail which VA officials said made their review quite labor intensive. In addition, some applications did not contain needed information. For example, 3 of the 16 grant files reviewed by GAO did not contain documentation of the grantee's financial management capabilities. VA customized its application form for fiscal year 2015, and VA officials said this led to a substantial improvement in the application process. VA developed a grant monitoring approach for fiscal year 2014 grants that relied on quarterly and annual reports from grantees (containing information on financial and sports activities), site visits, and remote auditing of selected grantees. In the sample of 16 grant files reviewed, GAO found grantees generally complied with VA's quarterly reporting requirements. VA has improved the quarterly report template so that it requests information on time spent on direct personal interaction with participants. Through June 2015, VA provided GAO with reports of 8 visits covering 9 of its 69 grants. However, VA did not initiate a remote audit until August 2015. The agency developed a draft grant monitoring plan in the fourth quarter of fiscal year 2015, but the plan does not specify the number or frequency of site visits and remote audits. This omission risks the possibility that none will be performed in some years, or performed very late in the year, thus missing an opportunity for prompt detection of the misuse of funds. The grants supported a variety of sports activities and afforded participant benefits such as socialization and improved personal independence, according to the participants, coaches, and grantee officials GAO interviewed. The 69 grantees in fiscal year 2014 planned activities that encompassed many different adaptive sports, with cycling, boating, and snow skiing among the most common. Overall, the allotment for administrative costs in grantees' budgets was about 5.7 percent of the total $8 million awarded in fiscal year 2014—below the statutory maximum of 7.5 percent. However, some grantee officials expressed concern about a significant no-show rate. VA officials confirmed that no-shows are a problem, and stated that they had shared information with some grantees about ways to reduce no-shows. However, they have not systematically gathered and disseminated such techniques to all grantees, which could promote higher attendance rates and maximum benefit of federal dollars. GAO recommends that VA (1) specify the number and frequency of annual site visits and remote audits, and (2) systematically identify and disseminate techniques for reducing no-shows. VA concurred with both recommendations. |
Oversight of contracts—which can refer to contract administration functions, quality assurance surveillance, corrective action, property administration, and past performance evaluation—ultimately rests with the contracting officer, who has the responsibility for ensuring that contractors meet the requirements as set forth in the contract. Frequently, however, contracting officers are not located in the contingency area or at the installations where the services are being provided. As a result, contracting officers appoint contract monitors who are responsible for monitoring contractor performance. For some contracts, such as LOGCAP or theaterwide service contracts like the Afghan trucking contract or some Afghan security guard contracts, contracting officers may delegate contract oversight to the Defense Contract Management Agency (DCMA) to monitor contractor performance. In Afghanistan, DCMA teams include administrative contracting officers, and quality assurance representatives, who ensure that the contractors perform work to the standards written in the contracts and oversee the CORs assigned to DCMA-administered contracts. The DCMA team also includes property administrators and subject matter experts who advise the agency on technical issues such as food service, electrical engineering, and fire safety. DCMA does not administer construction contracts because according to the head of DCMA in Afghanistan it lacks the technical expertise to manage these types of contracts. Generally, construction contracts in Afghanistan are administered by organizations like the Army Corps of Engineers, or they may be administered by the contracting officer assisted by a COR. If DCMA is not delegated responsibility for administrative oversight of a contract, the contracting officer who awarded the contract is responsible for the administration and oversight of the contract. These contracting officers, such as those from the CENTCOM Contracting Command, appoint CORs or contracting officer’s technical representatives to monitor contractor performance. CORs appointed by the CENTCOM contracting command and others are typically drawn from units receiving contractor- provided services. These individuals are not normally contracting specialists and serve as contract monitors as an additional duty. They cannot direct the contractor by making commitments or changes that affect price, quality, quantity, delivery, or other terms and conditions of the contract. Instead, they act as the eyes and ears of the contracting officer and serve as the liaison between the contractor, the contracting officer, and the unit receiving support or services. In Afghanistan, CORs who have been appointed as contracting officer’s representatives for contracts administered by DCMA report their oversight results to DCMA personnel. For contracts not administered by DCMA, CORs provide oversight information to the contracting officer, who may be located in Afghanistan or outside the theater of operations. In addition to their oversight responsibilities, CORs have been tasked with other duties such as developing statements of work, developing requirements approval paperwork and preparing funding documents. DOD has added new training for CORs serving in contingencies, but some gaps in training remain and not all of the required training is being conducted or completed. In Afghanistan, much of the day-to-day surveillance of contracted projects is done by CORs. The Federal Acquisition Regulation (FAR) requires that quality assurance, such as surveillance, be performed at such times and places as necessary to determine that the goods or services conform to contract requirements. DOD guidance requires CORs be trained and assigned prior to award of a contract. DOD training is intended to familiarize the COR with the duties and responsibilities of contract oversight and management. Contracting organizations such as CENTCOM Contracting Command require that personnel nominated to be CORs complete specific online training courses, as well as locally developed training and contract-specific training, before they can serve as CORs. DOD has taken some actions to improve the capability of CORs to provide management and oversight of contracts in contingency operations such as Afghanistan. These actions include developing a new COR training course, with a focus on contingency operations, and developing a COR certification program. Additionally, DOD has begun to emphasize the need for qualified CORs in military doctrine and other guidance with the publication of Joint Publication 4-10, Operational Contract Support and the Defense Contingency Contracting Representatives Officers Handbook and memoranda issued by the Deputy Secretary of Defense. However, our analysis of DOD’s COR training and interviews with CORs and contracting personnel from organizations like the regional contracting centers and the Defense Contract Management Agency indicated that some gaps and limitations continue to exist. According to personnel in Afghanistan, none of the required COR training provides enough specifics about contract management and oversight in Afghanistan. For example, the required training does not provide CORs with information regarding important issue areas like the Afghan First Program, which encourages an increased use of local personnel and vendors for goods and services as part of the U.S. counterinsurgency strategy, and working with private security contractors. Some CORs told us that they were unfamiliar with the challenges of working with Afghan contractors, and had believed that contracting with Afghan vendors would be similar to contracting with U.S vendors. However, some of the CORs and other contracting officials we interviewed said they found that providing oversight to Afghan contractors is more challenging than working with other vendors because Afghan vendors often did not meet the time lines established by the contract, did not provide the quality products and the services the units had anticipated, and did not necessarily have a working knowledge of English. For example, one COR told us during our visit in February 2011, that the unit was still waiting for barriers that they had contracted for in May 2010. While some of the barriers had been delivered, the unit had not received all of the barriers they required even though the contract delivery date had passed. Other CORs and contracting officials and contract management officials described similar situations where services were not provided as anticipated or not provided at all. As a result, items such as portable toilets, barriers, gates, water, and other items or services were not available at some locations when needed, raising concerns about security, readiness, and morale. Officials we spoke with noted similar problems with construction contracts awarded to Afghan contractors. For example, according to another COR, an Afghan contractor was awarded a $70,000 contract to build a latrine, shower, and shave unit. However, when the contractor was unable to satisfactorily complete the project, another contract was awarded for approximately $130,000 to bring the unit to usable condition. Similarly contracting officials provided documentation of other construction problems including, a latrine or shower facility built without drains, and a facility constructed in the wrong location, and facilities that were poorly constructed. Because of the nature and sensitivity of security contracts, CORs for private security contractor contracts have unique responsibilities. For example, CORs are responsible for compiling a monthly weapon’s discharge report and for ensuring contractor adherence to contractual obligations on topics such as civilian arming requirements, personnel reporting systems, property accountability and badging. According to a senior military officer with U.S. Forces Afghanistan’s private security contractor taskforce, because of gaps in training, CORs do not always understand the full scope of their responsibilities and so do not always ensure that a contractor is meeting all contract requirements. He noted that CORs do not always understand that they have the responsibility to ensure that the terms of the contract are met and therefore do not bring contractors’ performance issues to the contracting officer’s attention for resolution. As a result, DOD may pay contractors for poor performance and installations may not receive the level of security contracted. Further, we found that the training programs do not provide enough information on preparing statements of work or preparing documentation for acquisition review boards—two responsibilities that CORs are routinely tasked with. The Defense Contingency COR Handbook describes statements of work as specifying the basic top-level objectives of the acquisition as well as the detailed requirements of the government. The statement of work may provide the contractor with ‘how to” instructions to accomplish the required effort, and forms part of the basis for successful performance by the contractor. Well-written statements of work are needed to ensure that units get the services and goods needed in the required time frame. CORs we spoke to highlight the problems they encountered when preparing statements of work. For example, several CORs told us of instances when statements of work needed to be rewritten because the original statements of work did not include all required contractor actions, or because they included incorrect requirements. Military officials responsible for reviewing and approving requests for contract support told us that poorly written statements of work are a principal reason why units do not receive the contract support they require. In 2000 and 2004, we reported that poorly written statements of work can result in increased costs and in contractors providing services that do not meet the requirements of the customer. According to DOD, the acquisition review board—known in Afghanistan as the Joint Acquisition Review Board—reviews and recommends approval or disapproval of proposed acquisitions to ensure efficiency and cost effectiveness and so it is important that CORs understand and are able to complete the required documentation in order to obtain needed goods and services. Furthermore, in addition to required on-line training, CENTCOM Contracting Command guidance requires that contracting officers discuss with CORs their specific contract requirements and responsibilities after they have been nominated and before they have begun their duties. However, contracting officers we interviewed at regional contracting centers in Afghanistan said they are frequently unable to provide the required contract-specific training for CORs because they are busy awarding contracts. Without this follow-on training on the specific contract, the COR may not have a clear understanding of how to perform contract oversight or the full scope of their responsibilities. In contrast, DCMA is able to provide specific contract training and mentoring to its CORs because DCMA has quality assurance personnel who have been tasked with providing COR training and assistance. Although CORs are selected from a group of candidates who have completed the basic COR training, their technical expertise, or lack thereof is not always taken into consideration when they are appointed to oversee contracts. The Defense Contingency COR handbook indicates that CORs are responsible for determining whether products delivered or services rendered by the contractor conform to the requirements for the service or commodity covered under the contract. The COR handbook notes that personnel nominated as CORs should have expertise related to the requirements covered by the contract, and suggests that commanders should consider the technical qualifications and experience of an individual when nominating a COR. In addition, the CENTCOM Contracting Command requires that commanders identify the nominee’s qualifying experience. However, these requirements are not always taken into consideration when CORs are selected to oversee certain contracts. According to CORs and other personnel we interviewed in Afghanistan, CORs frequently lack the required technical skills to monitor contractor performance. For example, military personnel have been appointed to oversee construction contracts without the necessary engineering or construction experience, in part because their units lack personnel with those technical skills. While DCMA has subject matter experts in key areas such as fire safety available for CORs needing technical assistance, CORs for contracts written by the CENTCOM Contracting Command have no subject matter experts to turn to for assistance, particularly in the construction trades. As a result, according to officials there have been newly constructed buildings used by both U.S. and Afghan troops that had to be repaired or rebuilt before being used because the CORs providing the oversight were not able to adequately ensure proper construction. According to personnel we interviewed, this resulted in a waste of money as well as lower morale due to substandard facilities; and in an increased risk to bases and installations because required infrastructure such as guard towers, fire stations, and gates were lacking. Contracting officials from one regional contracting center told us that guard towers at a forward operating base were so poorly constructed that they were unsafe to occupy; they were subsequently torn down and reconstructed. According to a contracting officer, it is not uncommon for CORs to accept a portion of the contractor’s work only to find, at the project’s completion, that the construction was substandard. Similarly, officials told us that before the LOGCAP program will accept responsibility for maintenance of a facility not constructed by the LOGCAP contractor, the LOGCAP contractors are often required to repair or replace wiring or plumbing in buildings constructed by Afghan contractors to meet U.S. building codes. DOD continues to lacks a sufficient number of oversight personnel to oversee the numerous contracts and task orders used in Afghanistan. While there is no specific guidance on the number of contracts for which a COR can be responsible, the CENTCOM Contracting Command’s standard operating procedures for COR nomination requires that memoranda for COR nominations, signed by the unit commander, contain a statement verifying that the COR will have sufficient time to complete assigned tasks. Similarly, the Defense Contingency Contracting Officer Representative Handbook states that the requiring unit must allow adequate resources (time, products, equipment, and opportunity) for the COR to perform his or her COR functions. However, we found that CORs do not always have the time needed to complete their oversight responsibilities. While available data do not enable us to determine the precise number of contracts that require CORs, in fiscal year 2010 CENTCOM Contracting Command awarded over 10,000 contracts. According to contracting officials and CORS we interviewed in Afghanistan, some CORs are responsible for providing oversight to multiple contracts in addition to their primary military duty. For example, one COR we interviewed was responsible for more than a dozen construction projects. According to the COR, it was impossible to be at each construction site during key phases of the project, such as the wiring installation or plumbing, because these phases were occurring almost simultaneously at different locations. Consequently, according to officials, construction was completed without sufficient government oversight, and problems were not always identified until the buildings were completed. This often resulted in significant rework, at a cost to the U.S. taxpayer. In addition, in some cases units did not assign enough CORs to provide oversight. For example, we were told at one unit that they did not have a sufficient number of CORs to provide proper oversight of dining facilities. Although the unit was able to provide one COR for each dining facility, the dining facilities operate 24 hours a day, and ideally, enough CORs would have been assigned to provide contract oversight 24 hours a day. Army guidance requires that supervisory staff for dining facilities (military food advisors, food program manager, CORs, and contractors operations) check food for sanitation and safety at dining facilities at every meal period. Without verification that food is prepared in a safe manner, the health of military personnel, DOD civilians, contractors, and others could be put at risk, with the potential to impact ongoing operations. An underlying cause for the oversight issues discussed above is DOD’s inability to institutionalize operational contract support. Army officials stated that commanders, particularly those in combat units, still do not perceive contract management and oversight as warfighter tasks. As a result, units may not always use the tools available to help prepare for contract management operations in Afghanistan. For example, according to Army officials, personnel nominated as CORs are not always provided the opportunity to practice their COR roles during pre-deployment training events, despite Army guidance that requires the CORs to be exercised during these training events. Army CORs we interviewed in Afghanistan expressed their desire for more specific and in-depth training at their units’ predeployment training events. In addition, we and others have made recommendations to provide operational contract support predeployment training for commanders and senior leaders and DOD agreed with our recommendations. However, little or no operational contract support training for these personnel is available prior to deployment. As a result, commanders do not always understand their units’ roles and responsibilities to provide contract management and oversight. For example, some commanders and other personnel we interviewed questioned the idea that units should be responsible for contract oversight, and believe that contract oversight should be provided by other organizations. In response to continued congressional attention and concerns from DOD, USAID, and other agencies about actual and perceived corruption and its impact on U.S. and International Security Assistance Force activities in Afghanistan, several DOD and interagency (including USAID) efforts have been established to identify malign actors, encourage transparency, and prevent corruption. While our recent work has not directly addressed anti-corruption activities in Afghanistan, we can report that these efforts include the establishment of several interagency task forces. One of them is Task Force 2010, an interagency anticorruption task force that aims to provide commanders and civilian acquisition officials with an understanding of the flow of contract funds in Afghanistan in order to limit illicit and fraudulent access to those funds by criminal and insurgent groups. Another is the Afghan Threat Finance Cell, an interagency organization that aims to identify and disrupt the funding of criminal and insurgent organizations. In August 2010, DOD began to vet non-U.S. vendors in Afghanistan by establishing a vetting cell called the Vendor Vetting Reachback Cell (hereinafter referred to as the vetting cell). The purpose of this vetting process—which includes the examination of available background and intelligence information—is to reduce the possibility that insurgents or criminal groups could use U.S. contracting funds to finance their operations. The vetting cell is staffed by 18 contractor employees operating from CENTCOM headquarters and is supervised by DOD officials. The contract used to establish the vetting cell for Afghanistan was awarded in June 2010, and in August 2010 the cell began vetting non-U.S. vendors. Names of non-U.S. contractors who are seeking a contract award with DOD in Afghanistan are forwarded to the cell, and an initial assessment is made about the prospective vendor. Once an initial assessment is made by the cell about a non-U.S. vendor, a final determination is made by a DOD entity in Afghanistan as to whether to accept or reject the prospective vendor for the particular contract. However, some limitations exist in the vendor vetting process. According to the CENTCOM Contracting Command Acquisition Instruction, all awards of and options for contracts equal to or greater than $100,000 to all non-U.S. vendors in Afghanistan are subject to vetting by the vetting cell. Additionally, all information technology contracts in Afghanistan, regardless of dollar value, are subject to vetting. However, while the acquisition instruction does highly recommend that all vendors be submitted for vetting-which would include those with contracts under $100,000-it does not require that vendors with contracts below $100,000 be vetted. This presents a significant gap in the vetting requirements for non-U.S. vendors as nearly three-quarters of the new contracts awarded and options exercised for FY 2010 to non-U.S. vendors were valued at under $100,000. Additionally, currently, CENTCOM Contracting Command does not routinely vet subcontractor vendors, even though according to DOD officials, subcontractors do much of the work in Afghanistan. Also CENTCOM Contracting Command officials said that when the contract was established, it was with the intention of determining a non-U.S. vendor’s eligibility to be awarded a contract in Afghanistan prior to award. However, according to CENTCOM Contracting Command officials, when they began submitting names to the vendor vetting cell in 2010, the focus was on vendors who had already received contracts in order to address immediate corruption and illicit funding concerns. CENTCOM Contracting Command has not yet to determined how many of the remaining non-U.S. vendors that have already been awarded contracts valued above $100,000 will be vetted in the future, and at the same time, the number of vendors awarded contracts prior to vetting continues to grow as contracts continue to be awarded in Afghanistan by CENTCOM Contracting Command during fiscal year 2011. This may mean that the number of non-U.S. vendors who have not been vetted will continue to grow and further delayed by the fact that CENTCOM Contracting Command has also not established a timeline for when it will begin vetting vendors prior to award, nor have they developed an estimated number of prospective vendors that it anticipates vetting in the remainder of the fiscal year. Furthermore, the command does not use a formalized risk based approach to prioritize vetting needs. Officials from CENTCOM Contracting Command told us that they considered factors such as the risk, complexity, and nature of the contract to prioritize the first tranche of non-U.S. vendors sent to the cell for vetting, but they have no documentation identifying these considerations as a process. To address these vendor vetting limitations in Afghanistan, in our June 2011 report we made several recommendations to DOD. These recommendations included that CENTCOM Contracting Command consider formalizing a risk-based approach to enable the department to identify and vet the highest-risk vendors—including those vendors with contracts below the $100,000 threshold—as well as subcontractors, and to work with the vendor vetting cell to clearly identify the resources and personnel needed to meet the demand for vendor vetting in Afghanistan, using a risk-based approach. DOD concurred with our recommendations and in their response provided additional clarification about the limitations that currently exist on its resources, including limitations on expanding its joint manning document and the current mandate to reduce staff at CENTCOM. In January 2011, in order to counter potential risks of U.S. funds being diverted to support criminal or insurgent activity, USAID created a process for vetting prospective non-U.S. contract and assistance recipients (i.e., implementing partners) in Afghanistan. This process is similar to the one it has used in the West Bank and Gaza since 2006. This process was formalized in USAID’s May 2011 mission order, which established a vetting threshold of $150,000 and identified other risk factors, such as project location and type of contract or service being performed by the non-U.S. vendor or recipient. The mission order also established an Afghanistan Counter-Terrorism Team, which can review and adjust the risk factors as needed. USAID officials said that the agency’s vendor vetting process was still in the early stages, and that it is expected to be an iterative implementation process of which aspects could change—such as the vetting threshold and the expansion of vetting to other non-U.S. partners. In our June 2011 report we recommended that USAID consider formalizing a risk-based approach that would enable it to identify and vet the highest-risk vendors and partners, including those with contracts below the $150,000 threshold. We also recommended that in order to promote interagency collaboration so as to better ensure that vendors potentially posing a risk to U.S. forces are vetted, DOD and USAID should consider developing formalized procedures, such as an interagency agreement or memorandum of agreement, to ensure the continuity of communication of vetting results and to support intelligence information, so that other contracting activities may be informed by those results. USAID concurred with our recommendations and noted that the agency has already begun to implement corrective measures to ensure conformity with the GAO recommendations and adherence to various statutes, regulations, and executive orders pertaining to terrorism. As of May 2011, the State Department (State) was not vetting vendors in Afghanistan. As we reported in June 2011, State officials told us that currently many of their contracts are awarded to U.S. prime contractors, and that they award relatively few contracts to non-U.S. vendors. Nonetheless, our analysis of contract data shows that State does work with many non-U.S. vendors in Afghanistan, and embassy officials in Kabul told us they do not do any vetting or background checks on the vendors other than for the security risks posed by individual personnel with physical access to the embassy property or personnel. State has endorsed the Afghan First policy, which will likely result in increased contracting with Afghan vendors in the future, which will in turn increase the need to have procedures in place to prevent funds from being diverted to terrorist or insurgent groups. Given this potential increase in local contracting, and without a way to consider—after specific vendors are known to be candidates—the risk posed by funding non-U.S. vendors to perform particular activities in Afghanistan, the department may increasingly expose itself to contracting with malign actors. To help ensure that State resources are not diverted to insurgent or criminal groups, we recommended that State assess the need and develop possible options for vetting non-U.S. vendors—for example, these could include leveraging existing vendor vetting processes, such as USAID’s, or developing a unique process. State partially agreed with our recommendation, and in written comments noted that while it recognized the risk of U.S. funds under State’s management being diverted to terrorists or their supporters, there were significant legal concerns related to contracting law, competition requirements, and the conflict between open competition and the use of classified databases to vet contractors and grantees that have required analysis and discussion. We recognize these concerns and encourage State to continue to address these various issues should they develop and implement a vetting process. Although DOD, USAID, and State likely utilize many of the same vendors in Afghanistan, we found and reported in June 2011 that the agencies have not developed a formalized process to share vendor vetting information. Currently, DOD and USAID officials in Afghanistan have established informal communication, such as biweekly meetings, ongoing correspondence, and mutual participation in working groups. Further, DOD and USAID officials said that their vetting efforts are integrally related and are complementary to the work of the various interagency task forces, such as Task Force 2010 and the Afghan Threat Finance Cell, and that their mutual participation in these task forces contributes to interagency information sharing in general and vetting results in particular. However, a formal arrangement for sharing information such as would be included in a standard operating procedure or memorandum of agreement between DOD and USAID has not been developed for vetting efforts. In addition, though the U.S. Embassy also participates in various interagency task forces, such as Task Force 2010, there is no ongoing information sharing of vendor vetting results, either ad hoc or formally. According to CENTCOM Contracting Command officials, the command is in the process of developing a standard operating procedure for sharing the vendor vetting results specifically with USAID, but this document has not yet been completed. To promote interagency collaboration so as to better ensure that non-U.S. vendors potentially posing a risk to U.S. forces are vetted, we recommended that DOD, USAID, and State consider developing formalized procedures, such as an interagency agreement or memorandum of agreement, to ensure the continuity of communication of vetting results and to support intelligence information, so that other contracting activities may be informed by those results. DOD and USAID both concurred with our recommendation, but State did not comment on it. Since the beginning of our work on operational contract support in 1997, we have made numerous recommendations to DOD to help improve the oversight and management of contractors used to support contingency operations. Specifically, we have made recommendations in the areas of developing guidance, planning for contractors in future operations, tracking contractor personnel, providing sufficient numbers of oversight personnel, and training non acquisition personnel including CORs and other key leaders such as unit commanders and senior staff. DOD has implemented some—but not all—of these recommendations. DOD has taken some actions to address or partially address some of our previous recommendations regarding operational contract support, such as establishing a focal point to lead the department’s effort to improve contingency contractor management and oversight at deployed locations, issuing new guidance, incorporating operational contract support into professional military education, and beginning to assess its reliance on contractors. For instance, based on our work, in October 2006, the Deputy Under Secretary of Defense for Logistics and Materiel Readiness established the Office of the Assistant Deputy Under Secretary of Defense (Program Support) to act as a focal point for leading DOD’s efforts to improve contingency contractor management and oversight at deployed locations. Among the office’s accomplishments is the establishment of a community of practice for operational contract support comprising of subject matter experts from the Office of the Secretary of Defense, the Joint Staff, and the services. In March 2010, the office issued an Operational Contract Support Concept of Operations, and it has provided the geographic combatant commanders with operational contract support planners to assist them in meeting contract planning requirements. To provide additional assistance to deployed forces, the department and the Army introduced several handbooks and other guidance to improve contracting and contract management in deployed locations. For example in October 2008, the department issued Joint Publication 4-10, Operational Contract Support, which establishes doctrine and provides standardized guidance for, and information on, planning, conducting, and assessing operational contract support integration, contractor management functions, and contracting command and control organizational options in support of joint operations. Additionally, in 2003 we recommended that DOD develop training for commanders and other senior leaders who are deploying to contingencies and we recommended that CORs be trained prior to assuming their duties. DOD has partially implemented this recommendation; training is available for commanders and other senior leaders however these courses are not required prior to deployment. In 2006, we recommended that Operational Contract Support training be included in professional military education to ensure that military commanders and other senior leaders who may deploy to locations with contractor support have the knowledge and skills needed to effectively manage contractors. Both DOD and the Army have taken some actions to implement this recommendation. For example, the Army includes operational contract support topics in its intermediate leaders course and includes limited operational contract support familiarization in some but not all of its pre-command courses. DOD has established a program of instruction for use in senior leader professional military education but the instruction has yet to be incorporated in this level of professional military education. We have made several recommendations to improve contractor visibility in contingencies. While DOD, along with USAID and State, has implemented a system—the Synchronized Predeployment and Operational Tracker (SPOT)—to track information on its contractor personnel in Afghanistan and other countries, we have issued a series of reports that highlight shortcomings in the system’s implementation. The shortcomings are due, in part, to varying interpretations of which contractor personnel should be entered into the system. As a result, the information SPOT does not present an accurate picture of the total number of contractor personnel in Afghanistan. In October 2009, we recommended that DOD, State, and USAID develop a plan, to among other matters, ensure consistent criteria for entering information into SPOT and improve its reporting capabilities to track statutorily required contracting data and meet agency data needs. The agencies did not agree with our recommendation and when we reviewed the system a year later, we found that many of the issues our recommendation was intended to address had not been resolved. We are currently evaluating the status of SPOT’s implementations and the agencies’ efforts to improve SPOT. DOD and the services have taken some important steps to institutionalize OCS—for example, by issuing joint doctrine, including some training in professional military education, and establishing a vetting cell to vet non- U.S. vendors in Afghanistan, to minimize the risk of criminal groups using contracts to fund their operations but DOD’s efforts have not gone far enough. Our previous work has emphasized the need to institutionalize operational contract support within DOD and improved vetting processes for contractor personnel and vendors, as well as highlighting long- standing problems regarding oversight and management of contractors supporting deployed forces. Contract management, including contract oversight, remains on our high risk list in part because of DOD’s challenges in managing contracts used to support deployed forces. Since 2004, we have identified the need for a sufficient number of trained oversight personnel, including CORs, as challenge to effective contract management and oversight. While the department has improved contract management and oversight by adding training requirements for CORs, the current system of using CORs to provide contract management and oversight still has significant weaknesses. As a result, contract oversight and management issues are resulting in a waste of money and raises concerns about security, readiness, and morale. The Secretary of Defense recently called for a change in culture related to operational contract support and directed the joint staff to identify the resources and changes in doctrine and policy necessary to facilitate and improve the execution of operational contract support. This reexamination of culture, policies, and resources along with implementing solutions to the contract oversight problems identified by us and others should help DOD address its longstanding issues oversight issues. Madam Chairman, Ranking Member Portman, and members of the Subcommittee this concludes my statement. I would be happy to answer any questions you may have at this time. For further information on this testimony, please contact William Solis at (202) 512-8365 or [email protected]. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this statement are Carole Coffey, Assistant Director; Vincent Balloon, Natalya Barden, Tracy Burney, Carolynn Cavanaugh, Alfonso Garcia, Melissa Hermes, Christopher Miller, James Reynolds, Natasha Wilder and Sally Williamson. Michael Shaughnessy provided legal support, and Cheryl Weissman, Vernona Brevard, and Peter Anderson provided assistance in report preparation. 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. | The Departments of Defense (DOD) and State (State) and the United States Agency for International Development (USAID) have collectively obligated billions of dollars for contracts and assistance to support U.S. efforts in Afghanistan. The work of GAO and others has documented shortcomings in DOD's contract management and oversight, and its training of the non-acquisition workforce. Addressing these challenges can help DOD meet warfighter needs in a timely and costconscious manner; mitigate the risks of fraud, waste, and abuse; and minimize the operational risks associated with contractors. This testimony addresses the extent to which (1) DOD's Contracting Officer's Representatives (COR) are prepared for their roles and responsibilities and provide adequate contract oversight in Afghanistan; (2) DOD, State, and USAID vet non-U.S. firms for links to terrorist and insurgent groups in Afghanistan; and (3) DOD has implemented GAO's past recommendations. The testimony is based on GAO's recently published reports and testimonies on operational contract support, including a June 2011 report on vetting of non-U.S. vendors in Afghanistan, as well as providing preliminary observations as a result of ongoing audit work in Afghanistan. GAO's work included analyses of a wide range of agency documents, and interviews with defense officials including CORs, contracting officers, and contract management officials in the United States and Afghanistan. DOD has taken actions to better prepare CORs to conduct contract oversight and management in Afghanistan; however, CORs are not fully prepared for their roles and responsibilities to provide adequate oversight there. To improve the capability of CORs to provide contract management and oversight in contingencies, DOD has developed a new, contingency-focused COR training course, issued new guidance, and developed a COR certification program. Nonetheless, gaps in the training exist. For example, according to DOD personnel in Afghanistan, the required training does not provide CORs with enough specificity about contracting in Afghanistan, such as information about the Afghan First Program, which encourages an increased use of local goods and services, or working with private security contractors. Also, whether a COR has relevant technical expertise is not always considered prior to assigning an individual to oversee a contract, even though CORs have a significant role in determining if products or services provided by the contractor fulfill the contract's technical requirements. However, according to officials, some CORs appointed to oversee construction contracts have lacked necessary engineering or construction experience, in some cases resulting in newly constructed buildings that were to be used by U.S. or Afghan troops having to be repaired or rebuilt. According to CORs and commanders in Afghanistan, poor performance on construction contracts has resulted in money being wasted, substandard facilities, and an increased risk to bases. For example, contracting officials from one regional contracting center told GAO that construction of guard towers at a forward operating base was so poor that they were unsafe to occupy. DOD and USAID have both established processes to vet non-U.S. vendors in Afghanistan, but GAO has identified limitations; additionally, State has not yet developed a vendor vetting process. The purpose of DOD's vetting process begun in August 2010--which includes the examination of available background and intelligence information--is to reduce the possibility that insurgents or criminal groups could use U.S. contracting funds to finance their operations. Additionally, in January 2011 USAID also began to implement a process to vet prospective non-U.S. contract and assistance recipients (i.e., implementing partners) in Afghanistan. GAO made recommendations, such as to formalize their vetting processes, which, both agencies concurred with. For example, USAID signed a mission order in May 2011 codifying the details of its vetting process. As of May 2011, State had not developed a vendor vetting process for non-U.S. vendors in Afghanistan, though officials stated they are considering several options. GAO has made numerous recommendations in areas such as developing guidance, tracking contractor personnel, providing oversight personnel, and training, and DOD has made strides in addressing some of them. However, it has not fully implemented other previous recommendations, such as ensuring training for commanders and senior leaders and improvements to the contracting personnel tracking system in Afghanistan. |
Mr. Chairman and Members of the Subcommittee: I am pleased to be here today to discuss work we have done addressing management and program challenges at the Immigration and Naturalization Service (INS). These challenges have been related to INS’ strategic planning process, organizational structure, communications and coordination, financial management, and program implementation. For the most part, our testimony is based on products that we have issued on these matters since 1991. Attached to my statement is a bibliography of this work. INS’ mission involves carrying out two primary functions. One is an enforcement function that involves preventing aliens from entering the United States illegally and removing aliens who succeed in doing so. The other is a service function that involves providing services or benefits to facilitate entry, residence, employment, and naturalization of legal immigrants. To enable INS to better implement and enforce immigration laws, Congress significantly increased its resources during the past several years. For example, between fiscal years 1993 and 1998, the number of onboard staff at INS increased from about 19,000 to nearly 31,000. During the same period, INS’ budget more than doubled from $1.5 billion in fiscal year 1993 to about $3.8 billion in fiscal year 1998. Funding increases have continued in fiscal year 1999 with Congress providing over $3.9 billion. Earlier this year, we reported on management challenges and program risks in the Justice Department. Most of the challenges and risks that we identified were in INS. However, we noted that, in carrying out its responsibilities, INS has to contend with issues of foreign policy (e.g., U.S. readiness to provide asylum to political refugees); domestic policy (e.g., the tension between the need for cheap labor that immigrants have historically met and the protection of employment and working standards for U.S. citizens); and intergovernmental relations (e.g., between the federal government, which sets policy on immigration, and state and local governments, which largely bear its costs and consequences). (3) communications and coordination; and (4) financial management processes. In 1991, we reported that INS lacked a strategic plan and that past priority management processes were not successful. We also stated that past efforts to implement agencywide planning systems lacked sustained top management support, managers were not held accountable for achieving goals and objectives, and priorities were not used in planning for decisionmaking. Three years later, INS developed and issued a strategic plan to better focus its attention on key mission and operational priorities. The plan identified eight major strategic priorities, including such challenges as facilitating compliance with immigration laws, deterring unlawful migration, and reengineering INS work processes. In fiscal year 1995, INS implemented a priorities management process intended to facilitate the achievement of the strategic priorities identified in the plan. Specific annual goals related to strategic priorities were identified for special management attention, including the establishment of objectives, time frames, and performance measures. In fiscal year 1996, to further focus management attention on the most important goals, INS ranked the annual goals according to their priority. By assigning senior INS managers specific responsibility for achieving the annual priority goals, INS intended to establish better organizational and individual accountability. In 1997, we said that these efforts appeared to be consistent with the intent of the Government Performance and Results Act. However, we also concluded that, while INS’ initial steps in developing a strategic plan and management priorities had been positive, our past work at INS had indicated that, to be successful, such initiatives would require sustained management attention and commitment. INS’ 33 district directors and 21 Border Patrol chiefs were supervised by a single senior INS headquarters manager. In 1994, with the appointment of a new Commissioner, INS implemented an organizational structure intended to remedy at least two problems with the 1991 structure. First, the Commissioner thought the agency’s field performance was uneven and poorly coordinated. In particular, the headquarters operations office had an unrealistically large span of control because of its responsibility for overseeing the operations of 33 district offices and 21 Border Patrol sectors. Second, the Commissioner believed that program planning, review, and integration had suffered because the operations office was preoccupied with matters that should have been handled by field managers and therefore could not focus on program planning. To address these and other problems, the reorganization established Executive Associate Commissioner (EAC) positions for (1) policy and planning, (2) programs, (3) management, and (4) field operations. The EAC for Field Operations had overall responsibility for managing INS’ operational field activities through three regional directors, who were delegated budget and personnel authority over INS’ district directors and Border Patrol chiefs in their respective areas. In 1997, we reported that the reorganization had succeeded in shifting some management authority to officials closer to the field activities, and many INS managers that we interviewed perceived the reorganization as a positive step in providing oversight to the field units. However, the implementation of the headquarters reorganization also appeared to have created some uncertainty among INS managers and field staff about the relative roles and responsibilities of some of the EACs. This uncertainty had been amplified by internal questions about possible staffing imbalances among the offices. For example, we found that no analysis had been done to determine the appropriate number of staff needed for the office of programs, given the reassignment of some its new responsibilities to other offices. communications challenge involved uncertainty among INS managers about the roles and responsibilities of headquarters executives, which in turn caused uncertainty about proper channels of communication for obtaining policy guidance or implementing program initiatives. Headquarters’ efforts to resolve concerns about roles, responsibilities, and communication processes were not successful. For example, there was still confusion among field managers regarding roles and responsibilities, and inconsistent versions of guidance on naturalization procedures were distributed to field offices. INS did not intend to issue written guidance on appropriate communication channels and coordination methods between offices until it obtained a decision on how the agency would be restructured. Lack of up-to-date policies and procedures had also contributed to INS’ communications challenges. For example, at the time of our 1991 report, field manuals containing policies and procedures on how to implement immigration laws were out-of-date and had not been updated by the time of our 1997 report. As a result, INS employees were burdened with having to search for information on immigration laws or regulations in multiple sources, which sometimes resulted in their obtaining conflicting information. The lack of current manuals also led some field officers to create policy locally, thus compounding coordination difficulties. However, during the past 2 years, INS has published an administrative manual and established a timetable through January 2001 for issuing five field manuals. management systems. INS has taken action to address some of its financial management problems, including engaging a contractor to reconcile the fund balance differences with Treasury. With respect to INS’ financial management systems, the auditor reported that the systems (1) were not integrated, resulting in significant delays and burdensome reconciliation efforts; (2) had significant internal control weaknesses—including computer control problems—affecting the accuracy and reliability of financial information; and (3) limited, rather than enhanced, effective decisionmaking. In 1991, we reported that INS’ budget development process, which had evolved with weak controls over expenditures and revenues, significantly impeded INS management’s ability to address program weaknesses. In addition, we said that INS did not have fiscal accountability over its resources. Its outdated accounting systems, weak internal controls, and lack of management emphasis on financial management had contributed to this situation. As we reported again in 1993 and more recently in 1997,INS’ financial management systems’ weaknesses made it difficult for the agency to monitor the status of its budget and to make sound budgetary decisions. For example, in March 1995, INS’ budget office projected that the field offices would have about $115 million in surplus funds through the rest of the year. Upon subsequent input from INS’ field offices, it turned out that the field offices would experience a $5 million shortfall for the remainder of the year. Earlier this year, concerned that INS would incur a budget shortfall, the House Appropriations Committee asked that we examine INS’ fiscal condition for fiscal year 1999. Based on discussions with officials from INS, the Justice Department, and the Office of Management and Budget, and based on our analysis of INS budget documents, we concluded that INS was not experiencing an overall budget shortfall for fiscal year 1999.However, we noted that the hiring policy that INS followed in fiscal year 1998, and the reduced revenues from INS’ Examinations Fee revenues, contributed to reduced discretionary funding in fiscal year 1999. Cohen Act of 1996, to ensure that the new system did not automate outmoded, inefficient business processes. Instead of developing and implementing a risk management plan, as we had recommended, INS tasked its contractor with helping to ensure that risks associated with implementation of the new system would be identified and necessary steps taken to mitigate them. According to INS, it had an urgent need to replace its financial management system, which was over 19 years old and did not have the functionality needed for INS to efficiently manage and account for its resources, and INS believed that this was a prudent way to proceed. In addition to the long-standing management challenges that we identified, program implementation issues at INS have been of continuing concern. These issues have been related to INS’ efforts to (1) stem the flow of illegal aliens across the border, (2) identify and remove criminal aliens, (3) process applications for naturalization, (4) enforce immigration laws that pertain to the workplace, and (5) process aliens for expedited removal from the country. In 1993, we testified that INS was confronted with the challenge of preventing millions of aliens from entering the country illegally. Our prior work in this area had shown that INS had difficulty in removing illegal aliens once they entered the country and had limited space to detain aliens it apprehended. We concluded, therefore, that the key to controlling the illegal alien population was to prevent their initial entry. Consistent with the Attorney General’s strategy, in 1994, INS issued a national Border Patrol strategy intended to deter illegal entry between the ports of entry along the Southwest Border. In the strategy’s initial phase, the focus was on two sectors—San Diego and El Paso—that in 1993 accounted for the majority of apprehensions nationwide. In the second phase of the strategy, INS increased the resources it allocated to sectors in Tucson, Arizona, and south Texas. agents at the Southwest Border collectively spent on border enforcement activities did not increase between 1994 and 1997 as planned. Further, the Border Patrol had not determined the most appropriate mix of staffing and other resources needed for its sectors, as called for in the strategy. We also stated in our 1997 report that INS lacked data on several outcomes that the strategy was expected to achieve. For example, there were no data to indicate whether (1) illegal aliens were deterred from entering the United States, (2) there had been a decrease in attempted reentries by those who had been previously apprehended, and (3) the strategy had reduced border violence. We said that, despite the investment of billions of dollars in the strategy, INS had amassed only a partial picture of the effects of increased border control and did not know whether the investment was producing the intended results. Further, INS lacked a systematic and comprehensive evaluation plan to assess the strategy’s overall effectiveness. We noted also that developing such a plan would be in keeping with the principles embodied in the Results Act. In September 1998, INS contracted with independent research firms for an evaluation. In an update to our 1997 report, we noted that available data suggested that several anticipated interim effects of the strategy had occurred. For example, apprehensions of illegal aliens continued to shift from traditionally high entry points like San Diego and El Paso to other locations along the border, as resources were deployed. Also, southwest border ports of entry inspectors apprehended an increased number of persons attempting fraudulent entry, and there were reports of higher fees being charged by smugglers, which INS said indicated an increased difficulty in illegal border crossing. However, data were still not available on the overall impact of the strategy and how effective it has been in preventing and deterring illegal entry. work has shown that removing deportable criminal aliens from this country has been one of INS’ long-standing challenges. INS’ Institutional Hearing Program (IHP) is the Department of Justice’s main vehicle for placing aliens who are incarcerated in state and federal prisons into deportation proceedings so that they can be expeditiously deported upon release. In 1997, we reported on the 1995 performance results of the IHP, and more recently, in 1998, we reported on 1997 IHP results. In each year, for a 6-month period, we found that INS failed to identify nearly 2,000 potentially deportable criminal aliens before they completed their prison sentences. Hundreds of those criminal aliens were aggravated felons who, by law, should have been placed in removal proceedings while in prison and taken into INS custody upon release. Some of those aliens were subsequently rearrested for new crimes, including felonies. Even when INS determined that an alien was potentially deportable and should be placed in removal proceedings, INS did not complete the IHP for at least half of such cases in both 1995 and 1997. As a result, INS took many of the released criminal aliens into custody and completed the removal process for them after their prison release. As a result of its failure to complete the IHP before prison release, INS incurred about $37 million in avoidable detention costs in 1995 and about $40 million in 1997. INS took action on some, but not all of our 1997 recommendations to improve the IHP. For example, responding to our recommendation that INS give priority to aliens serving time for aggravated felonies, INS indicated that it should be screening all foreign-born inmates as they enter the prison systems. Therefore, INS took the position that it did not need to single out aggravated felons as a unique group. However, it remains unclear whether INS has the resources needed to screen everyone as they enter the prison system. INS has acknowledged and started to address the need for eliminating the backlog of cases that were not screened in previous years because aggravated felons could be part of the backlog. INS is authorized to charge user fees to recipients of certain INS services, such as the processing of an alien’s application. In 1991, we said that INS had a chronic problem with not processing applications for naturalization within its 4-month time frame. In our 1994 report on INS user fees, our analysis of INS’ workload in its four largest districts showed that it did not allocate its staff in proportion to its estimated workload. We said that about 80 percent of applicants could expect to wait 4 months or less for their applications to be processed. However, the expected waiting times for two of the four districts in our review exceeded 4 months; in New York and San Francisco, the waiting times for naturalization applications took 7 and 10 months, respectively. More recently, we reported that the number of applications was continuing to grow and that differences in production rates and processing times existed among field units in application processing. For example, our analyses of INS data for the 25-month period of June 1994 through June 1996 showed significant differences in the production rates for the five predominant types of applications processed by INS’ district offices and three predominant types of applications processed by its service centers. We also reported large differences in the projected processing times for the types of applications for which these data were readily available. While we did not directly determine the cause of the differences, we noted that differences in processing times mean that aliens in different INS districts have had to wait disparate amounts of time for their applications to be processed. We pointed out that the need to treat applicants fairly and use government resources efficiently makes both determining the causes of the production and timing differences and, if feasible, improving production and timeliness, important goals for INS. results of all requested fingerprint checks from the FBI, and the results were, therefore, not always available to examiners before the alien’s hearings. As a result, INS improperly naturalized citizens with felony convictions. In 1997, we testified that INS could still not assure itself and Congress that it was granting citizenship only to deserving applicants. In addition, a report to the Department of Justice by a consulting firm indicated that INS had not ensured that its field units were implementing internal control procedures issued by the INS Commissioner. INS has begun restructuring its naturalization process to address these problems. documents with increased security features, which it hoped would make it easier for employers to verify the documents’ authenticity. However, in addition to those INS documents, aliens can show employers various other less secure documents that authorize them to work. Therefore, unauthorized aliens seeking employment can circumvent the improved security features of INS documents by simply presenting fraudulent non- INS documents—such as counterfeit Social Security cards—to employers. Further, we reported that, since no verification system is foolproof, enforcing IRCA’s employer sanctions provisions would continue to be important. Since 1994, INS had devoted about 2 percent of its enforcement work years to its worksite enforcement program, which is designed to detect noncompliance with the law. INS completed about 6,500 investigations of employers in 1998—about 3 percent of the U.S. employers believed to have unauthorized workers on their payrolls. INS’ worksite enforcement program has infrequently imposed sanctions on employers. INS is in the process of changing its approach to worksite enforcement, but it is too soon to know how these changes will be implemented or to assess their impact on the hiring of unauthorized workers. The Illegal Immigration Reform and Immigrant Responsibility Act of 1996 included provisions establishing a new process for dealing with aliens who attempt to enter the United States by engaging in fraud or misrepresentation (e.g., falsely claiming to be a U.S. citizen or misrepresenting a material fact) or who arrive with fraudulent, improper, or no documents (e.g., visa or passport). Known as expedited removal, the new process gives INS officers, rather than immigration judges, the authority to formally order these aliens removed from the country. The process also limits the rights of aliens to appeal a removal order. Aliens who fear being persecuted or tortured if they are returned to their home country are to be granted a “credible fear” interview to determine if their claims of asylum have a significant possibility of succeeding. removal processes at five selected locations. For example, case file documentation indicated that supervisors reviewed the expedited removal orders in an estimated 80 to 100 percent of the cases at the five locations. Further, our report noted that INS had or was in the process of developing mechanisms to monitor the expedited removal procedures, including the credible fear determinations. Those mechanisms included creating an Expedited Removal Working Group to visit locations and address problems, creating a quality assurance team at headquarters to review selected credible fear files, and meeting with nongovernmental organizations to discuss issues and concerns. INS has made changes to its processes on the basis of concerns raised by these internal reviewers and outside organizations. Mr. Chairman, this completes my statement. I would be pleased to answer any questions that you or other members of the Subcommittee may have. For further information regarding this testimony, please contact Richard M. Stana at (202) 512-8777. Individuals making key contributions to this testimony included Evi Rezmovic and Brenda Rabinowitz. Illegal Aliens: Significant Obstacles to Reducing Unauthorized Alien Employment Exist (GAO/T-GGD-99-105, July 1, 1999). Illegal Immigration: Status of Southwest Border Strategy Implementation (GAO/GGD-99-44, May 19, 1999). Immigration Benefits: Applications for Adjustment of Status Under the Haitian Refugee Immigration Fairness Act of 1998 (GAO/GGD-99-92R, April 21, 1999). Illegal Aliens: Significant Obstacles to Reducing Unauthorized Alien Employment Exist (GAO/GGD-99-33, April 2, 1999). Drug Control: INS and Customs Can Do More To Prevent Drug-Related Employee Corruption (GAO/GGD-99-31, March 30, 1999). Visa Issuance: Issues Concerning the Religious Worker Visa Program (GAO/NSIAD-99-67, March 26, 1999). INS Budget: Overhiring and Decline in Revenues Have Created Fiscal Stress (GAO/T-GGD/AIMD-99-129, March 24, 1999). Major Management Challenges and Program Risks: Department of Justice (GAO/OCG-99-10, January 1, 1999). Criminal Aliens: INS’ Efforts to Remove Imprisoned Aliens Continue to Need Improvement (GAO/GGD-99-3, October 16, 1998). INS User Fee Revisions: INS Complied With Guidance but Could Make Improvements (GAO/GGD-98-197, September 28, 1998). H-2A Agricultural Guestworker Program: Experiences of Individual Vidalia Onion Growers (GAO/HEHS-98-236R, September 10, 1998). Immigration Statistics: Information Gaps, Quality Issues Limit Utility of Federal Data to Policymakers (GAO/GGD-98-164, July 31, 1998). Immigration Statistics: Guidance on Producing Information on the U.S. Resident Foreign-Born (GAO/GGD-98-155, July 22, 1998). Immigration Statistics: Status of the Implementation of National Academy of Sciences’ Recommendations (GAO/GGD-98-119, June 9, 1998). Assessment of Contractor’s Review of INS’ Analysis of a Random Sample of Recently Naturalized Aliens (GAO/GGD-98-131R, May 28, 1998). Illegal Aliens: Changes in the Process of Denying Aliens Entry Into the United States (GAO/GGD-98-81, March 31, 1998). Naturalized Aliens: Efforts to Determine if INS Improperly Naturalized Some Aliens (GAO/GGD-98-62, March 23, 1998). Retirement Eligibility of Customs and INS Employees on the Southwest Border (GAO/GGD-98-70R, March 13, 1998). Community Development: Changes in Nebraska’s and Iowa’s Counties With Large Meatpacking Plant Workforces (GAO/RCED-98-62, February 27, 1998). H-2A Agricultural Guestworker Program: Changes Could Improve Services to Employers and Better Protect Workers (GAO/HEHS-98-20, December 31, 1997). Illegal Immigration: Southwest Border Strategy Results Inconclusive; More Evaluation Needed (GAO/GGD-98-21, December 11, 1997). Customs and Border Patrol: Resources Needed for Reopening Rail Line From Mexico-U.S. Border Into the United States (GAO/GGD-98-20R, November 5, 1997). Combating Terrorism: Federal Agencies’ Efforts to Implement National Policy and Strategy (GAO/NSIAD-97-254, September 26, 1997). Illegal Immigration: Information on Illegal Immigrants and Automobile Insurance in California (GAO/GGD-97-172R, September 5, 1997). Higher Education: Verification Helps Prevent Student Aid Payments to Ineligible Noncitizens (GAO/HEHS-97-153, August 6, 1997). INS Management: Follow-up on Selected Problems (GAO/GGD-97-132, July 22, 1997). Immigration and Naturalization Service: Employment Verification Pilot Project (GAO/GGD-97-136R, July 17, 1997). Criminal Aliens: INS’ Efforts to Identify and Remove Imprisoned Aliens Need To Be Improved (GAO/T-GGD-97-154, July 15, 1997). INS Criminal Record Verification: Information on Process for Citizenship Applicants (GAO/GGD-97-118R, June 4, 1997). Alien Applications: Processing Differences Exist Among INS Field Units (GAO/GGD-97-47, May 20, 1997). State Department: Efforts to Reduce Visa Fraud (GAO/T-NSIAD-97-167, May 20, 1997). Naturalization of Aliens: INS Internal Controls (GAO/T-GGD-97-98, May 1, 1997). Naturalization of Aliens: Assessment of the Extent to Which Aliens Were Improperly Naturalized (GAO/T-GGD-97-51, March 5, 1997). Federal Law Enforcement: Investigative Authority and Personnel at 13 Agencies (GAO/GGD-96-154, September 30, 1996). Border Patrol: Staffing and Enforcement Activities (GAO/GGD-96-65, March 11, 1996). INS Investment Strategy (GAO/AIMD-96-26R, December 11, 1995). INS Border Crossing Cards (GAO/GGD-96-25R, November 29, 1995). Federal Law Enforcement: Information on Certain Agencies’ Criminal Investigative Personnel and Salary Costs (GAO/T-GGD-96-38, November 15, 1995). Law Enforcement Support Center: Name-Based Systems Limit Ability to Identify Arrested Aliens (GAO/AIMD-95-147, August 21, 1995). Illegal Aliens: National Net Cost Estimates Vary Widely (GAO/HEHS-95- 133, July 25, 1995). INS: Information on Aliens Applying for Permanent Resident Status (GAO/ GGD-95-162FS, June 8, 1995). Information Integrity: Using Technology to Determine Eligibility to Work and Receive Benefits (GAO/T-AIMD-95-99, March 7, 1995). Border Control: Revised Strategy Is Showing Some Positive Results (GAO/GGD-95-30, December 29, 1994). INS Fingerprinting of Aliens: Efforts to Ensure Authenticity of Aliens’ Fingerprints (GAO/GGD-95-40, December 22, 1994). INS: Management Problems and Program Issues (GAO/T-GGD-95-11, October 5, 1994). Employer Sanctions: Comments on H.R. 3362 - - Employer Sanctions Improvement Act (GAO/T-GGD-94-189, September 21, 1994). INS Drug Task Force Activities: Federal Agencies Supportive of INS Efforts (GAO/GGD-94-143, July 7, 1994). INS User Fees: INS Working to Improve Management of User Fee Accounts (GAO/GGD-94-101, April 12, 1994). INS’ EEO Progress in DC/LA (GAO/GGD-94-10R, October 5, 1993). Illegal Aliens: Despite Data Limitations, Current Methods Provide Better Population Estimates (GAO/PEMD-93-25, August 5, 1993). Assessing EEO Progress at INS (GAO/GGD-93-54R, July 15, 1993). Customs Service and INS: Dual Management Structure for Border Inspections Should Be Ended (GAO/GGD-93-111, June 30, 1993). INS Corrective Action (GAO/GGD-93-46R, June 16, 1993). Information on Black Employment at INS (GAO/GGD-93-44R, May 17, 1993). Border Patrol: Southwest Border Enforcement Affected by Mission Expansion and Budget (GAO/T-GGD-92-66, August 5, 1992). Immigration Control: Immigration Policies Affect INS Detention Efforts (GAO/GGD-92-85, June 25, 1992). Immigration and the Labor Market: Nonimmigrant Alien Workers in the United States (GAO/PEMD-92-17, April 28, 1992). Immigrants in Indiana: Northwest Indiana Compared to Other Parts of the State (GAO/GGD-92-32FS, January 10, 1992). U.S.-Mexico Trade: Concerns About the Adequacy of Border Infrastructure (GAO/NSIAD-91-228, May 16, 1991). Employee Drug Testing: Status of Federal Agencies’ Programs (GAO/GGD- 91-70, May 6, 1991). Border Patrol: Southwest Border Enforcement Affected by Mission Expansion and Budget (GAO/GGD-91-72BR, March 28, 1991). International Trade: Easing Foreign Visitors’ Arrivals at U.S. Airports (GAO/NSIAD-91-6, March 8, 1991). Financial Management: INS Lacks Accountability and Controls Over Its Resources (GAO/AFMD-91-20, January 24, 1991). Immigration Management: Strong Leadership and Management Reforms Needed to Address Serious Problems (GAO/GGD-91-28, January 23, 1991). Information Management: Immigration and Naturalization Service Lacks Ready Access to Essential Data (GAO/IMTEC-90-75, September 27, 1990). Immigration Services: INS Resources and Services in the Miami District (GAO/GGD-90-98, August 6, 1990). Criminal Aliens: Prison Deportation Hearings Include Opportunities to Contest Deportation (GAO/GGD-90-79, May 25, 1990). Immigration Reform: Employer Sanctions and the Question of Discrimination (GAO/GGD-90-62, March 29, 1990). Immigration Reform: Major Changes Likely Under S. 358 (GAO/PEMD-90-5, November 9, 1989). Immigration Control: Deporting and Excluding Aliens From the United States (GAO/GGD-90-18, October 26, 1989). 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 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 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. | Pursuant to a congressional request, GAO discussed the management and program challenges facing the Immigration and Naturalization Service (INS). GAO noted that: (1) GAO and others have identified management and program challenges that have troubled INS for years; (2) GAO's management reports in 1991 and 1997 and related reviews have indicated that urgent attention should be given to INS' management challenges; (3) GAO pointed out significant issues related to INS': (a) strategic planning process; (b) organizational structure; (c) communications and coordination; and (d) financial management processes; (4) specifically, GAO noted that INS': (a) strategic planning required sustained management attention and commitment; (b) reorganization had created some uncertainty about organizational roles and responsibilities; (c) internal communications and coordination were problematic, as evidenced by outdated policies and procedures on how to implement immigration laws; and (d) financial management processes were weak, including outdated accounting systems, weak internal controls, and a lack of management emphasis on financial management; (5) in addition to these management challenges, program implementation issues at INS have been the focus of much of GAO's work; (6) GAO's reports on these issues have been related to INS' efforts to: (a) stem the flow of illegal aliens across the Southwest Border; (b) identify and remove criminal aliens from the country; (c) process applications for naturalization; (d) enforce workplace immigration laws; and (e) process aliens for expedited removal; (7) GAO recognizes that addressing these management and program challenges can be difficult; (8) in carrying out its mission, INS has to contend with issues of foreign policy, domestic policy, and intergovernmental relations; and (9) sustained top-level management commitment and monitoring are necessary to ensure that these challenges are addressed appropriately. |
In 1988, the Congress enacted the Exon-Florio amendment to the Defense Production Act, which authorized the President to investigate the impact of foreign acquisitions of U.S. companies on national security and to suspend or prohibit acquisitions that might threaten national security. The President delegated this investigative authority to the Committee on Foreign Investment in the United States. The Committee is an interagency group that was established by executive order in 1975 to monitor the impact of and coordinate U.S. policy on foreign investment in the United States. The Committee is chaired by the Secretary of the Treasury, and its membership includes representatives from executive branch departments and the Executive Office of the President (see table 1). The President added the Department of Homeland Security to the Committee in 2003, reflecting an increased focus on domestic security in the aftermath of the September 11, 2001, terror attacks and subsequent global war on terror. In 1991, the Treasury Department issued regulations to implement Exon- Florio. As shown in figure 1, Exon-Florio and the regulations establish a four-step process for reviewing a foreign acquisition of a U.S. company: voluntary notice, 30-day review, 45-day investigation, and presidential decision. Notifying the Committee of an acquisition is not mandatory. However, any member agency is authorized to submit a notification of an acquisition if the companies have not done so. To date, no agency has submitted a notification of an acquisition. Instead, when a member agency becomes aware of an acquisition that may be subject to Exon-Florio, the agency informs Treasury, as Chair, and Committee staff contact the companies to encourage them to officially notify the Committee of the acquisition to begin a review. Committee officials noted that companies have an incentive to notify the Committee prior to completing the acquisition because Exon-Florio provides the President with the authority to order companies to divest completed acquisitions found to pose a threat to national security. Under Exon-Florio, after receiving notification of a proposed or completed acquisition, the Committee begins a 30-day review to determine whether the acquisition could pose a threat to national security. The Treasury Department, as Committee Chair, forwards the notification documentation to the lead office in each of the member agencies. Lead offices forward the information to other offices within their agency. For example, the Defense Technology Security Administration, the lead office for the Department of Defense, forwards notification to 12 other offices within the department. These other offices may also forward the notification, as appropriate. In one case, the point-of-contact in the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics, one of the initial 12 offices, forwarded the notification to four other offices within that organization. In most instances, the Committee completes its review within the 30 days. However, if the Committee is unable to complete its review within 30 days, the Committee may either allow the companies to withdraw the notification or initiate a 45-day investigation. If the Committee concludes a 45-day investigation, it is required to submit a report to the President containing its recommendations. If Committee members cannot agree on a recommendation, the regulations require that the report to the President include the differing views of all Committee members. Under Exon-Florio, the President has 15 days to decide whether to prohibit or suspend the proposed acquisition, order divestiture of a completed acquisition or take no action. The President may take action upon a determination that (1) there is credible evidence that leads the President to believe that a foreign controlling interest might take action that threatens to impair national security and (2) laws other than Exon- Florio and the International Emergency Economic Powers Act are inadequate or inappropriate to protect national security. Under the regulations, the President’s divestiture authority, however, cannot be exercised if (1) the Committee has informed the companies in writing that their acquisition was not subject to Exon-Florio or had previously decided to forego investigation or (2) the President has previously decided not to act on that specific acquisition under Exon-Florio. The Committee may reopen its review or investigation and revise its recommendation to the President if it determines that the companies omitted or provided false or misleading information. In some cases, the companies will decide not to proceed with the transaction because of concerns that a presidential decision would be unfavorable. However, the President has ordered divestiture in only one case. In 1990, the President ordered a Chinese aerospace company to divest its ownership of a U.S. aircraft parts manufacturer. Under the original Exon-Florio law, the President was obligated to report to the Congress on the circumstances surrounding a presidential decision only after prohibiting an acquisition. In response to concerns about the lack of transparency in the Committee’s process, in 1992 Congress passed the Byrd Amendment to Exon-Florio, requiring a report to the Congress if the President makes any decision regarding a proposed foreign acquisition. Companies can request to withdraw their notification at any time prior to the President announcing a decision. A Treasury official told us that the Committee generally grants withdrawal requests. After the Committee approves a withdrawal, any prior voluntary notices submitted no longer remain in effect. Any subsequent refiling by the parties is considered as a new, voluntary notice to the Committee. The manner in which the Committee implements Exon-Florio may limit its effectiveness because (1) Treasury, in its role as Chair, has narrowly defined what constitutes a threat to national security and (2) the Committee is reluctant to initiate a 45-day investigation because of a perceived negative impact on foreign investment and a conflict with the U.S. open investment policy. As a result of the narrow definition, some issues that Defense, Homeland Security, and Justice officials believe have important national security implications, such as security of supply, may not be addressed. In addition, the reluctance to initiate the 45-day investigation compresses the time available to consider issues. This compressed time frame limits agencies’ ability to complete their analysis of some cases. The Committee encourages companies to request withdrawal of their notification to provide additional time to resolve issues and to avoid the need for investigation. However, when companies that have already completed the acquisition are allowed to withdraw, there is a substantially longer time before they refile, and in some cases they never do, leaving unresolved any outstanding concerns. Under the statute, the President or the President’s designee may make an investigation to determine whether a foreign acquisition might threaten the national security of the United States. Neither the statute nor its implementing regulations define national security. This permits a broad interpretation of the term. The statute does provide factors to be considered in determining a threat to national security; however, consideration of these factors is not mandatory. These factors include the following: Domestic production needed for projected national defense requirements. The capability and capacity of domestic industries to meet national defense requirements, including the availability of human resources, products, technology, materials, and other supplies and services. The control of domestic industries and commercial activity by foreign citizens as it affects the capability and capacity of the United States to meet the requirements of national security. The potential effects of the proposed or pending transaction on sales of military goods, equipment, or technology to any country identified under applicable law as (a) supporting terrorism or (b) a country of concern for missile proliferation or the proliferation of chemical and biological weapons. The potential effects of the proposed or pending transaction on U.S. international technological leadership in areas affecting national security. Despite the broad coverage of the factors under the statute, Treasury and some other Committee member agencies have continued to view threats to national security in the traditional and more narrowly defined sense. That is, they based their definition on a U.S. company’s possession of export- controlled technologies or items, classified contracts, and critical technology; or specific derogatory intelligence on the foreign company. The Departments of Justice and Defense have applied a broader view of what might constitute a threat to national security. And since being added to the Committee, the Department of Homeland Security has begun to analyze acquisitions both in traditional terms and more broadly in terms of the potential vulnerabilities posed by the acquisition. According to Justice, Homeland Security, and Defense officials, vulnerabilities can result from foreign control of critical infrastructure, such as control of or access to information traveling on networks. Vulnerabilities can also result from foreign control of critical inputs to defense systems or a decrease in the number of innovative small businesses conducting research on developing defense-related technologies. While these vulnerabilities may not pose an immediate threat to national security, they may create the potential for longer-term harm to U.S. national security interests by reducing U.S. technological leadership in defense systems. The agencies that favor applying the narrower, more traditional definition of what constitutes a threat to national security have resisted using Exon- Florio to mitigate the concerns being raised by the Department of Defense and others. For example, in reviewing a 2001 acquisition involving a U.S. company that produced precision optics and semiconductor manufacturing equipment, Defense and Commerce raised concerns about (a) foreign ownership of sensitive but unclassified technology used in reconnaissance satellites, (b) the possibility of this sensitive technology being transferred to countries of concern, and (c) maintaining U.S. government access to the technology. Treasury officials said that the concerns raised by Defense and Commerce were not national security concerns because they did not involve classified contracts, the foreign company’s country of origin was a U.S. ally, and there was no specific negative intelligence about the company’s actions in the United States. During a more recent review, disagreement over the scope of Exon-Florio resulted in a weakening of the enforcement provisions in an agreement. The Defense Department had raised concerns about the security of its supply of specialized integrated circuits as a result of a proposed acquisition. These unique integrated circuits are used in a variety of defense technologies, such as unmanned aerial vehicles, the Joint Tactical Radio System, and communications protection devices including devices used for cryptography. A Defense Science Board task force recently noted that the functions performed by Defense-unique integrated circuits are essential to the national defense of the United States. However, in Treasury’s view, the Department of Defense’s concerns about its supply of integrated circuits were industrial policy concerns, not national security concerns, despite the importance of these circuits to a variety of defense technologies. Treasury, as Chair of the Committee, and several other members deemed the concerns outside the scope of Exon-Florio authority and would not allow the agreement between the Departments of Defense and Homeland Security and the companies to include any mention of the Committee. As a result, a provision that included strong enforcement language was deleted from an agreement with the acquiring company. In the absence of such language, presidential or Committee action can only result if the companies materially misrepresented information during the Committee’s review. In our view, without that provision, the consequences of failure to comply with the agreement are less certain. The Committee has been reluctant to initiate investigations, to avoid both the negative connotations of an investigation and the need for a presidential decision. As a result, the Committee has initiated few investigations. From 1997 through 2004, the Committee received 470 notices, including 19 refilings, for 451 proposed or completed acquisitions. The Committee initiated only eight investigations during the period (see table 2). According to Treasury Department officials, the Committee reviews foreign acquisitions with a view to protecting national security while maintaining U.S. open investment policy, which provides for equal treatment of foreign and domestic investors. The office within Treasury that provides staff support to the Committee—the Office for International Investment—is also the office responsible for promoting the open investment policy. The Committee’s goal is to implement Exon-Florio without chilling foreign investment in the United States. According to Treasury officials, being the subject of an investigation may have negative connotations for a company. If it becomes public knowledge that the acquiring company is the subject of an investigation, it may be perceived that the government views the acquisition as problematic and the stock price of the company may fall. Thus, avoiding an investigation helps maintain the confidence of investors. Consistent with its desire to avoid investigations, the Treasury Department, as Committee Chair, applies strict criteria in determining whether an acquisition should be investigated. The criteria for initiating an investigation are the likelihood that (1) there is credible evidence that the foreign controlling interest may take action to threaten national security and (2) no other laws are appropriate or adequate to protect national security. This is essentially the same criteria provided by the statute as the basis for the President to take action to suspend or prohibit an acquisition under Exon-Florio. The Defense Department and others have stated that these criteria are inappropriate for determining whether to initiate an investigation because the 45 days of the investigation should be used to determine whether the criteria are met to inform the Committee’s recommendation to the President. Exon-Florio does not provide specific guidance for the appropriate criteria for initiating a 45-day investigation. The statute merely provides that “the President or the President’s designee may make an investigation to determine the effects on national security” of acquisitions that could result in foreign control of a U.S. company. Committee guidelines require member agencies to inform the Committee of concerns by the 23rd day of the 30-day review allowed by Exon-Florio. According to one Treasury official, this time frame is necessary to meet the legislated 30-day requirement for completing a review. For some cases, particularly complex ones, the 23-day rule does not allow enough time to complete reviews and address concerns. For example, one Defense official said that, without advance notice of the acquisition, the time frames are too short to complete analysis and provide input for the Defense Department’s position. Another Defense official said that to meet Treasury’s deadline, analysts have between 3 and 10 days to analyze the acquisition. In one instance, Homeland Security was unable to provide input within the time frame. When agencies have needed more time to gather information or negotiate an agreement to mitigate national security concerns, the Committee generally suggests that companies request to withdraw their notification. If the company does not want to withdraw, the Committee can initiate an investigation. Exon-Florio’s implementing regulations permit the Committee to allow companies to withdraw their notifications at any time before a presidential decision. When companies have withdrawn their notification prior to concluding an acquisition, the companies have an incentive to resolve any outstanding issues and refile as soon as possible. However, if an acquisition has been concluded, there is less incentive to resolve issues and refile. Since 1997, companies involved in 18 acquisitions have withdrawn their notification and refiled 19 times. In one case, the company withdrew and refiled twice. In 16 cases, the acquisitions had not yet been concluded, and the time between withdrawal and refiling ranged between 0 days and 4 months (see fig. 2). In two cases, the companies had already concluded the acquisition, and 9 months and 1 year, respectively, passed before the companies refiled. In both cases, Defense or Commerce had raised concerns about potential export control issues. These concerns remained unresolved throughout the period. In addition to cases where a company that completed an acquisition withdrew and subsequently refiled, we identified two instances in which companies that had concluded an acquisition before filing with the Committee withdrew and have not refiled. In one case, the company filed with the Committee more than a year after completing the acquisition. The Committee allowed it to withdraw the notification to provide more time to answer the Committee’s questions and provide assurances concerning export control matters. The company refiled and was permitted to withdraw a second time because there were still unresolved issues. Four years have passed since the second withdrawal. In another case, a company filed with the Committee over 6 months after completing its acquisition of an internet backbone company. The Committee allowed the company to withdraw the notification more than 2 years ago because the Committee was busy with another, high-profile acquisition. The Committee has not requested that the company refile even though analysts within one agency had concerns about the acquisition. As a result, the review process has never been completed. A Treasury Department official said that the member agency that has national security concerns about a particular transaction is responsible for ensuring that the company refiles. However, the Committee’s guidance to member agencies specifically states that Treasury will manage activities during withdrawal by specifying time frames and goals to be achieved. In six of the eight investigations that have been undertaken since 1997, withdrawal was allowed after the investigation had begun. Withdrawal and refiling to restart the clock limits the potential negative connotation of an investigation. However, this practice also limits instances that require a presidential decision, contributing to the opaque nature of the Exon-Florio process because reporting to Congress on the results of Committee actions only occurs as a result of a presidential decision. Only two of the eight cases resulted in a presidential decision and a subsequent report to the Congress (see table 3). In our 2002 report, we identified several weaknesses in the agreements that agencies negotiated with companies under the Exon-Florio Amendment. Specifically, the two agreements that we reviewed either did not specify (1) the time frame for implementing provisions of the agreement or (2) the action that would be taken if the company failed to comply within the stated time frame, thus providing no incentive for the companies to act or no penalty for noncompliance. And in one case, the company failed to meet the agreed upon time frame. In addition, the agreements did not specify which offices in Committee member agencies would be responsible for monitoring compliance with the agreements. We recommended in our 2002 report that, to ensure compliance with agreements, the Secretary of the Treasury, as Chair of the Committee, increase the specificity of actions required by mitigation measures in agreements negotiated under Exon-Florio and designate in the agreements the agency responsible for overseeing implementation and monitoring compliance with mitigation measures. Three agreements negotiated between 2003 and 2005 contain specific time frames for actions to be taken: In a telecommunications agreement, the company was required to adopt and implement a visitation policy within 90 days after the agreement became effective. In a software agreement, the company had to adopt mandatory policies and procedures to implement the agreement within 90 days and provide copies to the government points of contact. In an electronics agreement, the company had to appoint a security officer and two security directors within 90 days of a vacancy to ensure compliance with the agreement, subject to approval by the Departments of Defense and Homeland Security. Two of the three agreements also contained strong language concerning the consequences of noncompliance with the terms of the agreement. For example, these agreements stated that if the company (1) fails to comply with the terms of the agreement, (2) makes a materially false or incomplete statement, (3) increases foreign entity control, or (4) makes other material changes in circumstances, the Attorney General, the Secretary of Defense, or the Secretary of Homeland Security may raise concerns to the Committee or the President. All three agreements also provided specific offices within the signatory agencies to which the companies are to report. For example, the telecommunications agreement designates as points of contact the Assistant Attorney General of the Justice Department’s Criminal Division, the General Counsel at the Federal Bureau of Investigation, the Deputy General Counsel for Acquisition, Technology, and Logistics at the Department of Defense, and the General Counsel at the Department of Homeland Security. The Department of Homeland Security has taken the lead on monitoring compliance for those agreements that it has signed under Exon-Florio. According to Homeland Security officials, the agency maintains compliance tables to track companies’ compliance with time frames provided for in the agreements. To keep all interested parties informed, the Department sends out periodic e-mails to other agencies informing them of the status of companies’ compliance efforts. The Departments of Defense, Commerce, and Justice significantly rely on Homeland Security to monitor companies’ compliance with the agreements. Homeland Security officials stated that Homeland Security Presidential Directive 7 gives the Department the authority to protect critical infrastructure assets such as telecommunications and information technology. According to a Defense official, the Department of Defense has no authority to enforce companies’ compliance with agreements signed pursuant to Exon-Florio. A Commerce Department official similarly stated that Commerce’s authority is limited to enforcing compliance with export control laws. As a result, the Department of Homeland Security is the only one of the three with broad enforcement authority. Further, according to Justice officials, while Justice has authority to seek enforcement of agreements signed pursuant to Exon-Florio and to which it is a signatory, the Department of Homeland Security has more resources for monitoring compliance as well as the legal mandate to act. In the aftermath of the September 11, 2001, terror attacks on the United States and the subsequent war on terrorism, the nature of threats facing this country has changed. In addition to traditional threats to national security, vulnerabilities in areas such as the nation’s critical infrastructure have emerged as potential threats. Exon-Florio provides the latitude for the Committee on Foreign Investment in the United States to address these threats. But the effectiveness of Exon-Florio as a safety net depends on the manner in which the broad scope of its authority is implemented. The narrow, more traditional interpretation of what constitutes a threat to national security fails to fully consider the factors currently embodied in the law. Further, the time constraints imposed on agencies to develop a position before the statutory deadline limits member agencies’ ability to complete in-depth analyses. Those time constraints, together with the Committee’s reluctance to initiate investigations, can result in the Committee permitting companies to withdraw their notifications. When companies withdraw after completing an acquisition, the Committee may lose visibility over the transaction, and the companies may choose not to refile. The initial legislation provided for congressional oversight through a requirement that the circumstances surrounding any negative decision by the President be reported to the Congress. To improve congressional oversight, the Byrd amendment expanded required reporting to include the circumstances surrounding all presidential decisions. However, the Committee’s reluctance to proceed to investigation, coupled with the use of withdrawal to resolve cases without the need for presidential decisions, has resulted in the circumstances surrounding only two cases being reported to the Congress since 1997. This criterion for reporting contributes to the opaque nature of the Committee’s process and is limiting the information that is provided to the Congress. In addition, where companies have concluded the acquisition prior to filing with the Committee and concerns have been identified, permitting withdrawal expands the opportunity for harm to national security before the Committee takes action. In light of the differing views within the Committee on Foreign Investment in the United States regarding the extent of authority provided by Exon- Florio, the Congress should consider amending Exon-Florio by more clearly emphasizing the factors that should be considered in determining potential harm to national security. In addition, to address Treasury’s concern with the impact of investigations on U.S. open investment policy and the member agencies’ concerns with having sufficient time to address relevant issues concerning the acquisitions, the Congress should consider eliminating the distinction between a review and an investigation and make the entire 75-day period available for review. The Committee could then be required to submit recommendations to the President only if presidential action was necessary. Also, to provide more transparency and facilitate congressional oversight, the Congress should revisit the criterion for reporting circumstances surrounding cases to the Congress. For example, the Congress could require an annual report on all transactions that occurred during the preceding year. Such a report could provide the Congress with information on the nature of each acquisition; the national security concerns raised by Committee member agencies, if any; how the concerns were mitigated; and whether each acquisition was concluded or abandoned, in addition to any presidential decisions required under the statute. In addition, in view of the need to ensure that national security is protected during the period that withdrawal is allowed for companies that have completed or plan to complete an acquisition prior to the Committee completing its work, the Congress should require that the Secretary of the Treasury, as Committee Chair, establish (1) interim protections where specific concerns have been raised, (2) specific time frames for refiling, and (3) a process for tracking any actions being taken during the withdrawal period. We provided a draft of our report to the Departments of Commerce, Defense, Homeland Security, Justice, and Treasury for comment. In responding, the Department of Treasury noted that it was providing comments on behalf of all the members of the Committee on Foreign Investment in the United States. However, the Department of Justice provided comments in a separate letter. Overall, Treasury disagreed with our findings. At issue is our characterization of the Committee’s process and the adequacy of insight into the Committee’s deliberations—concerns that Treasury states have caused the Committee to question our understanding of how it operates. Our understanding of the Committee’s process is based on an extensive examination of Committee guidelines, case files, and memorandums; discussions with member agencies, including Treasury, on the process and the time frames the Committee uses to come to a decision; and a review of the laws and regulations that provide the Committee with criteria against which to assess threats to national security. Treasury asserts that all Committee decisions are reached only by consensus among member agencies. However, during the course of our review, certain member agencies raised concerns about the Committee’s process that indicated fundamentally differing views among Committee members when reviewing certain cases. These disagreements involved different views on what constitutes a threat to national security, the sufficiency of the time allowed for reviews, and the appropriate criteria for initiating an investigation. While we agree that opposing views can, and should, be vigorously debated, such a debate does not demonstrate that issues have been fully vetted or that consensus has been reached, as Treasury implies. In fact, in a number of cases, we found evidence that indicates otherwise, for example: In one case we reviewed where member agencies disagreed over what should be deemed a national security concern, the narrower definition—one that excludes national security concerns raised by certain member agencies—has prevailed, in that the notice has been withdrawn instead of the case proceeding to investigation. In complex cases in which national security concerns have been raised and for which Exon-Florio is the relevant statute, case documentation we reviewed revealed the significant pressures some agencies face to complete analysis within 23 days. In its comments on our draft report, the Department of Justice shared our concern with respect to the time constraints imposed by the current process. Specifically, Justice stated that “gathering timely and fully vetted input from the intelligence community is critical to a thorough and comprehensive national security assessment. Any potential extension of the time available to the participants for the collection and analysis of that information would be helpful.” Policy-level officials from two member agencies have indicated that the debate over the criteria for initiating an investigation remains unresolved. Given these fundamental differences, we concluded that the extent to which issues are vetted and consensus is reached on certain cases is, at best, uncertain. Treasury also cites Committee guidelines on withdrawals—which state that parties, not member agencies, have the authority to request a withdrawal—to dispute our position that the Committee has encouraged companies to withdraw notifications to provide additional time to examine acquisitions. Guidelines stating that certain actions should be taken do not necessarily provide evidence that such actions were indeed taken. In five cases that we reviewed, letters from the companies requesting withdrawal and/or letters from Treasury, as Committee Chair, approving the requests to withdraw cited the need for more review time on the part of the government as the reason for the withdrawal. Regardless, Treasury’s detailed discussion of the withdrawal process ignores the key issue. Allowing companies to withdraw notices to provide more time for a review without initiating an investigation significantly increases the risk that companies will not refile in a timely manner—particularly in cases where the foreign acquisition has been completed—and that national security concerns will remain unaddressed. Avoiding investigations by using withdrawals also contributes to the opaque nature of the process because without an investigation there is no presidential decision and required reporting to the Congress. Understandably, Treasury is cautious about providing details into the Committee’s deliberations, given the sensitivity of the information discussed and the need to protect it. And we appreciate the challenges each case presents. However, despite Treasury’s assertion that the oral briefings provided by agency members to duly authorized committees of the Congress when requested are appropriate, the fact that our review was prompted by congressional concerns about the Committee’s review and investigation process suggests otherwise. Finally, Treasury criticized our review methodology—specifically, it questioned whether we spoke to all appropriate parties. We focused on the agencies that were most active in Exon-Florio reviews, as we noted to Treasury at the beginning of our review. During our preliminary discussions and throughout the review, none of the Committee member agencies, including Treasury, raised concerns with our methodology or suggested that we contact the Department of State, the United States Trade Representative, or the Council of Economic Advisers. Our reviews of the official Committee files, located at the Treasury Department, supported our view that the Departments of Commerce, Defense, Homeland Security, Justice, and Treasury were the most active agencies. Regardless, when it became clear to us that information from other Committee members could be germane, as was the case with the National Security Council, we attempted to contact them. In the case of the National Security Council, officials declined to meet with us. At the time we sent the draft report for comment, we were contacted by the Department of State and the U. S. Trade Representative who wanted to discuss the draft report. We met with representatives of both agencies to discuss their concern that our report did not adequately recognize the importance of open investment and was too focused on national security. We recognize that in implementing Exon-Florio, the Committee must consider national security in the context of open investment—a challenge we point out in the opening statement of our report. However, the purpose of the Exon-Florio amendment is to protect national security in the context of U.S. open investment policy. It is how national security is protected through the Committee process that needs to be better understood. We believe that understanding can be enhanced by improved insight and oversight of the process. The Department of Justice in its letter also provided technical comments, which we incorporated as appropriate. Treasury’s letter, along with our responses to specific comments, is reprinted in appendix I. Justice’s letter is reprinted in appendix II. To examine the process used by the Committee and its member agencies to review and investigate foreign acquisitions, we analyzed case files and discussed with Committee staff members the factors considered when cases are reviewed, the process and time frame the Committee uses to come to a decision, and the laws and regulations that provide the Committee with criteria against which to assess threats to national security. We examined in depth nine acquisitions notified to the Committee on Foreign Investment in the United States between June 28, 1995, and December 31, 2004. We selected acquisitions based on recommendations by Committee member agency officials and the following criteria: (1) the Committee permitted the companies to withdraw the notification; (2) the Committee or member agencies concluded agreements to mitigate national security concerns; (3) the foreign company had previously notified the Committee of a prior acquisition; or (4) GAO had conducted a prior review. The objective of the case reviews was to understand and document the Committee’s and its members’ approaches to and processes for reviewing foreign acquisitions of U.S. companies. We did not attempt to validate the conclusions reached by the Committee on any of the cases we reviewed. We also obtained information about other foreign acquisitions that we did not conduct case reviews on, and we also used information on other acquisitions obtained during prior GAO reviews. We obtained and analyzed data from relevant Committee member agencies, including the Departments of Commerce, Defense, Homeland Security, and Treasury. While we were not granted access to files held by the Department of Justice, we discussed individual cases with Justice officials and obtained adequate information to meet our objectives. We also discussed the Committee’s approach and process with Committee staff officials from member agencies most actively involved—namely, the Departments of Commerce, Defense, Homeland Security, Justice, and Treasury. To determine whether the weaknesses in provisions to assist agencies in monitoring agreements that GAO had identified in its 2002 report had been addressed, we analyzed agreements concluded under the Committee’s authority between 2003 and 2005 and compared these agreements with those GAO had previously analyzed. We discussed with Committee staff members the steps that they are taking to monitor agreements and enforce compliance. We conducted our review from April 2004 through July 2005 in accordance with generally accepted government auditing standards. As we 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 this letter. At that time, we will send copies of this report to the Chairman and Ranking Minority Member of the House Committee on Financial Services and to other interested House and Senate committees and subcommittees. We will also send copies to the Secretaries of Commerce, Defense, Homeland Security, and Treasury and the Attorney General. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-4841 or [email protected] if you have any questions regarding this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. A list of major contributors to this report is listed in appendix III. The following are GAO’s comments on the Department of the Treasury’s letter dated August 12, 2005. 1. Our understanding of the Committee’s process is based on an extensive review of Committee guidance and case files and structured interviews and discussions with member agencies, including Treasury. Further, except where changes in Committee make-up and proceedings have occurred since 2002, our discussion of the laws and the Committee’s process is consistent with our 2002 report. 2. As we point out in our evaluation of agency comments in the report, certain member agencies raised concerns that indicated fundamental disagreement among members when reviewing certain cases. Given these fundamental disagreements, we concluded that the extent to which issues are vetted and consensus is reached on certain cases is, at best, uncertain. 3. To analyze cases notified to the Committee and determine whether threats to national security exist, each agency effectively operationalizes its own definition of national security. The implication that individual agencies do not apply a definition is unrealistic. 4. We agree that Exon-Florio should be used judiciously as a safety net when laws other than Exon-Florio and the International Emergency Powers Act may not be effective in protecting national security—a point we make in the opening paragraph of our report. However, in cases where Committee members disagree on whether Exon-Florio applies, we have found that a more narrow definition of national security often takes precedence or the companies are allowed to withdraw their notification to avoid investigations. Treasury's rather lengthy discussion in its comment letter on the need to protect U.S. open investment policy underscores our concern. 5. In numerous case documents GAO reviewed, the definitional bounds agencies used in considering national security concerns are apparent. Some agencies followed routine analytical processes, searching specific databases related to export controls, acquisition history, and critical technology information—sources that would reveal whether the foreign acquisition involved any export-controlled technology or item or classified contracts, or whether there was specific derogatory intelligence on the foreign company. Other agencies prepared specific vulnerability or threat assessments that have their own methodological parameters. The debate among Committee members on each notification is fueled by these differing definitions. 6. We agree that, taken in total, member agencies consider a broad range of national security factors when cases are analyzed. We also agree that anything other than the broad consideration of a range of national security factors by the Committee would inappropriately limit the President’s necessary discretion to protect national security. 7. While only the President decides what constitutes a threat to national security and what actions are in the interest of U.S. national security in cases that are sent for a determination, only two cases have reached this stage since 1997. Further, only 8 of 451 cases have undergone investigations. By allowing withdrawals of notifications rather than initiating investigations, the Committee effectively pre-empts the President from using his discretion to make a determination. To this end, the Committee has defined what constitutes a threat to national security, not the President. Further, since only those few cases that go to the President for a determination require reporting to the Congress, there is little insight into the Committee’s deliberations. Our review found that for specific cases, there has been significant disagreement among member agencies on what constitutes a threat to national security and what actions are in the interest of national security. In two such cases, companies were allowed to withdraw their notices, and to date, they have yet to refile, leaving the concerns unresolved. 8. Again, Treasury’s response skews our finding. In two cases we reviewed, when an agency raised what it deemed a national security concern and other Committee members did not agree, the narrower definition of national security—which excludes the concern raised— prevailed, in that the notice was withdrawn instead of the case proceeding to investigation. Regardless, the case Treasury refers to was cited in our 2002 report as an example of an agreement in which nonspecific language made the agreement difficult to implement. For example, to mitigate a concern about access to technology, the agreement required a “good faith effort” to divest a subsidiary. When the company divested part, but not all, of the subsidiary—citing lack of interested buyers as the rationale—government officials could not determine whether the company’s efforts were made in good faith because the agreement did not include criteria defining what actions would constitute a good faith effort. In addition, the agreement contained no consequences for failure to comply with the monitoring terms of the agreement within the stated time frames, and as we noted, the company failed to meet the terms of one provision. Given this outcome, it is unclear how Treasury can assert that “extensive mitigation measures were put in place” or how this case exemplifies that all member agencies participate in the Committee’s decision- making process. 9. We agree that the decision to undertake an investigation demands careful deliberation on the part of all Committee members. However, in two cases we reviewed, documentation shows that in determining whether to initiate an investigation, Treasury, as Committee Chair, applies essentially the same criteria that the Exon-Florio amendment directs the President to use to decide whether to take action to suspend or prohibit a transaction. While Treasury states that an investigation is entirely appropriate if national security issues remain unresolved at the end of the 30-day review period, we found that rather than initiating an investigation, the Committee commonly allows companies to withdraw their notifications and refile at a later date to provide more time for review. Our report has not cited cases where a Committee decision not to investigate was the result of the application of an overly strict standard for deciding whether to investigate because where we noted the application of this standard, the companies withdrew their notice. Further, by applying the Presidential decision-making criteria at the conclusion of the 30-day review, the Committee effectively preempts the President’s opportunity to make a determination. In a 2004 case, documentation from a policy-level meeting shows that the appropriateness of applying these criteria in Committee deliberations was debated; the debate was not resolved at the time, and officials from two separate agencies told us that the debate continues. The implementing regulations for Exon-Florio make no distinction between the activities the Committee undertakes during the review and investigation periods—other than preparing a report to the President at the end of an investigation—and provide no criteria for determining when to initiate investigation. It is, in part, for this reason that we are proposing that the entire 75-day period be available for analyzing cases, if needed. Eliminating the distinction between the review and investigation periods would help ensure that sufficient time is available for thorough analyses of cases and that the presidential decision-making criteria are only applied by the President. 10. Guidelines requiring that certain actions be taken do not provide evidence that such actions were indeed taken. For example, in one 2004 case we reviewed, after a policy-level decision to initiate an investigation was made, some Committee member agencies, including the Chair, placed calls to corporate counsel informing them of the pending investigation and advising that their clients withdraw their notices. Because the companies withdrew, an investigation was never initiated. 11. As stated in our report, we understand that the purpose of the 23-day rule is to enable the Committee to meet its obligations under Exon- Florio’s statutory time limits for 30-day reviews. For the majority of cases where national security concerns either do not exist or agency members agree that concerns are addressed by other laws, the 23-day rule may help facilitate the closure of cases before the expiration of the 30-day review period. However, in complex cases—cases in which national security concerns have been raised and for which Exon-Florio is the relevant statute—case documentation we reviewed revealed the significant pressures some agencies face to complete analysis within 23 days. In five cases that we reviewed, letters from the companies requesting withdrawal and/or letters from Treasury, as Committee Chair, approving the requests to withdraw cited the need for more review time on the part of the government as the reason for the withdrawal. In one such case, an electronic message we reviewed cited the Committee’s workload on another high profile case as the reason that the Committee sought to have a notice withdrawn. In that case, the transaction had already been completed and the company had requested withdrawal on day 23, before agencies completed their analysis to determine whether to request an investigation. Because the company never refiled a notice, the national security concerns identified by two member agencies have not been further examined. Further, it should be noted that in its comments, the Department of Justice said that any additional time that could be made available to collect and analyze information needed to conduct a thorough and comprehensive national security assessment would be helpful. 12. We have acknowledged the use of mitigation agreements in our current report as a major tool used by the Committee. In fact, we point out that the more recent mitigation agreements have addressed several of the problems with such agreements that we noted in our 2002 report. However, strengthening or increasing the number of mitigation agreements does not ensure that all national security concerns raised by member agencies are sufficiently examined. Further, the particular passage cited by the Under Secretary is not disputing that mitigation agreements are often negotiated but rather is pointing out that there is not agreement on when these mitigation agreements are needed. As we reported, agencies that apply the more traditional definition of what constitutes a threat to national security have resisted using Exon- Florio to mitigate or address the concerns raised by other Committee members. 13. We have revised our report to reflect that the Departments of Defense, Commerce, and Justice significantly rely on DHS to monitor companies’ compliance with the agreements. 14. We did not mean to imply that Justice does not have the authority to undertake enforcement actions and have clarified that in the report. 15. We agree that the Federal Bureau of Investigation and other Justice Department components have been and continue to be a very active and critical participant in the Committee’s process. We also acknowledge there are other Committee agency components that are also critical to the process such as the Bureau of Industry and Security in the Department of Commerce; the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics–Industrial Policy, and the Central Intelligence Agency. Committee member agencies use many internal resources as part of their process. 16. A remedy is defined as a legal means of preventing or redressing a wrong or enforcing a right. A Defense official confirmed that the provision in question that was deleted from the agreement stated that if the company (1) fails to comply with the terms of the agreement, (2) makes a materially false statement, (3) increases foreign entity control, or (4) makes other material changes in circumstances, the Attorney General, the Secretary of Defense or the Secretary of Homeland Security may raise concerns to the Committee or the President. Without having this provision, it is unclear what remedy will be available to the Committee and its member agencies to enforce this mitigation agreement. 17. Despite what is stated in the guidelines, in practice the Committee has allowed companies or parties to withdraw their notices to provide member agencies additional time to complete their analyses or to negotiate mitigation measures. Documentation from Committee files shows that 12 of the 20 withdrawals we identified that have been granted since 1997 to companies that intended to continue the acquisition were granted to allow member agencies to either negotiate mitigation agreements, continue obtaining information from the companies, or otherwise continue analyses. 18. Of the 26 letters granting withdrawal that we reviewed, only three explicitly stated conditions for the withdrawal: in two cases, the companies were abandoning the transaction; in the third, the company agreed to divest its U.S. acquisition. 19. We recognize that the President retains the authority to take action if the Committee’s review is not completed. However, our review of case files does not support the Under Secretary’s assertion that Treasury, as Chair, tracked developments on the withdrawn cases that were notified after the transactions were closed. Further, it is unclear how Treasury could conclude that refiling is unnecessary in these cases, given that the withdrawals were granted to provide additional time to resolve specific concerns raised by other agencies. For example, in one case, a Treasury official told us that she was unaware that the Department of Defense had concerns. By not having the companies refile, Defense’s concerns were not fully vetted. In another case, a Defense official provided documentation indicating that the Defense Department’s position remained that conditions should be imposed on the transaction. In our view, refiling serves two purposes: (1) it provides assurances to the companies that action will not be taken at a future date and (2) it permits Committee member agencies to ensure that no national security concern was overlooked. 20. The documentation we reviewed clearly showed that Treasury and Defense have different views of what constitutes a threat to national security. For example, in one case, Treasury officials wrote three separate memos stating that in Treasury’s view, Defense and Commerce Department concerns about (a) foreign ownership of sensitive but unclassified technology used in reconnaissance satellites, (b) the possibility of this sensitive technology being transferred to countries of concern, and (c) maintaining U.S. government access to the technology were not national security concerns. 21. We agree that vulnerabilities can result from a variety of things not addressed by Exon-Florio. We merely provided examples of the kinds of vulnerabilities that may result from foreign control. We were not addressing the universe of vulnerabilities, only some of those addressed by Exon-Florio, the subject of our report. 22. We agree that Exon-Florio provides broad latitude for the Committee to consider whether foreign acquisitions constitute a threat to national security. Our concern is how Exon-Florio is being implemented. Given the internal disagreement among Committee members and the lack of transparency as to how disagreements are resolved, we believe that additional guidance from the Congress would be beneficial. 23. We recognize that, in most instances, 30 days is sufficient to conclude reviews. If Exon-Florio were amended, then we expect that the Committee could manage the process so that the vast majority of cases would continue to be completed within 30 days. However, Exon-Florio is to be used when other laws are inadequate—in short, to act as a safety net. The ability to complete “a vast majority” of reviews in 30 days is not relevant to Exon-Florio’s importance as a safety net. Moreover, as we point out in our report, some agency officials have stated that 30 days is insufficient in complex reviews. The Justice Department, in its official comments, stated that any potential extension of the time available to the participants for the collection and analysis of information from the intelligence community would be helpful (see page 2 of Justice Department comments in app. II). Treasury officials have pointed out that being the subject of an investigation may have negative connotations for a company, and that the Committee tries to avoid initiating investigations. By eliminating the distinction between investigations and reviews, this negative connotation and the potential impact on investment would no longer exist. The Under Secretary expressed concern that extending the time frames would deter filings but did not explain the basis for his concern. However, the Committee need not rely solely on voluntary filings. The implementing regulations state that “any member of the Committee may submit an agency notice of a proposed or completed acquisition to the Committee through its staff chairman if that member has reason to believe, based on facts then available, that the acquisition is subject to section 721 and may have adverse impacts on the national security. In the event of agency notice, the Committee will promptly furnish the parties to the acquisition with written advice of such notice.” 24. The Congress has made numerous efforts to conduct oversight of the Committee’s activities—first in the original Exon-Florio legislation by requiring a report when the President prohibited an acquisition, and again in 1992 by passing the Byrd Amendment to require a report when the President makes any decision regarding a foreign acquisition. In addition, in requesting our review, the Senate Banking Committee cited the “opaque nature” of the Exon-Florio process as a reason for its request, which suggests that the Committee on Foreign Investment in the United States has not been successful in keeping the Congress adequately informed. We agree that the confidentiality afforded to the companies under Exon-Florio should not be compromised. However, subsection (c) of the statute provides that the confidentiality provisions “shall not be construed to prevent disclosure to either house of Congress or to any duly authorized committee or subcommittee of the Congress.” Therefore, we stand by our suggestion that the Congress may wish to revisit the congressional reporting requirement. 25. As we stated in our 2002 report, the regulations should not call for negotiating interim measures, but rather for the Committee to use its authority to impose them as a condition of withdrawal where the transaction has been completed or will be completed during the withdrawal period. Further, as we state in our report, “the Committee’s guidance to member agencies specifically states that Treasury will manage activities during withdrawal by specifying time frames and goals to be achieved.” Because Treasury has declined to implement our recommendation, we are including our recommendation as a matter that Congress may wish to consider. In addition to the contact named above, Thomas J. Denomme, Assistant Director, Allison Bawden, Gregory K. Harmon, Paula J. Haurilesko, Karen Sloan, John Van Schaik and Michael Zola made key contributions to this report. Defense Trade: Mitigating National Security Concerns under Exon- Florio Could Be Improved. GAO-02-736. Washington, D.C.: September 12, 2002. Defense Trade: Identifying Foreign Acquisitions Affecting National Security Can Be Improved. GAO/NSIAD-00-144. Washington, D.C.: June 29, 2000. Foreign Investment: Implementation of Exon-Florio and Related Amendments. GAO/NSIAD-96-12. Washington, D.C.: December 21, 1995. Foreign Investment: Foreign Laws and Policies Addressing National Security Concerns. GAO/NSIAD-96-61. Washington, D.C.: April 2, 1996. | The 1988 Exon-Florio amendment to the Defense Production Act authorizes the President to suspend or prohibit foreign acquisitions of U.S. companies that may harm national security, an action the President has taken only once. Implementing Exon-Florio can pose a significant challenge because of the need to weigh security concerns against U.S. open investment policy--which requires equal treatment of foreign and domestic investors. Exon-Florio's investigative authority was delegated to the Committee on Foreign Investment in the United States--an interagency committee established in 1975 to monitor U.S. policy on foreign investments. In September 2002, GAO reported on the implementation of Exon-Florio. This report further examines that implementation. Foreign acquisitions of U.S. companies can pose a significant challenge for the U. S. government in implementing the Exon-Florio amendment because while foreign investment can provide substantial economic benefits, these benefits must be weighed against the potential for harm to national security. Exon-Florio's effectiveness in protecting U.S. national security may be limited because the Department of the Treasury--as Chair of the Committee on Foreign Investment in the United States--and others narrowly defines what constitutes a threat to national security and, along with some other member agencies, is reluctant to initiate investigations to determine whether national security concerns require a recommendation for possible presidential action. Some Committee members have argued that this narrow definition is not sufficiently flexible to protect critical infrastructure, secure defense supply, and preserve technological superiority in the defense arena. The Committee's reluctance to initiate an investigation--due in part to concerns about potential negative effects on the U.S. open investment policy--limits the time available for member agencies to analyze national security concerns. To provide additional time, while avoiding an investigation, the Committee has encouraged companies to withdraw their notification of a pending or completed acquisition and to refile at a later date. However, for companies that have completed the acquisition, there is a substantially longer time before they refile to complete the Committee's process; in some cases they never do, leaving unresolved any outstanding concerns. In our 2002 report, GAO recommended improvements in provisions to assist agencies in monitoring actions companies have agreed to take to address national security concerns. The Committee has improved provisions on monitoring compliance, and the Department of Homeland Security is actively involved in monitoring company actions. |
The vast majority of the $48.1 billion of Recovery Act funding for transportation programs went to the Federal Highway Administration (FHWA), FRA, and the Federal Transit Administration (FTA) for highway, road, bridge, rail, and transit projects. Indeed, more than half of all Recovery Act transportation funds were designated for the construction, rehabilitation, and repair of highways, roads, and bridges (see fig. 1). The remaining funds were allocated among other DOT operating administrations. DOT administered most Recovery Act funds through existing transportation programs. For example, highway funds were distributed under rules governing the Federal-Aid Highway Program generally and the Surface Transportation Program in particular. DOT also established new grant processes to award high speed intercity passenger rail and TIGER grants. For these programs, DOT published selection criteria, solicited and reviewed applications, and awarded grants to applicants that it judged best met the criteria and complied with legislative and regulatory requirements. The Recovery Act included obligation deadlines to indicate the temporary nature of the funds and to facilitate their timely use. Therefore, the Recovery Act identified short deadlines for obligating most transportation funds, and it required that preference be given to projects that could be started and completed expeditiously. For example, highway and transit funds were to be fully obligated by September 30, 2010. All TIGER funds must be obligated by September 30, 2011, and all high speed intercity passenger rail funds must be obligated by September 30, 2012. The Recovery Act also introduced new requirements for existing programs to help ensure that funds add to states’ and localities’ overall economic activity, and are targeted to areas of greatest need. For example, the Recovery Act required governors of each state to certify that their state will maintain its planned level of spending for the types of transportation projects funded by the act and also required states to give priority to projects in economically distressed areas. State and local agencies, contractors, and others that receive Recovery Act funding are required to submit quarterly reports on the number of jobs created or retained, among other data. These job calculations are based on the number of hours worked in a quarter and funded under the Recovery Act—expressed in full-time equivalents (FTE)—but they do not account for the total employment arising from the expenditure of Recovery Act transportation funds. That is, the data recipients report do not include employment at suppliers (indirect jobs) or in the local community (induced jobs). According to DOT data, as of March 31, 2011, DOT had obligated more than $45 billion (about 95 percent) on over 15,000 projects and had expended more than $26 billion (about 59 percent) of the $48.1 billion it received under the Recovery Act (see table 1). States and other recipients continue to report using Recovery Act funds to improve the condition of the nation’s transportation infrastructure, as well as invest in new infrastructure. For example, according to DOT data, highway funds have been primarily used for pavement improvement projects, such as resurfacing, reconstruction, and rehabilitation of existing roadways, and public transit funds have been used primarily for upgrading transit facilities and purchasing new vehicles (see fig. 2). New ridge contrction ($0.5) Operting assnce ($0.2) Bridge improvement ($1.2) Bridge replcement ($1.4) Ril cr prchas nd rehabilittion ($0.3) New contrction ($1.8) Preventive mintennce ($0.8) Other ($3.3) Other cpitl expen($1.0) Pvement widening ($4.7) Vehicle prchas nd rehabilittion ($2.0) Pvement improvement: resurfce ($6.1) Trit infrastrctre ($4.5) Pvement improvement: recontrction/rehabilittion ($7.1) Transit obligations include Recovery Act funds that were transferred from FHWA to FTA. The category “other” includes safety projects, such as improving safety at railroad grade crossings; engineering; right-of-way purchases; and transportation enhancement projects, such as pedestrian and bicycle facilities. “Transit infrastructure” includes engineering and design, acuisition, construction, and rehabilitation and renovation activities. “Other capital expenses” includes leases, training, finance costs, mobility management project administration, and other capital programs. Highway data are as of December 1, 2010, and transit data are as September 0, 2010. Recovery Act funding for aviation is reported to have gone to rehabilitating and reconstructing airfield runways and taxiways, as well as air navigation infrastructure such as air traffic control towers, engine generators, back-up batteries, and circuit breakers. The Recovery Act grant provided to Amtrak has been used to make infrastructure improvements and return cars and locomotives to service. Because high speed intercity passenger rail and TIGER were new grant programs, the Recovery Act allowed additional time for DOT to develop criteria, publish notices of funding availability for each program, and award grants. As a result, projects selected for high speed intercity passenger rail and TIGER were announced about a year after enactment, and DOT has been making progress obligating Recovery Act funds for these programs. For example, DOT selected one intercity passenger rail project to rehabilitate track and provide service from Portland to Brunswick, Maine, at speeds up to 70 miles per hour. Another project was selected to initiate the first part of California’s high speed rail system, which envisions service at more than 200 miles per hour between Los Angeles, San Francisco and the Central Valley, and eventually, San Diego. DOT’s TIGER grants funded projects across different surface transportation modes, including highways, transit, rail, and ports. For example, the California Green Trade Corridor/Marine Highway project is a collaborative effort of three regional ports in California to develop and use a marine highway system as an alternative to existing truck and rail infrastructure for transporting consumer goods and agricultural products. According to DOT, a variety of Recovery Act projects have been completed. Approximately 68 percent of the completed highway projects involve pavement improvement, according to FHWA, and completed transit projects generally included preventative maintenance activities and some vehicle purchases and facility construction, according to FTA. Amtrak had also completed a variety of projects, including construction station upgrades, right-of-way improvements, installing communications and signaling systems, and replacing aging bridges, among other things. While no high speed intercity passenger rail projects had been completed as of March 31, 2011, 15 projects were under way, according to FRA. These projects, which represent more than two-thirds of the allotted funding, include track and signaling work to improve reliability and increase operating speeds, improvements to stations, and the environmental analysis and preliminary engineering required to advance projects to construction. Recovery Act funds helped pay for jobs across various transportation modes. At a time when the construction industry was experiencing historically high unemployment and many states could not afford to maintain existing infrastructure, transportation officials we met with told us that the Recovery Act helped to keep the transportation industry in operation while allowing states to tackle some of their infrastructure maintenance priorities. According to the most recent recipient reported data, Recovery Act transportation projects supported about 50,000 FTEs from October 2010 through December 2010. Transportation recipients reported the highest FTE counts during the quarter that ended September 2010, when many projects were under way (see fig. 3). For the most recent reporting quarter, highway projects accounted for approximately two-thirds of the transportation FTEs reported, and the remaining one-third of FTEs were attributed to transit and all other transportation projects. The relatively low portion of FTEs reported for all other transportation projects is expected to rise in future reporting quarters as more high speed intercity passenger rail and TIGER program funds are obligated and projects get under way. While FTEs reported for the high speed intercity passenger rail and TIGER programs are expected to increase as these projects get under way, other program areas have reported fewer FTEs in the most recent reporting quarter. Recipient reported data for the quarter ending December 31, 2010, showed fewer recipients reporting than in the previous quarter across all program areas (highways, transit, and other). This may indicate that more projects were completed in the quarter ending December 31, 2010, than were started. Also in that quarter, the percentage of recipients that reported any FTEs decreased compared to the previous quarter, which may indicate that some projects are essentially completed but not closed out financially or may reflect interruptions in work due to winter weather for some projects in colder climates. Although recipients reported jobs funded, other long-term impacts of Recovery Act investments in transportation are unknown at this point. Transportation officials in several states we visited told us that Recovery Act funds helped reduce backlogs of “shovel-ready” resurfacing projects. Some states have efforts under way to report on Recovery Act benefits, but federal and state officials told us that attributing transportation benefits to Recovery Act funds can be difficult, particularly when projects are funded from multiple sources or when historic performance data is not available for particular projects. We recommended that DOT ensure that the results of Recovery Act projects are assessed and a determination is made about whether these investments produced long-term benefits. Specifically, in the near term, we recommended that FHWA and FTA determine the types of data and performance measures needed to assess the impact of the Recovery Act and the specific authority they may need to collect data and report on these measures. DOT officials told us that they expect to be able to report on Recovery Act outputs, such as miles of roads paved, bridges built or repaired, and transit vehicles purchased, which will help to assess the act’s impact. DOT will not be able to report on outcomes, such as reductions in travel time. DOT has not committed to assessing the long-term benefits of Recovery Act investments in transportation. DOT stated that limitations in its data systems, coupled with the fact that Recovery Act funds represented only about one year of additional funding for some transportation programs, would make assessing the benefits of Recovery Act projects difficult. We continue to believe, however, that it is important for organizations to measure performance to understand the progress they are making toward their goals and to produce a set of performance measures that demonstrates results. For Recovery Act high speed intercity passenger rail and TIGER grant programs, DOT has set broad performance goals and required recipients to identify potential project benefits. Specifically, FRA has outlined goals for developing high speed intercity passenger rail service in its strategic plan and national rail plan and evaluated grant proposals based on the potential project benefits they intended in their applications. However, the identified goals are broad—such as providing for transportation safety and economic competitiveness—and do not contain specific targets necessary to determine how or when FRA will realize intended benefits. DOT also incorporated performance measures tailored to each TIGER grant awardee based on the project design and the capacity of the recipient to collect and evaluate data. DOT is evaluating the best methods for measuring objectives and collecting data and is working collaboratively with applicants to weigh options for measuring performance. As many TIGER projects are just being initiated, the effectiveness of these measures will not be clear for some time. Federal, state, and local transportation officials we contacted reported that while Recovery Act transportation funds provided many positive outcomes, they also provided lessons learned that may be relevant as Congress considers the next surface transportation reauthorization. In addition, our reports on high speed intercity passenger rail and the TIGER grant program identified a number of challenges and key lessons learned. Certain Recovery Act provisions not typically required under existing DOT programs proved challenging for some states to meet. We found that it may have been difficult for states to meet these requirements for a number of reasons, including rapidly changing state economic conditions. Confusion among the states as to how to interpret and apply the new requirements was also a contributing factor. Maintenance of effort. We have reported that there were numerous challenges for DOT and states in implementing the transportation maintenance-of-effort provision in the Recovery Act. This provision required the governor of each state to certify that the state would maintain its planned level of transportation spending from February 17, 2009, through September 30, 2010, to help ensure that federal funds would be used in addition to, rather than in place of, state funds and thus increase overall spending. A January 2011 preliminary DOT report indicated that 29 states met their planned levels of expenditure, and 21 states did not. States had a monetary incentive to meet their certified planned level of spending in each transportation program area funded by the Recovery Act because those that fail will not be eligible to participate in the August 2011 redistribution of obligation authority under the Federal-Aid Highway Program. States had until April 15, 2011, to verify their actual expenditures for transportation programs covered by the Recovery Act. DOT is reviewing this information to determine if any more states met their planned levels of spending. The DOT preliminary report summarized reasons states did not meet their certified planned spending levels, such as experiencing a reduction in dedicated revenues for transportation due to a decline in state revenues or a lower-than-expected level of approved transportation funding in the state budget. The preliminary report also identified a number of challenges DOT encountered in implementing the provision, such as insufficient statutory definitions of what constitutes “state funding” or how well DOT guidance on calculating planned expenditures would work in the many different contexts in which it would have to operate. As a result, many problems came to light only after DOT had issued initial guidance and states had submitted their first certifications. DOT issued seven pieces of guidance to clarify how states were to calculate their planned or actual expenditures for their maintenance-of-effort certifications. DOT invested a significant amount of time and work to ensure consistency across states on how compliance with the maintenance-of-effort provision is certified and reported. As a result, DOT is well-positioned to understand lessons learned—what worked, what did not, and what could be improved in the future. DOT and state officials told us that while the maintenance-of- effort requirement can be useful for ensuring continued investment in transportation, more flexibility to allow for differences in states and programs, and to allow adjustments for unexpected changes to states’ economic conditions, should be considered for future provisions. For example, the Recovery Act allows the Secretary of Education to waive state maintenance-of-effort requirements under certain circumstances and allows states to choose the basis they use to measure maintenance of effort. The maintenance-of-effort requirement for transportation programs proved difficult for states to apply across various transportation programs because of different and complicated revenue sources to fund the programs. Many states did not have an existing means to identify planned transportation expenditures for a specific period and their financial and accounting systems did not capture that data. Therefore, according to DOT, a more narrowly focused requirement applying only to programs administered by state DOTs or to programs that typically receive state funding could help address maintenance-of-effort challenges. Consideration of economically distressed areas. Our previous reports have identified challenges DOT faced in implementing the Recovery Act requirement that states give priority to highway projects located in economically distressed areas. For example, while an economically distressed area is statutorily defined, we found that there was substantial variation in how some states identified economically distressed areas and the extent to which some states prioritized projects in those areas. We reported instances of states developing their own eligibility requirements for economically distressed areas using data or criteria not specified in the Public Works and Economic Development Act. Three states—Arizona, California, and Illinois—developed their own eligibility requirements or interpreted the special-needs criterion in a way that overstated the number of eligible counties, and thus the amount of funds, directed to economically distressed areas. Officials in these three states told us that they did so to respond to rapidly changing economic conditions. In May 2010, we recommended that DOT advise states to correct their reporting on economically distressed area designations, and in July 2010 FHWA instructed its division offices to advise states with identified errors to revise their economically distressed area designations. In September 2010, we recommended that DOT make these data publicly available to ensure that Congress and the public have accurate information on the extent to which Recovery Act funds were directed to areas most severely affected by the recession and the extent to which states prioritized these areas in selecting projects for funding. DOT recently posted an accounting of the extent to which states directed Recovery Act transportation funds to projects located in economically distressed areas on its website, and we are in the process of assessing these data. Most states we visited as part of our ongoing Recovery Act oversight considered the requirement to prioritize projects in economically distressed areas in addition to other immediate and long-term transportation goals, as the Recovery Act required. For example, officials in Washington state said that they considered federally-recognized economically distressed areas as one of several criteria when selecting projects. Other criteria included state economic data and projects that would be ready to proceed in a short amount of time. However, state officials were also uncertain what the economically distressed area requirement was intended to accomplish, such as whether it was intended to provide jobs to people living in those areas or to deliver new infrastructure to those areas. The economically distressed area provision proved difficult to implement because of changing economic conditions, and it is unclear that it achieved its intended goal. We have reported that allocating federal funding for surface transportation based on performance in general, and directing some portion of federal funds on a competitive basis to projects of national or regional significance in particular, can more effectively address certain challenges facing the nation’s surface transportation programs. In our recent reports on the high speed intercity passenger rail and TIGER programs, we found that while DOT generally followed recommended grantmaking practices, DOT could have documented more information about its award decisions. The Recovery Act and the Passenger Rail Investment and Improvement Act of 2008 required FRA to implement a plan to award and oversee billions of dollars for high speed intercity passenger rail grants. This was challenging for FRA as it did not have a large-scale grantmaking infrastructure in place and had to develop that capability within a short time frame to meet Recovery Act goals. We mostly found that FRA substantially followed recommended practices for awarding these grants, including communicating key information to applicants and planning for the grant competition. However, one area in which FRA could have done better is to develop clearer records for how it made final grant award decisions. Specifically, while FRA maintained detailed records on how officials evaluated applications on technical merit, the documented reasons for making final grant selections were typically vague and provided little insight into why projects were or were not selected. In addition, FRA provided only general reasons for adjusting applicants’ requested funding amounts. We recommended that FRA should better document the rationales for award decisions in any future high speed and intercity passenger rail funding rounds by including substantive reasons why individual projects are or are not selected and for any changes made to requested funding amounts. Without a clear record of selection decisions, FRA is vulnerable to criticism about the integrity of its decisions. This is important because FRA has already been criticized for its award decisions and for providing incremental improvements to existing systems rather than providing more funds to meet the administration’s expectations of developing a true national high speed rail intercity passenger network. To evaluate the more than 1,450 TIGER grant applications it received, DOT developed criteria to assess the merits of these projects. We evaluated these criteria and concluded that DOT had followed key federal guidance and standards. The criteria clearly indicated that projects should produce long-term benefits, such as improving the state of repair of existing transportation infrastructure, reducing fatalities and injuries, and improving the efficient movement of workers or goods. To apply its criteria, DOT used 10 Evaluation Teams of five reviewers to conduct a technical review of all applications. The evaluators drafted narratives explaining their assessments, assigned ratings such as “highly recommended” and “recommended,” and advanced those that best met the criteria for further review. A Control and Calibration Team, made up of senior staff from the Office of the Secretary of Transportation, also selectively reviewed and advanced applications throughout the process to ensure consistency across Evaluation Teams’ ratings and to help meet statutory requirements such as an equitable distribution of funds. The Evaluation Teams advanced 115 highly recommended applications. The Control and Calibration Team advanced an additional 50 recommended applications as well as 1 application that was not recommended. Together, the teams advanced 166 applications for further review. The TIGER Review Team—composed of 12 senior DOT officials, such as the Deputy Secretary and cognizant operating administrators—reviewed those 166 applications. This team—which considered a broader set of factors than the Evaluation Teams, including project readiness and whether expected project benefits outweighed costs—developed a final list of 51 projects that it recommended to the Secretary of Transportation for award. All 51 projects were accepted by the Secretary, and the awards were announced on February 17, 2010. Of the 51 applications that received awards, 26 were from the highly recommended applications advanced by the Evaluation Teams and the other 25, which received one-third of the TIGER funds, were from the recommended applications advanced by the Control and Calibration Team (see fig. 4). While DOT thoroughly documented the Evaluation Teams’ assessments and the Review Team’s memorandum recommending projects to the Secretary of Transportation for award described the strengths of projects recommended for award, it did not document the Review Team’s final decisions and its rationale for selecting recommended projects for half the awards over highly recommended ones. DOT officials told us that some highly recommended projects were not selected to achieve a more equitable geographic distribution of award funds, as required by the Recovery Act. Furthermore, our discussions with DOT officials indicated that the Review Team raised some valid concerns about some highly recommended projects, such as whether a project’s economic benefits were overstated. However, without adequate documentation of final decisions, DOT cannot definitively demonstrate the basis for its award selections, particularly the reasons why recommended projects were selected for half the awards over highly recommended ones. Developing internal documentation is a key part of accountability for decisions, and DOT guidance states that officials should explain how discretionary grant projects were selected when projects with the highest priority in a technical review were not funded. The absence of documentation can give rise to challenges to the integrity of the decisions made, and DOT is vulnerable to criticism that projects were selected for reasons other than merit. We recommended that DOT document key decisions for all major steps in the review of applications, particularly decisions in which lower- rated applications are selected for award over higher-rated applications, and, in consultation with Congress, develop and implement a strategy to disclose information regarding award decisions. Both the high speed intercity passenger rail and TIGER programs represent important steps toward investing in projects of regional and national significance through a merit-based, competitive process. We noted a natural tension between providing funding based on merit and performance and providing funds on a formula basis to achieve equity among the states as the formula approach can potentially result in projects of national or regional significance that cross state lines and involve more than one transportation mode not competing well at the state level for funds. Given that the Recovery Act was intended to create and preserve jobs and promote economic recovery nationwide, Congress believed it important that TIGER grant funding be geographically dispersed. As we noted in our recent report discussing the TIGER grant program, when Congress considers future DOT discretionary grant programs, it may wish to consider balancing the goals of merit-based project selection with geographic distribution of funds and limit, as appropriate, the influence of geographic considerations. Chairman Mica, Ranking Member Rahall, and Members of the Committee, this concludes my statement. I would be pleased to respond to any questions at this time. For further information regarding this statement, please contact Phillip R. Herr at (202) 512-2834 or [email protected] or Susan A. Fleming at (202) 512- 2834 or [email protected]. 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 testimony were Steve Cohen, Assistant Director; Heather MacLeod, Assistant Director; James Ratzenberger, Assistant Director; Jonathan Carver; Matt Cook; John Healey; Joah Iannotta; Bert Japikse; Delwen Jones; SaraAnn Moessbauer; Josh Ormond; and Pamela Vines. 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. | The American Recovery and Reinvestment Act of 2009 (Recovery Act) provided more than $48 billion to the Department of Transportation (DOT) to be distributed through existing programs and through two new competitive grant programs--high speed intercity passenger rail and the Transportation Investment Generating Economic Recovery (TIGER) program. As requested, this testimony addresses the (1) status and use of Recovery Act transportation funds, (2) outcomes and long-term benefits of Recovery Act transportation investments, and (3) lessons learned from DOT's and states' experiences implementing the Recovery Act. GAO reviewed prior and ongoing work, federal legislation, and guidance. GAO also analyzed Recovery Act data and interviewed federal, state, and local officials. As of March 31, 2011, more than $45 billion (about 95 percent) of Recovery Act transportation funds had been obligated for over 15,000 projects nationwide, and more than $26 billion had been expended. States and other recipients continue to report using Recovery Act funds to improve the nation's transportation infrastructure. Highway funds have been primarily used for pavement improvement projects and transit funds have been primarily used to upgrade transit facilities and purchase new vehicles. Recovery Act funds have also been used to rehabilitate airport runways and improve Amtrak's infrastructure. DOT continues to obligate funds for its high speed intercity passenger rail and TIGER grant programs. As of March 31, 2011, DOT had obligated nearly all of the $1.5 billion in TIGER funds for 51 surface transportation projects. The Recovery Act helped to fund transportation jobs, but long-term benefits are unclear. For example, according to available data, Recovery Act transportation projects supported about 50,000 full-time equivalents (FTE) in the three months from October through December 2010. The most recent data showed that highway projects accounted for about two-thirds of the transportation FTEs reported, and the remaining one-third of the FTEs were attributed to transit and other transportation projects. However, the impact of Recovery Act investments in transportation is unknown, and GAO has recommended that DOT determine the data needed to assess the impact of these investments. Although DOT has set broad performance goals for its high speed intercity passenger rail and TIGER programs--and is currently evaluating the best methods for measuring objectives and collecting data--it has not committed to assessing the long-term benefits of the Recovery Act investments in transportation. Certain Recovery Act provisions meant to stimulate the economy, but not typically required under existing DOT programs, proved challenging. For example, GAO has reported on numerous challenges DOT and states faced in implementing the transportation maintenance-of-effort requirement, which required states to maintain their planned levels of spending over approximately 18 months or be ineligible to participate in the August 2011 redistribution of obligation authority under the Federal-Aid Highway Program. A January 2011 preliminary DOT report found that 29 states met the requirement while 21 states did not. In this report, DOT also discussed how the maintenance-of-effort provision could be improved. With regard to the high speed intercity passenger rail and TIGER programs, GAO found that while DOT generally followed recommended grant-making practices, DOT could have better documented its award decisions. For example, the Federal Railroad Administration could have developed clearer records for how it made award decisions. Without a clear record of selection decisions, DOT is vulnerable to criticism about the integrity of its decisions. Likewise, DOT did not clearly document its final decisions and rationale for selecting recommended TIGER projects. This testimony does not include new recommendations. In our past work, GAO recommended that the Secretary of Transportation take several actions, such as directing the Federal Highway and Federal Transit administrations to determine the data needed to assess the impact of Recovery Act projects; we recently recommended that the Federal Railroad Administration and DOT better document decisions regarding their competitive grant programs. DOT has addressed some GAO recommendations, but others remain open. We will continue to track them. GAO provided a draft of this statement to DOT and incorporated its comments where appropriate. |
The Army’s current aviation modernization strategy was documented in the Army’s Aviation Modernization Plan, which was modified by the February 1993 Aviation Restructure Initiative and validated by the September 1993 Department of Defense’s (DOD) Bottom-Up Review. In determining its aviation requirements, the Army has designated the Comanche helicopter as the centerpiece of its aviation modernization strategy. The Army’s latest biennial Aviation Modernization Plan, issued in January 1993, was to be the Army’s aviation modernization guide into the 21st century. However, as the Army was developing the plan, the world situation was changing. Evolving national military strategy expanded the Army’s roles in national assistance, humanitarian assistance, counter-drug activities, peacekeeping operations, and counterterrorism. The focus of the national warfighting doctrine changed from a major European war to regional conflicts. The dependence on foreign-based U.S. troops was replaced by one of rapidly deploying U.S.-based troops overseas. The Army’s total research, development, and acquisition budget declined by 36 percent for fiscal years 1990 through 1994. Army acquisition funding decreased about 50 percent during this time; however, research and development funding was more stable—remaining in the $5 billion a year range. Army officials realized before the 1993 update to the Aviation Modernization Plan was issued that it would not reflect the global and budgetary changes taking place. Therefore, the Aviation Center at Fort Rucker, Alabama, began an effort with the intent of redesigning the aviation force structure to resolve the problems associated with downsizing and affordability. The resultant Army’s Aviation Restructure Initiative was issued February 3, 1993. The current aviation modernization strategy is the product of the 1993 Aviation Modernization Plan and the Aviation Restructure Initiative. The objectives of the Army’s modernization efforts were to (1) correct deficiencies in the Army’s aviation force structure, particularly its reconnaissance and attack capabilities; (2) reduce aviation maintenance and support requirements; (3) reduce aviation operating costs; and (4) retire old aircraft. These objectives were to be achieved within anticipated funding levels. According to the Army, modern armed reconnaissance and attack helicopter capabilities are required to project a force worldwide and achieve battlefield dominance. A modernized Apache fleet and the Comanche, when fielded, would provide those capabilities. To carry out its modernization strategy, the Army intends to (1) procure about 1,300 Comanche helicopters, some with enhancements provided by the Army’s Longbow program, (2) modify 761 existing Apaches with some or all of the Longbow upgrades, and (3) purchase approximately 350 Kiowa Warrior helicopters to use until the Comanche is introduced. The Army plans to spend $6.2 billion in research, development, and acquisition funds to modernize its helicopter fleet during fiscal years 1995-1999. Of that amount, $4.7 billion, approximately 76 percent, will be spent on the Comanche and the Longbow Apache helicopters, with which the Army intends to perform future reconnaissance and attack missions. The implementation of the strategy is scheduled to begin in fiscal year 1995 and is split into two phases. Design goals have been established for the interim time frame—from initiation through the year 2015—and for the objective force—beyond the year 2015 when the Comanche is to be fully fielded. As of February 1993, the Army owned 7,914 helicopters, comprising 10 different types. The strategy calls for 4,965 helicopters, consisting of 5 types—the Chinook, Blackhawk, Apache, Comanche, and Light Utility Helicopter. In its September 1, 1993, report, DOD’s Bottom-Up Review concluded, among other things, that the Army should have 10 active and 5 reserve divisions in order to maintain the capability to win 2 nearly simultaneous major regional conflicts. Regarding the Army’s attack and reconnaissance fleet, the review concluded that the Army’s modernization plan provided significant improvements and a balanced, deployable, and sustainable fleet. A group of outside experts evaluated the review’s analysis and concluded that the Army’s plan to acquire the Comanche and the Longbow Apache would provide significant improvements in both reconnaissance and attack capabilities. According to the review, the life-cycle cost estimate of this option was $75.6 billion. At the conclusion of the study, the Secretary of Defense endorsed the Army’s aviation modernization strategy with the Comanche as its centerpiece. The current life-cycle cost estimate for the Comanche and the Longbow Apache helicopters, according to program officials and program documents, is about $157 billion, of which about $51.6 billion is for research, development, and acquisition. The Army’s process for determining its aviation requirements and consolidating them into its budget request involves varying degrees of analysis at three levels of the Army’s organization. The Army Aviation Center at Fort Rucker, Alabama, drafts an aviation branch assessment. This assessment is developed following guidance in the National Military Strategy, the Defense Planning Guidance, and Field Manual 100-5 on Operations and incorporates input provided by Army aviation users. The branch assessment is a fiscally unconstrained prioritized list of requirements—perceived deficiencies in the force that need to be resolved. The Center sends its assessment to the Training and Doctrine Command where it is combined with assessments from the Army’s 16 other branches. The Command evaluates the branch assessments and develops a list of needs for the entire Army. Based on this analysis, the Command decides what the Army must have to be an effective fighting force and produces a list of Army-wide aviation requirements—the Warfighting Lens Analysis. The Command sends this analysis to the Army’s Deputy Chief of Staff for Operations and Plans and the Assistant Secretary of the Army for Research, Development, and Acquisition. After reviewing the analysis, they generate the Long-Range Research, Development, and Acquisition Plan—the Army’s fiscally constrained 15-year strategic plan for procurement. This plan helps form the basis for the Army’s portion of DOD’s budget request. The Chairman and Ranking Minority Member of the Subcommittee on Oversight and Investigations, House Armed Services Committee, requested that we review how the Army is modernizing its aviation force, in particular its attack and reconnaissance helicopters, which represent the major portion of the Army’s aviation modernization investment. Our objectives were to determine whether (1) the Army’s plan for modernizing its aviation fleet is still valid, (2) there are alternative aircraft systems to the ones the Army plans to acquire, and (3) the Army’s funding plans include all of the helicopter systems that it says it needs. We conducted the majority of our review at the U.S. Army Aviation and Troop Command, St. Louis, Missouri; the U.S. Army Aviation Center, Fort Rucker, Alabama; U.S. Army Training and Doctrine Command, Fort Monroe, Virginia; DOD and the Department of the Army, Washington, D.C. In addition, we visited Fort Campbell, Kentucky, and Fort Hood, Texas, to obtain the aviation user’s perspective on requirements. To obtain data on helicopter capabilities, we visited Bell Helicopter Textron, Fort Worth, Texas; Boeing Defense and Space Group, Helicopter Division, Philadelphia, Pennsylvania; McDonnell Douglas Helicopter Systems, Mesa, Arizona; and United Technologies, Sikorsky Aircraft, Stratford, Connecticut. We also visited the Comanche Joint Program Office in Trumbull, Connecticut. To determine whether the Army’s helicopter modernization plans were still valid, we interviewed cognizant Army officials involved in the aviation requirements setting process. The purpose of these interviews was to gain a balanced perspective on the requirements process from those at all organizational levels who are involved in its implementation. Officials that we talked to who were directly involved in the process of developing the requirement were located at the office of the Army’s Deputy Chief of Staff for Operations and Plans; Assistant Secretary of the Army for Research, Development, and Acquisition; the offices responsible for developing requirements data for input to and preparation of the Warfighting Lens Analysis at the Army’s Training and Doctrine Command; and offices responsible for preparing branch assessments, which reflect critical inputs to the requirements process such as threat analyses, doctrine, organizational structure, training, and equipment, at the Army Aviation Center at Fort Rucker, Alabama. We also talked to active unit commanders, pilots, and aviation maintenance personnel at the brigade, battalion, and squadron levels who provide input to the process and eventually implement the decisions the process produces. These individuals represented Force Package I and Force Package II units. Commanders and pilots in Force Package I units are those that deploy first and, therefore, require the highest level of equipment support and training. Commanders and pilots of Force Package II units are those that immediately follow Force Package I units in a deployment. Because these units are among the first to enter a conflict, we believed that they would be keenly aware of the advantages and disadvantages of the systems they use in the missions they perform. Therefore, they could provide valuable insights into the current mission deficiencies in the Army’s aviation systems and how the Army’s planned strategy would address those deficiencies. This approach was especially important in our assessment of the Comanche’s capabilities to correct deficiencies in the reconnaissance and light attack missions as there are no production representative prototypes to evaluate. We were able to obtain users’ perceptions on how the requirements process responded to their observation on needed and unneeded capabilities in the Comanche helicopter. We also obtained documentation on the roles, missions, and doctrinal employment of helicopters and the results of previously conducted studies or tests that evaluated a helicopter’s performance or its requirement. In addition, we obtained the supporting data used in the Bottom-Up Review evaluation of force structure options for Army attack and reconnaissance helicopters. We used this data to perform our own analysis of aviation requirements for several force structure options, including the 16-division option considered in the Bottom-Up Review. To determine if the Army considered alternative aircraft in developing its aviation modernization strategy, we interviewed key Army aviation officials and helicopter contractors involved in the aviation requirements setting and acquisition process. We developed a data collection instrument to obtain performance capabilities and specific mission information on various Army helicopters from both the Army and contractors, which we used for comparison purposes. We also obtained Army documentation and studies on various aircraft in the force structure and underdevelopment. Throughout the review, we attempted to obtain and evaluate copies of any studies that looked at alternative strategies. DOD and Army officials were unable to provide such studies. To determine whether the Army’s funding plans included all of the helicopters that it said it needs, we interviewed DOD and Army personnel involved in the budgetary process and responsible for establishing the short- and long-term funding estimates. We also interviewed representatives from the Congressional Budget Office, the Defense Budget Project, the Office of Management and Budget, and the Brookings Institution to discuss defense budget projections. We obtained and assessed funding estimates contained in the fiscal year 1995 President’s Budget, the fiscal year 1995 Future Years Defense Program, Selected Acquisition Reports, and Research and Development and Procurement Cost Driver Reports. We compared this data to the Army’s Aviation Modernization Plan to determine which systems the Army is funding. In addition, we interviewed Army aviation program management personnel and obtained data supporting cost estimates developed for future aviation requirements. We conducted our review from March 1993 through August 1994 in accordance with generally accepted government auditing standards. The validity of the Army’s aviation modernization strategy is now questionable. The Army’s estimates of the quantities of helicopters needed are higher than those identified in the DOD’s Bottom-Up Review. The Army’s estimates were not based on the same total force structure and unit composition data as DOD’s estimates. In addition, the Army overstated expected benefits and understated technical risks associated with the Comanche and the Longbow Apache programs that represent the bulk of its modernization strategy. While the Army believes that it can accomplish its modernization objectives, some users are concerned that their needs may not have adequately been considered and that implementation of the current procurement plan could result in an inappropriate mix and quantity of helicopters and, therefore, adversely impact operational effectiveness. The total force structure used as the basis for computing requirements in the Army’s aviation modernization strategy is higher than the force structure used in DOD’s 1993 Bottom-Up Review assessment. While the Army’s strategy is based on a force structure of 20 divisions, the Bottom-Up Review recommended reducing the number of Army divisions. The Bottom-Up Review supported the continuation of the Army’s aviation modernization initiative but with a reduced force structure. It recommended that the Army reduce its force structure to 10 active and approximately 5 reserve divisions by the end of fiscal year 1999. According to DOD, decisions regarding the structure of the reserve component have been left to the Army. The Army is currently basing its aviation modernization plans on an 18-division force—10 active and 8 reserve, according to Army Force Organization and Development officials. The aviation assets required to support the future force, whether it be 15 or 18 divisions, will be less than what is needed for the current 20-division structure. According to Army officials, estimates of the number of helicopters needed to implement the strategy are very fluid. The overall total changes as program manager decisions on aspects of the modernization plan change. For example, estimates of the number of Blackhawks and Kiowa Warriors changed as program decisions under the Aviation Modernization Plan and Restructure Initiative changed. To show the impact of varying force structure assumptions on estimates of quantitative requirements for helicopters, we obtained and analyzed aircraft requirements data, including training and float requirements, for those Army organizational units performing aviation missions. After we completed our analysis, the Army officials responsible for providing aviation data to the Bottom-Up Review validated our computations on the numbers of helicopters affected. We estimated that the Army would need 4,696 aircraft in the fiscal years 1995-2015 time frame for a 20-division force. For the same time frame, 4,539 helicopters would be needed to fill an 18-division structure and 4,222 helicopters would be needed for a 15-division force structure. Our analysis shows that the number of divisions will have little immediate impact on the helicopter fleet. However, it will eventually impact the Army’s procurement plans for the Longbow Apache, the Comanche, and the Blackhawk programs as prescribed by the proposals in the aviation modernization strategy and, ultimately, estimates of the strategy’s cost. Table 2.1 shows aircraft quantitative requirements for the interim and objective forces based on our projections. The Aviation Restructure Initiative reduced the number of Longbow Apache, Blackhawk, and Comanche helicopters needed to fill the current 20-division force structure. Table 2.2 shows how additional division cuts—depending on the structure chosen—could further reduce the requirement for these systems in the objective force. There are differences of opinion throughout DOD and the Army over the number of helicopters needed to perform the air cavalry troop role in the Army’s objective force. The Office of the Army’s Deputy Chief of Staff for Operations and Plans and the Army Aviation Center at Fort Rucker, Alabama, both document the requirement for the air cavalry troop to be 12 aircraft per troop. This is the basis used under the Aviation Restructure Initiative and, therefore, the Army’s strategy. However, the Bottom-Up Review performed by the Office of the Secretary of Defense, which evaluated the continuation of the Comanche program, based its decisions on using eight aircraft in the cavalry troop in the objective force. The Comanche Training and Doctrine Command System manager’s and program manager’s offices also used eight aircraft in a cavalry troop to develop the Comanche’s future tactics, techniques, and procedures. As table 2.1 shows, the difference between using 8 or 12 aircraft in the cavalry role in the Army’s current 20-division force is 287 aircraft. Although the Bottom-Up Review eventually recommended a 15-division force structure, it used a 16-division force structure for its computations. However, the 16-division structure included 2 more attack battalions than it should have. It also used 8 helicopters in a cavalry troop instead of the required 12. These inconsistencies resulted in DOD underestimating some of the helicopters it needs and overestimating others. For example, our analysis shows that using a 16-division force structure with the required number of 12 helicopters in the cavalry troop and eliminating the 2 extra attack battalions, the Army would need 1,378 Comanches. This amount is 192 more than the Bottom-Up Review estimated the Army needed. The cost of the option would increase by approximately $6.7 billion, which is the amount needed to procure the additional 192 Comanches at a unit cost of $35 million. DOD’s Bottom-Up Review recommended that the Army continue on its course of developing the Comanche and the Longbow Apache despite this being the most costly option. According to the review, this option has a life-cycle cost estimate of $75.6 billion and is more than $23.6 billion higher than the lowest cost option, which would terminate the Comanche program but retain the Longbow Apache and procure additional Kiowa Warriors. The Bottom-Up Review report noted that this higher cost was “not a significant discriminator, given the improvements in capability both systems (the Comanche and the Longbow) provide.” However, it also noted that “there were technical and cost-growth risks associated with this option that need to be monitored and carefully managed, since both systems are on the cutting edge of technology . . . .” Since the Bottom-Up Review was issued, the life-cycle cost estimate has increased to $157 billion, of which $113 billion is for the Comanche and $44 billion is for the Longbow Apache. The Comanche helicopter, which is in the demonstration/validation phase of its development cycle, is designed to include advanced avionics and targeting, increased maneuverability, greater firepower, and cutting edge low observability features. One of the advantages intended by this advanced technology is that the Comanche will have a significantly lower maintenance man hours/flight hour requirement than existing helicopters. However, because this expected maintenance requirement is considered unrealistic, overall aviation operation and support costs may be significantly understated. According to many active unit users, it is unlikely that a sophisticated aircraft, such as the Comanche, will achieve the required 2.6-maintenance man hours/flight hour. As a matter of comparison, DOD has determined the Apache has a 14.5-maintenance man hours/flight hour average and the less sophisticated Kiowa Warrior a 9.5-maintenance man hours/flight hour average. Realizing that the Army’s requirement was not realistic, the Office of the Secretary of Defense increased its estimate of the Comanche’s maintenance man hours/flight hour ratio to between 3.2 and 4.9 for the Bottom-Up Review analysis. In an April 1990 study, DOD’s Cost Analysis Improvement Group developed an independent estimate of 9.0-maintenance man hours/flight hour for the Comanche. If DOD’s higher maintenance man hours/flight hour ratios were used in the most recent Comanche cost and operational effectiveness analysis (COEA), the Comanche may not have been ranked the most cost-effective system. The 1990 Comanche COEA ranked the Comanche third behind the Longbow Comanche and the Longbow Apache for operational effectiveness. However, once the Comanche’s low maintenance ratio was applied, the Comanche was ranked first overall. The COEA noted that the maintenance man hours/flight hour estimates for each alternative helicopter was the principal support for determining system costs. The extent to which the Comanche will be able to meet the planned 2.6-hour requirement will not be demonstrated until the year 2000, after a significant amount of money has been spent. If the Comanche is unable to meet this ambitious requirement, the operation and support costs associated with this system will significantly increase. In addition, maintenance personnel levels are programmed based partially on the maintenance man hours/flight hour requirement for the system. If the actual maintenance man hours/flight hour ratio is higher than projected, a shortage of necessary maintenance personnel would result. While this potential shortage would impact operation and support costs, it would also negatively affect the effectiveness of units and the affordability of the strategy. The Army plans to modify the Apache helicopter to improve its target acquisition capabilities by adding the Longbow technology enhancements. The Longbow Apache program includes: airframe improvements, radar modifications, and a Longbow compatible Hellfire missile with fire-and-forget capability. The Longbow system being designed for the Apache helicopter falls short of achieving the capabilities the Army originally required for stationary target tracking. The Longbow Apache stationary target indicator requirements have been reduced. In addition, the value of the current Longbow technology is questionable, according to an assessment performed by the Bottom-Up Review panel. The current Longbow system can detect (locate a target) and classify (determine whether it is a wheeled or tracked vehicle), but it cannot recognize (tank or armored personnel carrier) or identify (the type of tank—Soviet T-72) targets. Longbow program officials believe that future Longbow developments could improve the ability of Army helicopters to recognize and identify targets through the integration of Longbow radar information with data from a second generation forward looking infrared system. Accordingly, the Longbow improvements increase the effectiveness and survivability of the Apache. Demonstration of the Longbow capability still involves high-technical risk. Acquisition of the Longbow Apache System (Report No. 94-015) DOD Inspector General, November 9, 1993. relation to the overall mission of the Army, the emerging threat, national military strategy, and available resources. DOD advised us that while not all specific concerns may be incorporated, they are considered. DOD indicated that the Comanche capabilities, for example, were based on real user inputs of the operational requirements needed to successfully accomplish cavalry and attack missions within the anticipated combat, environmental, and geographic spectra. This is not consistent with the views of users we interviewed. Although the Army’s leadership believes that the current strategy will accomplish its modernization objectives, some active unit commanders, pilots, and aviation maintenance personnel at the brigade, battalion, and squadron levels who provide input to the requirements setting process are concerned that the process, and ultimately the resultant modernization strategy, may not have adequately considered lower level recommendations and users’ views. Some users told us that requirements are often determined by advocates in the process. They also stated that implementation of the strategy will change the operational mix of some units and, therefore, reduce their operational effectiveness. The difficulty in trying to reconstruct the evolution of decisions generated by the requirements determination process is that the principals involved do not document the decisions made. According to DOD and Army officials, the information exchanged between proponents at different levels of the process that influence decisions is not recorded, but can be significant. As DOD said, while the requirements process may consider all concerns, they may not be incorporated in the final decision. Active unit helicopter users, the Army’s Aviation Center, an Army test of scout helicopters, and the Warfighting Lens Analysis, in some instances, support different system procurements and capabilities than what the Army’s aviation modernization strategy supports. For example, the strategy prescribes using the Apache attack helicopter as the scout in the attack battalion; however, a number of the attack battalion pilots and commanders we interviewed stated they preferred using the Kiowa Warrior in this role. According to some Army personnel, the fact that user’s desires and lower level recommendations do not always agree with the Army’s overall modernization strategy may be partially due to the advocacy driven nature and culture associated with the acquisition process. According to numerous aviation users that we interviewed, they did not need all of the costly capabilities being designed into the Comanche to perform their assigned roles. For example, these aviation users told us that: The requirement that the Comanche self-deploy across the Atlantic, is a high-risk operation and, therefore, is not realistic. Examples of difficulties cited in performing such a mission include: pilot fatigue, inadequate or nonexistent training, and safety problems. The majority of Comanches are being procured to fill the cavalry scout role. However, the Comanche’s 170-knot speed will be greater than what is needed by cavalry scout units that fly slow, nap-of-the-earth missions. The Comanche’s low-observability requirement serves to increase the airframe and crew’s survivability, while also increasing the aircraft’s effectiveness in accomplishing its mission. However, when the Comanche is configured for the light attack mission, it requires the use of external wings. The external wings increase the radar cross section of the Comanche and, therefore, the Comanche will be more easily detected by enemy forces. To reduce maintenance support costs, the strategy proposes limiting the type of helicopters in aviation attack battalions by taking Blackhawk helicopters out of these battalions and consolidating them in general support battalions. Many active users expressed concern that this will leave the aviation attack battalions without the ability to perform missions such as recovery of downed air crews without relying on a separate command structure to supply these aircraft. For example, active unit users told us that in conducting air crew rescue missions, the first 30 minutes are critical to the recovery of pilots and their helicopter. In this time critical operation, an attack battalion commander will have to request aircraft from a general support battalion and compete against other units’ needs. In their opinion, obtaining the Blackhawks for an air crew rescue mission under these circumstances could take longer than 30 minutes. Also, they are concerned that, in the future, the attack battalions might be deployed without the maintenance support provided by the general aviation support battalions; thereby, limiting its ability to perform its assigned missions. According to division officials, moving one of the 101st Air Assault Division’s three currently active attack battalions to the reserves, as prescribed in the strategy, will reduce the division’s ability to effectively train to carry out its mission. According to 101st Division’s commanders, placing one of the active attack battalions in the reserve will make it nearly impossible for the division to maintain the necessary training and readiness required for it to perform its rapid deployment mission. According to the commanders, it is already very difficult to meet the current training demands of the division with three active attack battalions. It will become even more difficult to do so with one less attack battalion. DOD generally agreed with our findings concerning the strategy’s (1) failure to consider force structure changes in computing helicopter requirements; (2) reliance on costly and high-technical risk helicopter development; and (3) potential adverse impact on operational effectiveness, the military’s use of inconsistent unit force structure data in aviation studies, and that advocates influence the decision process. DOD questioned our estimates of helicopter quantities associated with a particular force structure, noting that such estimates need to be based on a detailed breakout allowing for training and float requirements. DOD asserted that the strategy did consider user concerns. We realize that unit size, mission, training, and float affect the determination of helicopters needed by the Army. Our analysis is based on data developed at the unit level and was validated by those Army officials directly responsible for providing aviation data for the Bottom-Up Review. As DOD has acknowledged, the requirements process is complicated; that is why we have described it in the introduction to the report. The purpose of our interviews was to obtain a balanced perspective on the requirements process and resultant strategy from those who are involved in the final decision and those who provide user input to the decision process—the pilots and maintainers. We have revised the introduction of the report to more fully describe the types of interviews we held and the purpose of those interviews. We have also modified those sections of the report that discuss these issues to present a more balanced description of user perceptions of the process and resultant strategy. The Army looked at some alternative helicopters and aircraft in developing past Comanche COEAs; however, in developing its current aviation modernization strategy, the Army did not fully consider alternative aircraft that can meet the Army’s aviation needs. Recent defense reviews of force structure and roles and missions also failed to adequately explore the issue of alternative helicopters or weapon systems in meeting the Army’s aviation needs. However, should the Comanche be delayed or not be produced, DOD has alternative attack and reconnaissance helicopters which, if upgraded, have the ability to conduct many of the Comanche’s roles and missions. Alternatives may become more affordable and, therefore, may be more attractive in light of anticipated force structure changes; they could impact decisions regarding the mix and quantity of helicopters in the Army’s projected fleet. The Army did not consider alternatives to the Comanche in either the 1993 Aviation Modernization Plan or the Aviation Restructuring Initiative. Army officials told us that they felt that the issue of alternatives had been sufficiently addressed in the Comanche’s two COEAs and other earlier studies. While each of the two COEAs looked at some alternative helicopters and aircraft, they did not consider all alternative helicopters. Both supported the continued development of the Comanche. Also, DOD, in two recent force structure reviews, did not adequately consider alternative helicopters or weapon systems. The 1987 Comanche COEA considered alternative aircraft—a tiltrotor aircraft and modifications to existing helicopters. It noted that while modifying existing helicopters will cost less, none will meet all of the Comanche’s requirements. The 1990 Comanche COEA considered modifications to existing Army helicopters and two foreign helicopters. It noted that “the (Comanche) alternative provides the Army with the most cost and operationally effective way of modernizing its light (scout and attack) fleet.” Neither analysis considered the Marine Corps Super Cobra, or alternative weapon systems, such as fixed-wing aircraft or tactical missile systems. Two recent defense reviews, the Joint Chiefs of Staff Chairman’s review of roles and missions and the Secretary of Defense’s Bottom-Up Review, looked at force structure alternatives. Each failed to adequately explore the issue of alternative helicopters or weapon systems. For example, in addressing the future course of theater air interdiction missions, the Chairman’s review of military roles and missions focused on fixed-wing aircraft and did not fully acknowledge other interdiction capabilities such as the Army’s Tactical Missile System or attack helicopters. The Secretary’s Bottom-Up Review of attack and armed reconnaissance helicopters was limited to three options—different helicopter force structures—and did not consider fixed-wing aircraft, tactical missiles, or unmanned aerial vehicles. The Marine Corps’ Super Cobra and other non-Army helicopters were also excluded from consideration. On August 18, 1994, the Deputy Secretary of Defense—noting the desire for a military pay increase and improvements in areas such as readiness, sustainability, and quality of life—directed the services to develop program options to selected major defense acquisition programs that he identified in his memorandum. One of those programs was the Comanche helicopter program. Specifically, the Deputy Secretary’s memorandum stated, “The Army should develop a program alternative that terminates the Comanche.” We did not examine in detail the pros and cons of terminating the Comanche as part of this review. However, we have identified three U.S.-built alternative helicopters that we believe could, if upgraded, conduct many of the Comanche’s roles and missions. Use of alternative helicopters could alter the mix and quantity of helicopters in the Army’s objective force. The Marine Corps’ Super Cobra, a substantially improved twin-engine version of the Army’s Cobra helicopter, could perform armed reconnaissance or attack missions. It can carry several different weapons, including up to eight Hellfire missiles or two Sidewinder air-to-air missiles. The Marines are currently planning to upgrade the Super Cobra helicopter with, among other things, a four-blade rotor system that is expected to substantially improve flight performance. With this upgrade, the Super Cobra’s maximum airspeed is expected to increase from 170 knots to 210 knots. Other expected advantages of the four-blade rotor are a 170-percent increase in vertical rate-of-climb, a 40-percent increase in payload, and a 70-percent reduction in rotor vibration levels. The Army’s Apache performs many of the missions the Comanche is being developed to perform. The Comanche is being developed as a multimission aircraft that can perform both armed reconnaissance and attack missions. The Apache, the Army’s premier attack helicopter, has demonstrated, during Operation Desert Storm, that it can also perform armed reconnaissance missions. Also, the Army is planning to use the Apache as an interim armed reconnaissance helicopter until the Comanche is fielded. Both helicopters give the Army a lethal attack capability and vital armed reconnaissance capability. The Army is currently testing improvements to the Apache, such as the Longbow fire control and radar system. These improvements will include greater reliability, fire-and-forget Hellfire missiles, and digitized electronics. If these technology enhancements are demonstrated, the Army plans to equip 227 Apaches with the Longbow radar. This technology is expected to improve combat effectiveness 16 fold over the current model. In addition, in the 1990 COEA, the Longbow Apache was ranked higher, for operational effectiveness, than the basic Comanche aircraft. Other planned improvements on aircraft carrying the Longbow radar include enhanced target acquisition and weapons accuracy, and the ability to hand over targets to other Apaches. The Army’s Kiowa Warrior is a much improved version of the early model Kiowas that can perform armed reconnaissance missions. The Kiowa Warrior incorporates a mast-mounted, stabilized sight that can be used day or night to laser designate targets, for itself or other armed helicopters. It is the Army’s first helicopter capable of operating on the digitized battlefield—a capability to be incorporated into the Comanche. In an armed configuration it can carry several different weapons, including up to four Hellfire missiles. Possible upgrades to the Kiowa Warrior include, among others, a night flying system, integrated helmet display system, inertial navigation system, digital map display, engine upgrade for improved hot day performance, conformal auxiliary fuel tanks for increased range, an upgraded mast-mounted sight, and an improved data modem. Many users believe the lethality, low observability, deployability, and speed of the Kiowa Warrior when combined with certain upgrades or doctrinal changes would resolve many of the deficiencies the Comanche is expected to resolve. DOD disagreed with our assertion that the Army did not adequately consider alternative aircraft in the development of the strategy. DOD contends that the 1987 and 1990 Comanche COEAs looked at alternative aircraft. Throughout our review of the Army’s aviation modernization strategy, we asked DOD and Army officials to provide copies of studies that showed that DOD and the Army had looked at alternative aircraft in the development of the strategy. We have not been provided any such studies to evaluate. The fact that some aircraft were looked at in past Comanche COEAs does not address (1) the thrust of our finding or (2) the Deputy Secretary of Defense’s August 1994 call for the Army to develop a program alternative that terminates the Comanche. In our opinion, DOD’s response reflects the approach that has previously prevented the Army from fully considering alternatives. The Army has established the Comanche’s projected performance and capabilities as the baseline standard against which all alternative aircraft are judged. We continue to believe that in developing the strategy—especially in today’s budget environment, the Army should, at least, seriously consider the capabilities of other aircraft to perform the attack and reconnaissance missions called for in the Aviation Modernization Plan. Declining budgets mean that the Army cannot afford to fund all of its modernization requirements, including aviation modernization. Therefore, the Army is faced with making major decisions on how to fulfill its mission in the face of reduced resources. To achieve its mission objectives, the Army has opted to modernize its force through the acquisition of weapon systems that it states would provide the necessary technological advantages on the battlefield. For its aviation modernization strategy, the Army has chosen to use most of its available resources to procure the Comanche helicopter and upgrade the Apache helicopter and defer or cancel funding of other Army helicopter programs. The option the Army has chosen to modernize its aviation fleet has a life-cycle cost currently estimated at $157 billion. This acquisition plan excludes an estimated $15.7 billion in other Army helicopter programs that the Army’s modernization plans have indicated are important to the performance of its aviation missions. In addition, the Army is faced with an estimated $540 million shortfall in the Comanche program. The Army is proposing to streamline this acquisition program in order to deal with the shortfall. However, DOD officials have expressed concerns about the risk associated with the Army’s proposal. The Army’s plan calls for eliminating some testing, buying fewer prototypes, and shortening the developmental phase of the acquisition process by concurrently doing things that normally should be done sequentially, thereby increasing risks associated with entering production too soon. It should be noted that we reported in May 1992 and again in March 1994 that given real and probable development cost increases, an uncertain operating and support cost environment, and questions about the role of the Comanche compared to other Army helicopters, the Congress may wish to reconsider the need to purchase the Comanche. Comanche Helicopter: Program Needs Reassessment Due to Increased Unit Cost and Other Factors (GAO/NSIAD-92-204, May 27, 1992) and Addressing the Deficit: Budgetary Implications of Selected GAO Work (GAO/OCG-94-3, Mar. 11, 1994). According to DOD, the Army cannot fund all of its modernization programs, and the Army’s aviation modernization program reflects the tight budget environment and the priorities placed by the Army on all of its competing programs. In deciding to fund the development of the Comanche and the Longbow Apache helicopters, Army officials indicated that they could not afford other aviation program requirements identified in the Army’s Aviation Modernization Plan and Restructure Initiative. The Army’s funding plans, therefore, defer or cancel about $15.7 billion in other helicopter programs that its modernization plans indicate are important to the performance of its aviation missions. Army officials provided the following examples of aviation programs that were included in the January 1993 Aviation Modernization Plan and the Army’s Aviation Restructure Initiative but are excluded from the Army’s current spending plans. The Chinook cargo helicopter will have to be modernized because the Army cannot afford to replace it with a new aircraft program in the near future. Although various degrees of modernization could be undertaken, a major modernization program could cost as much as $6.8 billion. The Army’s medical community needs modern medical evacuation capability to replace its current outdated fleet. The cost to modify each aircraft could be as much as $1.9 million. The medical community needs about 400 of these aircraft. Therefore, total modification costs could be as much as $760 million. The Army canceled production of the Blackhawk utility helicopter because of affordability concerns; therefore, there is no production funding after fiscal year 1996. Based on the Army’s previous modernization plans, 605 aircraft were needed. At a production rate of 60 aircraft per year, a total of $4.4 billion in funding would be needed to finish production of this aircraft. Depending on the modernization option chosen for the Huey utility helicopter, total program costs range from $705 million to $2.8 billion to modernize up to 1,000 helicopters. The Light Utility Helicopter was originally intended to replace the Vietnam era Huey and Blackhawk helicopters that are currently performing the light utility role. The Army’s Aviation Modernization Plan shows a requirement for 491, and the Aviation Restructure Initiative shows a requirement of 131. No cost estimates for Light Utility Helicopter modernization options were available at the time of our review. The Congress usually provides funding for the Kiowa Warrior program as an add on to the Army’s budget. If the Army had to fund the total Kiowa Warrior production requirement, it would need a total of $881 million. Since the Kiowa Warrior retrofit program is a necessary companion to the production program, program officials plan to request $89 million for fiscal year 1996 to retrofit 36 aircraft. Further declines in defense funding and predicted increases in funding for existing programs may have a significant impact on the Army’s ability to fund canceled or deferred aviation programs. During fiscal years 1990-1994, the Army’s budget declined from $79 billion to $61 billion, a 23-percent reduction. That compares to a 14-percent reduction in DOD’s budget during the same time frame. During the same time frame, the Army experienced a 36-percent reduction to its research, development, and acquisition funding. DOD funding for these areas declined by 31 percent. Army officials told us they expect further reductions in the Army’s budget. Recently, DOD identified an unexpected $20 billion shortfall for fiscal years 1996-1999. As a result, planning guidance reduced the Army’s overall budget projection by $2.5 billion for those years, according to Army officials. This $2.5 billion reduction could have a significant impact on the Army’s aviation modernization strategy. DOD also predicted increases in Army funding requirements during the fiscal years 2000-2010 time frame in an April 1993 report provided to the Congress on selected Army helicopter modernization programs. According to this report, aviation’s share of the Army’s research, development, and acquisition budget during the fiscal years 2000-2010 time frame may increase from the historical average of about 14 percent to about 28 percent. DOD’s analysis assumed the Army budget would remain constant at the fiscal year 1999 level. Army officials we spoke with acknowledged that the Army faces increased funding requirements in this time frame. This is brought on by the procurement of major weapon systems such as the Comanche, Longbow Apache, Bradley Fighting Vehicle, Abrams Tank, and Advanced Field Artillery System. Our recent report on DOD’s Future Years Defense Program points out that more programs have been included in DOD’s future years plans than spending plans will support. As previously discussed, the Army has documented $15.7 billion in aviation programs that it will not be able to support and, therefore, has decided to develop its spending plans for modernizing its aviation fleet around the procurement of the Comanche and upgrade of the Apache. Despite the Army’s effort to cancel or defer some aviation programs to afford its modernization strategy, the Army is faced with a current shortfall on the Comanche program estimated at $540 million. This shortfall exists because of planned reductions in the Army’s funding for fiscal years 1995-2004. In December 1993, the Comanche’s prime contractor team submitted an estimate of $819 million to complete a streamlined engineering and manufacturing development phase. That estimate was revised downward to $540 million when the contracting team “scrubbed” the estimate. In May 1994, the Army submitted its plan to “streamline” the Comanche program to the Secretary of Defense for approval. However, according to program officials, DOD expressed concern regarding the proposed reduction in prototypes and program schedule slippage that they believe would cause higher risk associated with the increased concurrency in the program. The plan proposed merging the prototype and engineering and manufacturing development phases into one development phase and having two developmental prototypes and three low-rate initial production helicopters instead of the original six developmental prototypes. The Army acknowledges DOD’s concerns that its plan to truncate the developmental phase will introduce concurrency into the Comanche acquisition program and, therefore, increase risks associated with entering production too soon. We have reported on problems associated with increased risks of concurrent development and production on other systems. For example, we have reported on various programs that problems found in developmental testing, which have to be corrected in already produced or concurrently produced models, significantly increases overall program cost and may result in an aircraft that does not meet performance requirements. Therefore, we are also concerned that the Army’s approach will lead to the same problems that DOD has experienced under those acquisition programs with concurrent development and production. As previously mentioned, we have specifically reported on our concerns about the affordability of the Comanche program. DOD agreed that the Army does not have adequate resources to implement all of its modernization programs. DOD also said it may have difficulty in obtaining sufficient future funds for its aviation programs and that streamlining the Comanche’s developmental phase of acquisition will increase concurrency and its associated risks. DOD indicated that it was in the process of formulating its fiscal year 1996 budget and, therefore, specific resource shortfalls for Army aviation programs cannot be substantiated at this stage. Likewise, DOD pointed out that the estimated $540 million shortfall associated with the Comanche program represented the difference between the Army program manager’s cost estimate and the contractor’s rough order of magnitude estimate of the funds needed to execute the streamlined engineering and manufacturing development phase of the program through fiscal year 2004. According to DOD, the amount of the shortfall, if any, has not yet been validated. As it proceeds with its aviation modernization strategy, we believe the Army needs to resolve several inconsistencies and make a final decision regarding its total force structure and unit force composition. The total force structure the Army chooses—15 or 18 division—will have an impact on the number and mix of helicopters in the Army’s future helicopter fleet. In light of anticipated reductions in future Army budgets and concomitant force structure changes, we believe alternatives to the Army’s current aviation modernization option may become more attractive. Should the Comanche be delayed or not produced, we believe alternative attack and reconnaissance helicopters exist that have the ability to conduct most, if not all, of the Comanche’s roles and missions. Like the other services, the Army is faced with a major dilemma—how does it fulfill its mission in the face of reduced resources. To achieve its mission objectives, the Army has opted to modernize its force through the acquisition of weapon systems that it states would provide the necessary technological advantages on the battlefield. For its aviation modernization strategy, the Army has chosen to procure the Comanche helicopter and upgrade the Apache—an option that can only be funded at the expense of other aviation modernization programs that the Army’s modernization plans indicate are important to the performance of its aviation missions. In addition to predicted future funding shortfalls, the Army is already faced with a funding shortfall in the Comanche program of about $540 million and, therefore, wants to “streamline” the Comanche acquisition program. To us, this is just another name for introducing concurrency to the program and, therefore, increasing the risks associated with entering production too soon. We recommend that the Secretary of the Army revise the Army’s aviation modernization strategy in order to consider (1) the agreed upon force structure, (2) the validated mix and quantity of helicopters for each aviation unit, and (3) an analysis of appropriate alternative capabilities to satisfy the aviation mission’s various roles. This could be done at the same time the next Aviation Modernization Plan is prepared. In reviewing the Army’s revised Aviation Modernization Plan currently planned to be submitted in January 1995, the Congress should consider whether it adequately addresses the issues in this report. The Congress may also wish to consider requiring the Secretary of the Army to forego any acquisition streamlining initiatives for the Comanche program until the revised modernization strategy is submitted. DOD pointed out that the Army’s revised Army Modernization Plan, a subset of which is the Aviation Modernization Plan, should be out by January 1995, and Army leadership intends to provide it to the Congress and the Secretary of Defense. Therefore, DOD felt that our recommendation and the matters for consideration concerning the need for a revised strategy were not necessary. DOD also pointed out that since the Army now intends to take another look at the streamlining proposal in the third quarter of fiscal year 1995, our matters for congressional consideration concerning streamlining were unnecessary. We have revised the report to incorporate DOD’s suggested technical corrections and to more fully explain the basis for the conclusions regarding user perceptions. However, after careful consideration of DOD’s comments, we continue to believe that our recommendation and matters for congressional consideration concerning streamlining are still valid. Although the Army is revising its Aviation Modernization Plan, neither DOD nor the Army provided any indication of how the revised plan would address our concerns. Moreover, DOD provided no analyses that alternative aircraft options had been studied in developing the Army’s aviation modernization strategy. We have, therefore, revised the matters for congressional consideration to suggest that the Congress carefully review the Army’s plan to ensure that it addresses the issues in this report. We have consistently reported on our concerns with concurrent development and production of DOD’s weapon systems. In fact, in our May 27, 1992, report on the need to reassess the Comanche program, we raised our concern about concurrency and recommended that the Secretary of the Army eliminate concurrency to the extent practicable. At that time, DOD agreed with our recommendation and noted that it planned to consider the issue in its next scheduled program review. We continue to believe that Army “streamlining” initiatives should be postponed at least until the Aviation Modernization Plan has been reviewed by the Congress and until the future of the Comanche program is determined by the Deputy Secretary of Defense’s review of selected major acquisition programs and their alternatives. | Pursuant to a congressional request, GAO reviewed whether: (1) the Army's plan for modernizing its aviation fleet is still valid; (2) there are alternative aircraft systems to the ones the Army plans to acquire; and (3) the Army's funding plans will meet all of its modernization requirements. GAO found that: (1) the validity of the Army's aviation modernization strategy is questionable; (2) the Army has overstated expected benefits and has understated the technical risks associated with the major systems that comprise its modernization strategy; (3) some Army personnel are concerned that the current procurement plan could result in an inappropriate mix of helicopters and adversely impact their operational effectiveness; (4) the Army has not fully considered alternative helicopters and weapon systems that could accomplish many of the planned roles and missions of the Comanche helicopter; (5) the Army plans to use most of its available resources to procure Comanche helicopters and upgrade Apache helicopters while deferring or cancelling funding of other Army helicopter modernization programs; (6) the Army's Comanche program will be short about $540 million through fiscal year 2004; and (7) to address the shortfall in Comanche funding, the Army plans to streamline the developmental stages of the Comanche program, thereby increasing the risks associated with entering production before the aircraft has been tested and shown to meet specifications. |
HUD defines elderly households as those in which the householder—the person whose name is on the lease, mortgage, or deed—or the householder’s spouse is at least 62 years old. Elderly households occupied about one-quarter (26 million) of the approximately 106 million housing units in the United States in 2001, according to the American Housing Survey. A large majority of these elderly households were homeowners. A small share of elderly households, about 19 percent or 5 million, rented their homes (compared to about 36 percent of nonelderly households), and about 3.3 million of these elderly households were renters with very low incomes—that is, 50 percent or less of area median income. The Housing Act of 1959 (P.L. 86-372) established the Section 202 program, which began as a direct loan program that provided below-market interest rate loans to private nonprofit developers, among others, to build rental housing for the elderly and people with disabilities. In 1990, the Cranston- Gonzalez National Affordable Housing Act (P.L. 101-625) modified Section 202 by converting it from a direct loan program to a capital advance program. In its current form, Section 202 provides capital advances—effectively grants—to private nonprofit organizations (usually referred to as sponsors or owners) to pay for the costs of developing elderly rental housing. As long as rents on the units remain within the program’s guidelines for at least 40 years, the sponsor does not have to pay back the capital advance. HUD calculates capital advances in accordance with development cost limits that it determines annually, and HUD’s policy is that these limits should cover the reasonable and necessary costs of developing a project of modest design that complies with HUD’s project design and cost standards as well as meets applicable state and local housing and building codes. To be eligible to receive Section 202 housing assistance, households must have very low income and one member who is at least 62 years old. Section 202 tenants generally pay 30 percent of their income for rent. Because their rental payments are not sufficient to cover the property’s operating costs, the project sponsor receives rental assistance payments from HUD to cover the difference between the property’s operating expenses (as approved by HUD) and total tenant rental receipts. In addition, the project sponsor can make appropriate supportive services, such as housekeeping and transportation, available to these elderly households. From year to year, Section 202 has carried significant balances of unexpended appropriated dollars for capital advances and rental assistance payments. In fiscal year 2002, the unexpended balance for Section 202 was approximately $5.2 billion. About 41 percent of this balance was in capital advance funds and 59 percent was in rental assistance funds. Some of these unexpended funds have not yet been awarded to projects, and others are for projects that have not begun construction. Once construction begins, funds are expended over several years during the construction phase and during the term of the rental assistance contracts. Other federal programs can provide housing assistance to needy elderly households, albeit not exclusively. For example, low income housing tax credits and tax-exempt multifamily housing bonds provide federal tax incentives for private investment and are often used in conjunction with other federal and state subsidies in the production of new and rehabilitated rental housing. The Housing Choice Voucher Program supplements tenants’ rental payments in privately owned, moderately priced apartments chosen by the tenants. Currently, about 260,000 of the approximately 1.5 million voucher households are elderly. Other programs are discussed in an appendix to the report. Section 202 is the only federal housing program that targets all of its rental units to very low income elderly households. Because these households often have difficulty affording market rents, program funding is directed to localities based in part on their proportions of elderly renter households that have a housing affordability problem. Section 202 insulates tenants in housing units subsidized by the program from increases in housing costs by limiting rents to a fixed percentage of household income. The program is a significant source of new and affordable housing for very low income elderly households. Even with the program’s exclusive focus on the very low income elderly, Section 202 has reached only a small share of eligible households. Congress specifically intended the Section 202 program to serve very low income elderly households and to expand the supply of affordable housing that can accommodate the special needs of this group. HUD takes into account the need for the kind of housing Section 202 provides when allocating program funds to the field offices. The criteria for allocating funds to the field offices include, among other things, the total number of very low income elderly renters in the area and the number in this group that pay more than 30 percent of their incomes for rent. According to the American Housing Survey, in 2001 about 1.7 of the 3.3 million elderly renters with very low incomes paid over 30 percent of their incomes for rent. The rent that tenants in Section 202 housing pay equals a percentage of their household incomes—generally 30 percent. This percentage remains constant, so the amount of rent tenants pay increases only when household income rises, protecting them from rent increases that might be imposed by the private housing market when market conditions change. In contrast, very low income elderly renter households that do not receive this type of assistance are vulnerable to high rent burdens and increases in market rents. Most of these households have few or no financial resources, such as cash savings and other investments, and rely primarily on fixed incomes that may not increase at the same rate as market rents. Section 202 serves another important function, potentially allowing elderly households to live independently longer by offering tenants a range of services that support independent living—for example, meal services, housekeeping, personal assistance, and transportation. HUD ensures that sponsors have the managerial capacity to assess tenants’ needs, coordinate the provision of supportive services, and seek new sources of assistance. HUD pays a small portion of the costs of providing these services through its rental assistance payments. According to the American Housing Survey, in 2001 about 1.3 million, or 40 percent, of elderly renter households with very low incomes received some form of rental assistance from a government housing program, including Section 202. According to our analysis of HUD program data, about 260,000 Section 202 units with rental assistance generally served very low income elderly households in 2001. Taken together, these two sources of data suggest that Section 202 served around one-fifth of the 1.3 million assisted elderly households identified in the American Housing Survey. While Section 202 is an important source of affordable elderly housing, the program has reached a relatively small fraction of very low income elderly renter households. Between 1985 and 2001, Section 202 reached no more than about 8 percent of elderly households eligible for assistance under the program. Also, during this period, many of the elderly renter households with very low incomes—ranging from about 45 to 50 percent—had housing affordability problems. Other federal programs that develop rental housing generally target different income levels, serve other populations in addition to the elderly (including families with children and people with disabilities) and do not require housing providers to offer supportive services for the elderly. Most of the Section 202 projects funded between fiscal years 1998 and 2000 did not meet HUD’s guideline for approving the start of construction within 18 months. However, a slight majority of the projects were processed and approved to start construction within 24 months. Timeliness varied both across HUD’s field offices and by project location (metropolitan versus nonmetropolitan areas). As well as taking longer to complete than other projects and thus delaying benefits to very low income elderly households, projects that were not approved for construction after the 18-month time frame increased the Section 202 program’s year-end balances of unexpended appropriations. HUD’s guidelines state that within 18 months of the funding award date, field offices and project sponsors must complete various task before construction can commence (fig.1). Altogether, 73 percent of the Section 202 projects funded from fiscal years 1998 through 2000 did not meet this 18-month processing time guideline. These projects accounted for 79 percent of the nearly $1.9 billion in funding awarded to projects during this period. Also during this period, 78 percent of projects located in metropolitan areas exceeded the 18-month guideline as opposed to 61 percent of projects located in nonmetropolitan areas. HUD field offices may grant an extension of up to 6 months after the 18- month guideline for projects needing more time to gain approval to start construction, and many projects were approved within that 6-month time frame. Of the projects funded from fiscal years 1998 through 2000, HUD approved 55 percent for construction within 24 months of the funding award—27 percent within 18 months and 28 percent within 19 to 24 months. The remaining 45 percent of projects took longer than 24 months to be approved. We looked at the performance of HUD’s 45 field offices that process Section 202 projects and found that they had varying degrees of success in meeting the 18-month guideline. We evaluated their performance by estimating the percentage of projects approved for construction within 18 months for each field office. Among these offices, the median project approval rate for construction within 18 months was 22 percent, but their performance varied widely. Eight field offices had no projects that met the 18-month guideline, while at one office more than 90 percent of projects met the guideline. Field offices’ performance varied by region, with those located in the northeast and west being least likely to approve projects within 18 months of the funding award. Meeting processing time guidelines is important because most of the delays in total production time—that is, the time between funding award and construction completion—stem from the project processing phase. When we compared the average total production times for completed projects that did not meet HUD’s 18-month processing guideline and those that did, the delayed projects took 11 months longer than other projects to proceed from funding award to construction completion. Since the average time taken for the construction phase was very similar for all projects, most of the 11-month difference in total production time was attributable to the extra 10 months that delayed projects took to complete the processing phase. Delayed processing of Section 202 projects also affected the Section 202 program’s overall balances of unexpended appropriations. At the end of fiscal year 2002, for example, HUD had a total of $5.2 billion in unexpended Section 202 funds. A relatively small part of these unexpended funds—about 14 percent—was attributable to projects that had not yet been approved to start construction and had exceeded HUD’s 18-month processing time guideline. Consequently, none of the funds reserved for these projects had been expended. By contrast, the remaining 86 percent of unexpended funds were associated with projects for which HUD was in the process of expending funds for construction or rental assistance. For example, almost half of the unexpended balances—about 48 percent—resulted from projects that had already been completed but were still drawing down their rental assistance funds as intended under the multiyear project rental assistance contract between HUD and the project sponsor. Our review of projects funded from fiscal years 1998 through 2000 shows that several factors impeded Section 202 projects from meeting the 18- month processing time guideline, including insufficient capital advances, limited training and guidance for HUD field office staff on processing policies and procedures, and limitations in HUD’s project monitoring system. Factors external to HUD, such as sponsors’ level of development experience and requirements established by local governments, also hindered processing. Although HUD policy intends for capital advances to fund the cost of constructing a modestly designed project, capital advances have not always been sufficient to cover these expenses. HUD field office staff, project sponsors, and consultants reported that program limits on capital advances often kept projects from meeting HUD’s time guideline for approving projects for construction. Most field offices, and every sponsor and consultant that we surveyed, reported that insufficient capital advances negatively affected project processing time, and a substantial majority of respondents indicated that this problem occurred frequently. Many respondents also reported that securing secondary financing to supplement the capital advance amount often added to processing time. According to nearly all sponsors and consultants, the capital advance amounts set by HUD were frequently inadequate to cover land, labor, and construction costs as well as fees imposed by local governments. As a result, sponsors had to seek secondary financing from other federal, state, and local sources—including other HUD programs—or redesign projects to cut costs, or both. According to a HUD official, the agency is currently initiating steps to study the sufficiency of capital advances in covering project development costs. In 1996, to help ensure that field office staff and project sponsors could complete project processing requirements within the 18-month time guideline, HUD adopted changes that were intended to streamline processing procedures. One of the key changes included requiring field office staff to accept sponsor-provided certifications of architectural plans, cost estimates, and land appraisals. Previously, field office staff performed detailed technical reviews of these items. According to our survey, differences in the procedures field offices used to approve projects for construction and the lack of staff training and experience affected project processing time. For example, most consultants and sponsors in our survey responded that inconsistent implementation of streamlined processing procedures by field offices caused delays, as did insufficient training for and inexperience of field office staff. Some consultants and sponsors whom we interviewed told us that some field offices continued to conduct much more detailed and time- consuming technical reviews of project plans than HUD’s current policies require. HUD has provided limited guidance for field office staff on the current processing policies and procedures. At the time of our review, most field office staff had not received any formal training on Section 202 project processing. According to HUD, in 2002, the agency required representatives from each field office to attend the first formal training on project processing for field office staff since at least 1992. Although HUD headquarters expected those who attended to relay what they had learned to other staff members in their own offices, our survey showed that by November 2002 no on-site training had occurred at about a quarter of the field offices. We also found that HUD’s field office staff was relying on out- of-date program handbooks that did not reflect the streamlined processing procedures. HUD’s project monitoring system was not as effective as it could have been and may have impeded HUD’s oversight of project processing. HUD officials told us that headquarters periodically uses its Development Application Processing (DAP) system to identify projects that have exceeded the 18-month processing time guideline. In addition, headquarters contacts field offices on a quarterly basis to discuss the status of these delayed projects. Nevertheless, HUD officials have acknowledged that there are data inaccuracies in the DAP system. The lack of reliable, centralized data on the processing of Section 202 projects has limited HUD headquarters’ ability to oversee projects’ status, determine problematic processing stages, and identify field offices that may need additional assistance. HUD officials indicated that enhancing the DAP system is a priority, but that a lack of funding has hindered such efforts. Finally, other factors outside of HUD’s direct control kept some projects from meeting the time guideline, according to field office representatives and sponsors and consultants responding to our survey. Almost all survey respondents agreed that project processing time was negatively affected when sponsors were inexperienced in project development. Nearly 60 percent of field offices, and almost 40 percent of sponsors and consultants, indicated that this problem occurred frequently. A majority of survey respondents reported that local government permitting and zoning requirements prolonged project processing, although we found differences of opinion on whether these problems occurred frequently. Community opposition and environmental issues were also reported to negatively affect project processing time, but not frequently. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions at this time. For further information on this testimony, please contact David G. Wood at (202) 512-8678 or Paul Schmidt at (312) 220-7681. Individuals making key contributions to this testimony included Emily Chalmers, Mark Egger, Daniel Garcia-Diaz, William Sparling, and Julianne Stephens. 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. | In 2001, an estimated 2 million elderly households with very low incomes (50 percent or less of area median income) did not receive housing assistance. The Department of Housing and Urban Development (HUD) considered most of these households to be "rent burdened" because they spent more than 30 percent of their incomes on rent. The Section 202 Supportive Housing for the Elderly Program provides capital advances (grants) to nonprofit organizations to develop affordable rental housing exclusively for these households. Based on a report issued in May 2003, this testimony discusses the role of the Section 202 program in addressing the need for affordable elderly housing and factors affecting the timeliness of approving and constructing new projects. As the only federal housing program that targets all of its rental units to very low-income elderly households, HUD's Section 202 program provides a valuable housing resource for these households. Although they represent a small share of all elderly households, very low income elderly renters have acute housing affordability problems because of their limited incomes and need for supportive services. The Section 202 program offers about 260,000 rental units nationwide and ensures that residents receive rental assistance and access to services that promote independent living. However, even with the program's exclusive focus, Section 202 has only reached an estimated 8 percent of very low-income elderly households. More than 70 percent of Section 202 projects in GAO's analysis did not meet HUD's time guideline for gaining approval to start construction. These delays held up the delivery of housing assistance to needy elderly households by nearly a year compared with projects that met HUD's guideline. Several factors contributed to these delays, particularly capital advances that were not sufficient to cover development costs. Project sponsors reported that because of insufficient capital advances, they often had to spend time seeking additional funds from HUD and other sources. Although HUD's policy is to provide sufficient funding to cover the cost of constructing a modestly designed project, HUD has acknowledged that its capital advances for the Section 202 program sometimes fall short. Other factors affecting the timeliness of the approval process include inadequate training and guidance for field staff responsible for the approval process, inexperienced project sponsors, and local zoning and permit requirements. |
The financial regulatory framework in the United States was built over the last 150 years, largely in response to crises and significant market developments. As a result, the regulatory system is complex and fragmented. For some time, we have reported that the U.S. financial regulatory system has not kept pace with major developments in financial markets and products in recent decades. Although the Dodd-Frank Act has brought additional changes, the U.S. financial regulatory structure largely remains the same. The U.S. financial regulatory structure is a complex system of multiple federal and state regulators as well as self-regulatory organizations (SRO). In the banking industry, the specific regulatory configuration depends on the type of charter the depository institution chooses. Charter types for depository institutions include commercial banks, savings associations, and credit unions. These charters may be obtained at the state or federal level. The prudential regulators—all of which generally may issue regulations and take enforcement actions against industry participants within their jurisdiction—are identified in table 1. In addition, as will be discussed, the Dodd-Frank Act created CFPB as an independent bureau in the Federal Reserve System that is responsible for regulating the offering and provision of consumer financial products and services under federal consumer financial laws. Under the Dodd-Frank Act, certain authority vested in the prudential regulators and other regulators was transferred to CFPB on July 21, 2011. The securities and futures industries are regulated under a combination of self-regulation (subject to oversight by the appropriate federal regulator) and direct oversight by SEC and CFTC, respectively. SEC oversees the securities industry’s SROs, and the securities industry as a whole, and is responsible for administering federal securities laws and developing regulations for the industry. SEC’s overall mission includes protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation. CFTC oversees the futures industry and its SROs. Under the Dodd-Frank Act, CFTC also has extensive responsibilities for the regulation of swaps and certain entities involved in the swaps markets, and SEC has comparable authority for markets in security- based swaps. CFTC and SEC have responsibility for administering federal legislation and developing comprehensive regulations to protect the public from fraud and manipulation, insure the financial integrity of markets, and help to foster better risk management, among other things. Further, state regulators oversee the insurance industry and contribute to the oversight of banks and securities as well. Certain housing market participants, including the housing finance government-sponsored enterprises—Fannie Mae and Freddie Mac (the enterprises)—and the Federal Home Loan Bank System, are supervised by FHFA. FHFA has authority to take enforcement actions against, appoint itself conservator or receiver for, and resolve these enterprises. Federal financial regulators are continuing to implement reforms pursuant to the Dodd-Frank Act. A key goal of the act was to promote the stability of the financial system, and the act puts forward a number of reforms to achieve this goal, such as provisions related to identifying and addressing systemic risk and enhancing supervision of large, complex financial institutions. Other reforms seek to expand protections for consumers and investors and expand oversight to entities that were less regulated. The implementation of the reforms is largely being driven by the rulemakings or other key actions of the various responsible financial regulators, and as figure 1 shows, the status of the regulators’ implementation of these reforms varies. As of December 2012, regulators had finalized rules for a little less than half of the 236 required rulemakings and other key rulemakings that we identified. The remaining required rulemakings and other key rulemakings have not been finalized or have yet to be proposed. Additionally, of the 236 provisions we identified, over two-thirds (157) required regulators to take action by a specific date. Among the provisions with deadlines that passed as of December 2012 (a total of 134 provisions), regulators had missed the act’s deadlines for the majority (119, or 89 percent) of the provisions. The recent crisis highlighted several sources of systemic risk, including the potential for one financial firm’s distress to spill over into the broader financial system and economy and for systemic risk to be generated and propagated outside of the largest financial firms. This was due, in part, to interconnections not only among firms but also among markets. To better monitor and contain the potential for such events to create systemic risk and increase overall system stability, the act mandated various reforms including creating FSOC and the Office of Financial Research (OFR); establishing heightened prudential requirements for certain nonbank financial companies and new capital standards for banks and bank holding companies; establishing the Orderly Liquidation Authority (OLA) to address failures of certain financial institutions; expanding the regulation of the swaps market; and banning banking entities from engaging in certain types of trading and investments. However, the implementation of many of these reforms remains ongoing and the effectiveness of some remains an open question. The 2007-2009 financial crisis highlighted the lack of an agency or mechanism responsible for monitoring and addressing risks across the financial system and a shortage of timely information to facilitate this oversight. To address these limitations, the Dodd-Frank Act created FSOC to provide, for the first time, an entity charged with monitoring and identifying risks to financial stability throughout the entire financial system. The act also established OFR to serve FSOC, its member agencies, and the public by improving the quality, transparency, and accessibility of financial data and information; conducting and sponsoring research related to financial stability; and promoting best practices in risk management. The voting members of FSOC include the Secretary of the Treasury and the heads of CFPB, CFTC, FDIC, Federal Reserve, FHFA, National Credit Union Administration, OCC, SEC, and an independent voting member with insurance expertise. The nonvoting members include the director of the Federal Insurance Office, the director of OFR, and a state banking supervisor, a state insurance commissioner, and a state securities commissioner. on regulating proprietary trading, contingent capital, and concentration limits on large financial companies. FSOC has also issued two annual reports addressing market and regulatory developments across the financial system. In addition, FSOC voluntarily issued rulemakings explaining the processes and criteria that it will follow in designating financial market utilities—entities that provide critical services to the markets such as clearinghouses that process trading information and facilitate payments associated with trades—as systemically important and nonbank financial companies for supervision by the Federal Reserve. OFR—created by the act to support FSOC, its member agencies, Congress, and the public by improving financial data and conducting research related to financial stability—has taken a number of steps to help For example, in July 2012 OFR released its first annual fulfill its mission. report, which assessed the state of the U.S. financial system.also begun a process to assemble an inventory of data that FSOC member agencies obtain, which OFR staff described as a first step toward standardizing data, reducing duplication, and eventually lowering costs for industry and regulators. OFR has also collaborated with industry, foreign government entities, and international bodies in efforts to create a legal entity identifier (LEI), which OFR describes as an emerging global standard that will enable regulators and companies around the world to quickly and accurately identify parties to financial transactions. Additionally, OFR has initiated a working paper series in which OFR researchers often collaborate with outside academics. Three papers have been published, including one that catalogs systemic risk monitoring systems and another that describes ways to improve risk management at financial institutions. Several more papers will be published in the coming months. OFR has Although the creation of FSOC and OFR could assist the U.S. regulatory system in identifying systemic threats, they will have to overcome various challenges to help ensure that these reforms achieve their intended goals. First, FSOC’s key missions—to identify risks to financial stability and respond to emerging threats—are inherently challenging. For example, key indicators, such as market prices, often do not reflect these risks; such threats do not develop in precisely the same way in successive crises; financial innovations are not well understood; and according to experts, effectively monitoring and mitigating systemic risk is a very large and procedurally complex undertaking. Additionally, actions to preemptively mitigate threats may appear unnecessary or too costly at the time they are proposed or taken. Second, FSOC’s effectiveness hinges to a large extent on collaboration among its many members, almost all of whom come from federal and state agencies with their own specific statutory missions. In testifying before Congress on Dodd-Frank rulemakings, the chairperson of FSOC recognized this challenge, noting that coordination in the rulemaking process was hard because the act left in place a financial system with a complex set of independent agencies with overlapping jurisdictions and different responsibilities. Third, OFR faces the challenge of trying to build a world-class research organization from the ground up while meeting shorter-term goals and responsibilities. Those researchers who supported the creation of OFR have suggested that it will take many years for the new entity to provide the insights that will ultimately be expected of it. In addition, in a September 2012 report, we concluded that the ability of FSOC and OFR to fundamentally change the way the federal government monitored threats to financial stability remains to be seen. The uncertainty partly stemmed from the newness of the entities, as both were continuing to develop needed management structures. But we also noted that limits in FSOC’s and OFR’s transparency contributed to questions about their effectiveness. We made 10 recommendations to FSOC and OFR to strengthen their accountability and transparency. These include FSOC and OFR clarifying their monitoring responsibilities to better ensure that the monitoring and analysis of the financial system are comprehensive and not unnecessarily duplicative, and FSOC systematically sharing key financial risk indicators among member agencies to assist in identifying potential threats for further monitoring or analysis. In responding to the recommendations in this report, Treasury emphasized the progress that FSOC and OFR have made since their creation, including preparing rules and guidance, promoting transparency and accountability by testifying before Congress, providing information to oversight bodies, and making information available on websites. Treasury also stated that officials would carefully consider the report’s findings and recommendations, and would share them with the council for their review and consideration. The recent financial crisis revealed weaknesses in the existing regulatory framework for overseeing financial institutions. For example, although large, interconnected financial firms were subject to some form of federal supervision and regulation, the oversight proved inadequate and inconsistent. The crisis also showed that regulators did not require financial firms to hold sufficient capital to cover their trading and other losses or plan for a scenario in which liquidity was sharply curtailed. To address these shortcomings, the Dodd-Frank Act requires the Federal Reserve to supervise and develop enhanced capital and prudential standards for bank holding companies, including foreign banking organizations, with $50 billion or more in consolidated assets and nonbank financial companies designated by FSOC for supervision by the Federal Reserve. The act also requires the Federal Reserve to establish a regulatory framework for the early remediation of financial weaknesses for these companies. The act requires the enhanced prudential standards to be more stringent than standards applicable to other bank holding companies and financial firms that do not present similar risks to U.S. financial stability. The act further requires the enhanced standards to increase in stringency based on the risk characteristics of each firm. In general, the Federal Reserve has authority to tailor the application of the prudential standards, including differentiating among companies on an individual basis or by category. Some key actions to implement these reforms have not been completed. The Federal Reserve has issued proposed and final rules implementing certain elements of these requirements. In January 2012, the Federal Reserve proposed regulations on enhanced prudential standards and early remediation requirements for U.S. bank holding companies with total consolidated assets of $50 billion or more and U.S. nonbank financial companies supervised by the Federal Reserve. These proposed regulations included risk-based capital and leverage requirements, liquidity requirements, single-counterparty credit limits, overall risk management and risk committee requirements, stress test requirements, early remediation requirements, and debt-to-equity ratio requirements for companies that FSOC has determined pose a grave threat to financial stability. In October 2012, the Federal Reserve issued a final rule implementing the supervisory and company-run stress test requirements included in the December 2011 proposal. Federal Reserve issued proposed regulations that would implement the enhanced prudential standards and early remediation requirements required to be established by the Dodd-Frank Act for foreign banking organizations and foreign nonbank financial companies supervised by the Federal Reserve. According to the Federal Reserve, the proposed standards for foreign banking organizations are broadly consistent with the standards proposed for large U.S. bank holding companies and U.S. nonbank financial companies. As required by the act, FDIC and OCC also issued rules in October 2012 mandating stress testing by the institutions they supervise with assets of over $10 billion. In addition to the enhanced prudential standards for certain U.S. bank holding companies and identified U.S. nonbank financial companies, under the act, the regulators are also required to establish minimum leverage and risk-based capital requirements, on a consolidated basis, that apply to insured depository institutions, bank and thrift holding companies, and systemically important nonbank financial companies. In June 2012, OCC, the Federal Reserve, and FDIC proposed comprehensive revisions to their regulatory capital framework through three concurrent notices of proposed rulemaking. The proposals would revise the agencies’ current capital rules to incorporate changes made by the Basel Committee on Banking Supervision—a body that sets international standards for bank capital and liquidity—to the Basel capital framework consistent with relevant provisions of the Dodd-Frank Act. According to the regulators, the reforms contained in the rule would, among other things, improve the resilience of the banking sector in times of stress. The proposed rules, which were published in August 2012, include an extended comment period that ended in October 2012. The provisions in U.S. regulators’ implementation of these capital requirements are intended to conform to these international standards and are proposed to phase in over the next 10 years. The agencies received thousands of comment letters from the public, including banking organizations of all sizes, trade groups, academics, public interest advocates, and private individuals, through the comment period. According to testimony before Congress given by the Federal Reserve’s banking supervision director, the breadth of the proposed changes has raised concerns among many industry participants that a January 2013 implementation date for the rules would not provide sufficient time for them to understand the rules or make necessary system changes. As a result, the banking agencies announced in November 2012 that they did not expect to finalize the proposal by January 2013—as expected in the Basel Agreement. During the recent crisis, the federal government took unprecedented actions to address the financial difficulties of several large financial firms, including making equity investments in some firms or placing others in government-administered conservatorships. The Dodd-Frank Act provides a new option for resolving failing financial firms whose disorderly resolution would have serious adverse effects on U.S. financial stability by creating a process under which FDIC has the authority to liquidate large financial firms, including nonbanks, outside of the bankruptcy process—called the Orderly Liquidation Authority (OLA). Under this authority, FDIC may be appointed receiver for a financial firm if the Treasury Secretary determines that the firm’s failure threatens U.S. financial stability. SIFIs also must formulate and submit to the Federal Reserve, FSOC, and FDIC resolution plans (or “living wills”) that detail how they could be resolved in the event of material financial distress or failure. Progress has been made to implement the reforms related to resolving large, complex financial companies. For instance, FDIC finalized several rules to implement OLA. The Federal Reserve and FDIC finalized and made effective rules relating to resolution plans, and the large financial institutions that were the first firms required to prepare such plans submitted these to regulators as expected in July 2012. However, work remains to be completed in other important areas. Rules that either remain in proposed form or have not yet been proposed include those that establish a program to guarantee obligations of solvent depository institutions and their holding companies and affiliates during times of severe economic stress, and implement OLA for broker-dealers. In addition, regulators have not yet completed their reviews of the large bank holding companies’ resolution plans. Although many market observers expect that these resolution reforms will help mitigate threats to the financial system posed by the failure of a SIFI or other large, complex, interconnected financial firm, some questions about their potential effectiveness have been raised. Some observers noted that OLA is new and untested, and its effectiveness in reducing risky behavior by institutions will depend on the extent to which market participants believe that FDIC will use OLA to make an institution’s creditors and shareholders bear losses of any SIFI failure. Furthermore, others questioned whether FDIC has sufficient capacity to use OLA to handle multiple SIFI failures and thus prevent further systemic disruption. Others have raised concerns over whether any FDIC-imposed losses on some creditors of a failed firm could threaten the soundness of other important financial institutions or how FDIC would handle the non-U.S. subsidiaries of a failed firm. Experts also expressed mixed views on the usefulness of the living wills. One market expert expressed doubt that these living wills would prove useful for resolving a complex firm’s failure, but was more optimistic that the documents could serve to encourage regulators to make such firms simplify their organizational structures and become more transparent. Experts further noted that resolution plans may provide regulators with critical information about a firm’s organizational structure that could aid the resolution process or motivate SIFIs to simplify their structures and this simplification could help facilitate resolution. However, other experts commented that although resolution plans may assist regulators in gaining a better understanding of SIFI structures and activities, the plans may not be useful guides during an actual liquidation—in part because the plans could become outdated or because the plans may not be helpful during a crisis. Resolution plans also may provide limited benefits in simplifying firm structures, in part because tax, jurisdictional, and other considerations may outweigh the benefits of simplification. FSOC has found that over-the-counter (OTC) derivatives, particularly credit default swaps, generally were a factor in the propagation of risks during the recent crisis because of their complexity and opacity, which contributed to excessive risk taking, a lack of clarity about the ultimate distribution of risks, and a loss in market confidence. Although some standardized swaps, such as certain interest rate swaps, have been cleared through clearinghouses—which stand between counterparties in assuming the risk of counterparty default—credit default swaps and most other swaps traditionally have been traded in the OTC market where holders of derivatives contracts bear the risk of counterparty default. Title VII of the Dodd-Frank Act establishes a new regulatory framework for swaps to reduce risk, increase transparency, and promote market integrity in swaps markets by, among other things, moving trading to exchanges (or similar trading platforms), requiring that many trades are to be centrally cleared, and providing for greater public dissemination of trading information. To implement the act’s reforms, SEC is responsible for any security-based swaps, SEC and CFTC are jointly responsible for mixed swaps, and CFTC is responsible for all other types of swaps. Progress has been made in implementing derivatives reforms. CFTC officials noted that swap reform has involved multiple rulemakings including rules, such as defining swaps, registering dealers and reporting to CFTC on the size of positions in swaps held by such dealers. The swaps definition rules are in place and effective, and dealer registration is ongoing. As of April 2012, rules requiring dealers to publicly report their swaps positions to CFTC were final, and in December 2012 the CFTC Chairman testified that CFTC had finalized approximately 80 percent of Dodd-Frank swaps rules. However, the rules that will specify how much margin—funds posted with a clearinghouse that can serve to absorb losses as the value of the swaps position changes—and how much capital a swaps dealer must hold to absorb losses on its swaps remain incomplete. Because swaps are globally traded, the regulatory developments in overseas markets also have affected implementation of the swaps reforms. Although many other jurisdictions have been developing new regulatory regimes, the United States has been one of the first jurisdictions to have enacted legislation in this area. The Financial Stability Board (FSB)—which is an organization of representatives of national authorities responsible for financial stability that has been established to coordinate and promote the implementation of effective regulatory, supervisory, and other financial sector policies—reported to the Group of Twenty leaders in October 2012 that regulatory uncertainty remains the largest impediment to timely implementation of swaps regulatory reforms across countries. FSB urged continued discussions to identify and address any conflicts in rules affecting cross-border activities. According to SEC staff, SEC and CFTC have been active participants in these ongoing discussions. In some cases, international bodies have requested the delay of some derivatives-related regulations because of the importance of coordination. For example, CFTC officials noted that one of the reasons their Commission voted to reopen the comment period for the swaps capital and margin requirement rule was to allow European regulators to complete similar rules, potentially by early 2013. The role that proprietary trading—trading activities conducted by banking entities for their own accounts as opposed to those of their clients— played in the recent crisis is a matter of debate. Some experts have stated that the ability of banking entities to use federally insured deposits to seek profits for their own accounts provides incentives for them to take on excessive risks. In particular, academics have noted that commercial banks benefit from government-insured deposits that subsidize their funding and thus do not bear the full risks of their proprietary activities. We previously reported that proprietary trading provided revenues but also produced large losses for some financial institutions during the recent crisis. However, others dispute that proprietary trading creates significant risks. For example, one market observer questioned the role of proprietary trading in the crisis—noting that losses by banks came from holdings of mortgage-related securities and not their proprietary trading activities. In addition, he noted that banks have expertise and add value in conducting trading activities and that such trading is likely not more risky than lending. To address potential risks of proprietary activities, the act generally prohibits proprietary trading by insured depository institutions and their affiliates and restricts the extent to which these companies can sponsor or invest in hedge and private equity funds. Regulators have taken some steps to implement this reform. For instance, the Federal Reserve issued the final rule and subsequent policy statement on the time frame for the effective dates (beginning in July 2014 unless extended by the Federal Reserve) after which banking entities must fully conform their activities and investments with these requirements. FSOC also issued a study recommending the types of monitoring metrics that regulators could use to help ensure compliance. In addition, the regulators responsible for issuing a rule specifying how affected institutions must comply—the Federal Reserve, FDIC, OCC, SEC, and CFTC—issued proposed rules in November 2011 and February 2012. The proposed rules have generated debate and interest from thousands of commenters, and some in Congress have called for a repeal of the law or delay of its implementation, and others have called for regulators to issue a revised proposal. As of November 2012, staff from some of the regulators responsible for preparing the rules related to proprietary trading and fund investment restrictions told us that they were considering the public comments and next steps, but could not estimate when the next action would occur. In our 2011 report on proprietary trading, we recommended that regulators collect and review more comprehensive information on the nature and volume of activities potentially covered by the act. Regulators have also been implementing Dodd-Frank Act reforms to improve protections for consumers and investors. In addition to creating a new regulatory body—CFPB—that will consolidate certain rulemaking, supervision, and enforcement authorities relating to various consumer financial laws, including many of those relating to mortgage lending, the act also included changes to securitization practices to better protect investors. In addition, the act expands regulatory oversight of credit rating agencies and advisers of private funds. Many bank and nonbank mortgage lenders weakened their underwriting standards and made mortgage loans to homebuyers who could not afford them or engaged in abusive lending practices before the crisis. After many homeowners were unable to make their mortgage payments, many of these mortgages went into default and led to widespread foreclosures. To address these consumer financial protection failures, the act created CFPB, among other reforms. Before the passage of the act, consumer financial protection responsibilities were vested in multiple agencies across the federal government. The creation of CFPB brought many of the consumer financial protection rulemaking and other authorities of the federal government into one agency, with the purpose of increasing accountability for such responsibilities. The authority for many of these responsibilities transferred to CFPB in July 2011, but staff told us that it was not allowed to move forward with its full regulatory responsibilities until the appointment of its director in January 2012. CFPB has issued rules and begun taking enforcement actions, including obtaining refunds for consumers and imposing penalties on certain credit card issuers for practices that violated the law. For example, in January 2012, CFPB issued rules, which were formally published in February 2012, to protect consumers who send money electronically to foreign countries. In January 2013, the CFPB issued two rules that established numerous mortgage servicing requirements. Although CFPB’s mission extends beyond the mortgage market, many of its initial rulemaking efforts have focused on this market as the bureau works to implement the act’s reforms. For example, the act prohibits a creditor from making a residential mortgage loan unless the creditor makes a reasonable and good faith determination based on verified and documented information that, at the time the loan is made, the consumer has a reasonable ability to repay the loan according to its terms. When making that determination, the creditor must consider, among other things, the consumer’s income and assets, debt obligations, and credit history. The act created a presumption of compliance with the repayment ability requirement when creditors make “qualified mortgages.” The Federal Reserve issued a proposed rule in May 2011 that would implement the act’s ability-to-repay and qualified mortgage provisions; however, due to certain transfers of authority under the Dodd-Frank Act CFPB has responsibility for finalizing the proposal. After seeking additional public comments on new data and information related to this proposal in June 2012, CFPB issued a final rule in January 2013 that defines qualified mortgages using the criteria specified in the Dodd-Frank Act. This rule is to be effective in January 2014. Although intended to encourage responsible lending, many market observers (including consumer advocates and lenders) previously have expressed concern that the rule, as proposed, could result in overly restrictive requirements (such as debt service-to-income ratios) that would limit the availability of mortgages to lower-income and minority borrowers. However, in a prior report, we examined five of the nine qualified mortgage criteria specified in the Dodd-Frank Act for which sufficient data were available and generally found that, for each year from 2001 through 2010, most mortgages would likely have individually met each specific criterion. The act also attempts to improve investor protections through a variety of reforms, including reforming securitization practices and requiring additional disclosures. According to some market observers, institutions that created mortgage-backed securities in the lead-up to the crisis engaged in a number of practices that undermined the quality of their securities, including not adequately monitoring the quality of the underlying mortgages, because they did not bear the risk of significant losses if those mortgages defaulted. To address this risk and protect investors, the act imposes certain risk-retention obligations on securitizers to retain an economic interest of no less than 5 percent of the credit risk of any securitized asset (such as a residential mortgage) that they created unless the asset meets criteria (to be defined by the regulators) associated with a lower risk of default. Securitized mortgages that meet the criteria are exempt from the risk-retention requirement and are referred to as qualified residential mortgages. The act directs the Federal Reserve, FDIC, OCC, SEC, FHFA, and the Department of Housing and Urban Development (HUD) to jointly prescribe rules to implement these requirements. The act also requires additional disclosures to be made to investors about these asset-backed securities. Some market participants have expressed concern that restrictive criteria for qualified residential mortgages would subject some mortgages with relatively low default risks to risk retention and make mortgage credit less affordable for many borrowers, because the increased securitization costs would be passed on to borrowers in the form of higher mortgage interest rates and fees. However, FDIC officials have stated that risk retention should not result in substantially higher interest rates for non qualified residential mortgage borrowers and comes with the benefit of safer and sounder lending practices. Additionally, rulemaking agencies have indicated that a more restrictive definition could help ensure that a sufficient volume of non qualified residential mortgages subject to risk retention would be available for an active, liquid securitization market for such mortgages. Although regulators have finalized some rules in this area, they have not yet completed all of the rules that would implement the reforms described above. In January 2011, SEC published final rules that will require an issuer to perform a due diligence analysis of the underlying assets and disclose the results. However, other key reforms, such as the joint rulemaking requirement to define a qualified residential mortgage as well as the rulemaking requiring greater disclosure of information related to the loans backing specific portions of an asset-backed security remain incomplete. These rules likely will have a significant impact on the volume of private (non-enterprise) mortgage-backed securitizations. As a result, the rules likely will affect competition in the housing finance market, which is currently dominated by the enterprises. We discuss reforming the enterprises later in the report. As the financial crisis unfolded in 2007 and 2008, questions were raised about the role that credit rating agencies played in the securitization of high-risk mortgages into investment-grade securities, the accuracy of the credit ratings assigned to these securities, and the integrity of these ratings processes. Critics of credit rating agencies also pointed to the conflict of interest created by the industry’s predominant compensation model in which issuers of securities pay the rating agencies for their ratings as a contributing factor to the poor quality of ratings. In response, the Dodd-Frank Act mandated additional oversight over the credit rating agencies that issued these ratings. For example, the act created an Office of Credit Ratings within SEC, which is to provide oversight and enhanced regulation of the credit rating agencies registered with SEC as Nationally Recognized Statistical Rating Organizations. The act also requires that SEC study, among other things, an alternative means for compensating credit rating agencies that would create incentives for accurate ratings. SEC issued its study on alternative means for compensating credit rating agencies in December 2012. However, as of December 2012, SEC had yet to issue key rules related to credit rating agencies, several of which had statutory deadlines. For example, a rule preventing sales and marketing considerations of credit rating agencies from influencing the production of credit ratings and a rule that will require these entities to submit annual internal control reports to SEC remain in proposed form. Over the last decade, private funds—such as hedge funds and private equity funds—proliferated but generally were less regulated, raising questions about investor protection and systemic risk to financial markets. To address this gap, the act expands regulatory oversight to hedge and private equity funds by requiring the investment advisers to these funds to register with SEC. This would result in any such advisers that had not previously registered to begin providing reports to SEC on their activities and being subject to examinations by regulatory staff. SEC has completed all of its rulemaking requirements related to private fund oversight. SEC and CFTC also issued a joint rule, in consultation with FSOC, to establish the form and content of the reports required to be filed with SEC and CFTC by investment advisers that are registered under both the Investment Advisers Act of 1940 and the Commodity Exchange Act. The completion of these rules helps to bring a largely unregulated part of the financial markets under regulatory supervision. A variety of challenges have affected regulators’ progress in executing rulemaking requirements intended to implement the act’s reforms. Regulators to whom we spoke indicated that the primary challenges affecting the pace of implementing the act’s reforms include the number and complexity of the rulemakings required and the time spent coordinating with regulators and others. In addition, some regulators identified additional challenges, including extensive industry involvement through comment letters and litigation resulting from rulemakings, concurrently starting up a new regulatory body and assuming oversight responsibilities, and resource constraints. The regulators identified the number and complexity of the required rulemakings as a primary impediment to their implementation of financial regulatory reforms. In particular, regulators were tasked with a large volume of rulemakings and other key actions; in many cases, the act mandated their completion in relatively short time frames compared to the typical rulemaking process. For example, we identified more than 80 provisions of the act for which SEC is responsible for (solely or jointly) developing rules or taking other key actions. As of December 2012, SEC had proposed or finalized rulemakings for at least 70 of these provisions. Similarly, we identified more than 50 provisions for which CFTC is responsible for (solely or jointly) developing rules, all but one of which CFTC had proposed or finalized. According to SEC and CFTC staff, this represents a significant increase in their rulemaking agendas. In many cases, the rulemakings also involved complex issues, such as developing regulation for a previously unregulated market function. Implementing such complex regulatory reforms through the rulemaking process has resulted in delays, as the following examples illustrate. One of the major reform areas of the act requires that previously unregulated OTC swaps be brought under the regulatory umbrella. Regulators indicated this presented a unique set of challenges because the swaps market is complex and involves a large number of domestic and international participants. According to SEC staff, they had to research and acquire expertise on a range of issues. To acquire diverse perspectives and information, staff also held meetings and roundtables with industry participants and other agencies and foreign regulators before proposing the rules. Regulators responsible for implementing the restrictions on proprietary trading and hedge and private equity fund investing also indicated that developing rules on these topics has been challenging because of the knowledge they had to acquire and the multiple perspectives and interests of market participants they had to consider. The complexities of implementing the proprietary trading ban was highlighted in the rule proposed in November 2011 and February 2012, which included more than 750 questions seeking input from market participants to help inform regulators’ decision making. In other cases, the complexity involved identifying and developing new frameworks or standards for market participants. For example, regulators must replace references to credit ratings in their regulations (that is, to regulated entities’ use of or dependence on ratings) and substitute alternative standards of creditworthiness. According to the regulators, creating objective and consistent standards for creditworthiness and defining such standards by regulation is difficult and finding an alternative to the ratings these agencies produce requires a thorough understanding of how the process has functioned in capital markets. Additionally, replacing the credit ratings with an alternative standard affects other regulations and policies that rely on credit ratings. Because of the broad effects that removal of the references to credit ratings would have, regulators stated that they had to approach this task with great care to avoid unintended consequences, which is why some of these rules have yet to be finalized. Although the regulators have missed statutory deadlines to complete rulemakings, regulators told us that some of the mandated time frames were ambitious. For example, CFTC staff described the statutory timetable as a challenge, noting that they were required to issue a significant number of rules within the first year of the act’s passage. According to some of the regulators with whom we spoke with, their staffs have prioritized “getting it right” over meeting statutory deadlines, which has resulted in missing a number of the act’s deadlines. Regulators’ progress in implementing the act’s reforms also has been delayed because of the need to coordinate with other domestic and foreign regulators. We identified 58 provisions in which the act specifically mandates that regulators issue joint rules or consult with other federal financial regulators during rulemakings or other key actions. In other cases, reforms require regulators to implement rules that impact or are impacted by the rulemakings of other regulators. For example, rules related to what constitutes a “qualified residential mortgage” for securitizations have been awaiting CFPB’s issuance of the rule on what constitutes a “qualified mortgage” because the act stipulates that the definition of a “qualified residential mortgage” cannot be broader than the definition of a “qualified mortgage.” CFPB issued the final “qualified mortgage” rule in January 2013. According to many regulators with whom we spoke, coordination among domestic regulators and between domestic and foreign regulators has improved the quality of the rulemakings. For example, these efforts likely have eliminated duplication and helped fill regulatory gaps to limit risks migrating to unregulated markets, according to the regulators. Nevertheless, coordination with other regulatory bodies lengthens the time required to implement reform. To facilitate domestic coordination, while financial regulators employed some formal communication methods, they mostly used informal communications strategies and tools. Regulators generally held formal interagency meetings early in the rulemaking process, then held recurring meetings at different staff levels and facilitated coordination through informal communications (e-mail, telephone conversations, and one-on-one staff conversations). For example, FDIC, OCC, and the Federal Reserve held a principal-level meeting to discuss the major issues relating to development of risk-based capital rules. Afterwards, the agencies formed an interagency working group at the staff level that continues to work on these rules. In addition, FSOC has established a framework for consultation when it is required to be consulted or may make recommendations. On the international level, U.S. regulators also have coordinated with foreign regulators and with international standard-setting bodies. For example, in December 2012, FDIC and the Bank of England issued a joint paper that discusses their common view about how to resolve failures of large financial institutions. Also, CFTC and SEC coordinated with securities and futures regulators in other countries on various derivatives reform provisions by participating in several international groups as well as numerous conference calls and meetings. OFR staff have also coordinated with international regulators and financial market participants through the FSB to develop standards for a LEI that is intended to accurately identify parties to financial transactions. OFR played a key role leading work streams and working with other regulators and industry to provide recommendations to the Group of Twenty to guide the governance, development, and implementation of a global LEI system. During the implementation phase, OFR is serving as a vice-chair on the LEI Implementation Group and will continue to provide leadership and support as this group works towards meeting the March 2013 target for launching the LEI system. Although the federal financial regulators have developed and fostered several mechanisms to facilitate coordination and believe these efforts have improved the quality of the rulemakings, several regulators said that interagency coordination has increased the amount of time needed to develop and finalize several rulemakings. Regulators stated that working with other agencies—both domestically and internationally—can be difficult for a variety of reasons. For example, each regulator has different statutory authorities and obligations, jurisdictions, and missions. Each regulator has unique expertise and experience with the financial products or services it regulates and the supervisory structures of each agency are different. These differences can make reaching consensus (for instance, by aligning or reconciling regulations) difficult and time consuming. For example, although CFTC and SEC reached consensus on the text for the jointly issued swap entities rule, the regulators outlined different approaches in certain parts of the rule due to their regulatory jurisdiction over different products. In addition, regulators told us that they had to allow extra time for other regulators to review draft rules, hold discussions, and reach consensus. The volume of comments that regulators have received on some rules also affected the pace of rule development. For example, regulatory staff told us that they had received more than 19,000 comment letters on the proposed proprietary trading ban rules, further complicating the rulemaking process. According to these staff, the volume of comments from market participants and consumer groups has presented challenges for deciding the content of a final rule—as in the case of market participants advocating opposing or disparate positions, which regulators then needed to consider and perhaps reconcile. CFTC staff cited the example of comments relating to the amount of business that could be done before an entity would be required to register as a swaps dealer. Suggested amounts for the de minimus exception ranged from the millions to the billions of dollars. Although some comments regulators received on rules were multiple versions of similar form letters, in other cases the letters were unique and could be lengthy (more than 200 pages). OCC staff noted that the proprietary trading rule received more than 400 nonform letters with substantive comments, some of which were more than 100 pages each. The capital rules generated fewer comments, but these letters were very lengthy and had to be carefully considered. Regulator staff told us that high comment volume lengthens the rulemaking process and requires more staff review and analyze because each regulator is legally required to consider every comment it receives. In addition, industry involvement, including filing legal challenges, has delayed some regulatory efforts. According to one public interest association, intense industry lobbying efforts and the threat of lawsuits have been roadblocks to successful implementation of consumer protection reforms. Also, an industry-sponsored study has criticized the impending reforms, such as the ban on proprietary trading. In other cases, legal challenges filed by the industry have affected the pace of reforms. For example, in October 2011, CFTC approved a final rule on position limits for futures, options, and swaps related to 28 physical commodities, such as agricultural and energy products or metals, an action that the agency believed the act mandated. However, in September 2012, the United States District Court for the District of Columbia overturned the final rule after finding that the agency did not prove that the Dodd-Frank Act granted CFTC authority to issue the regulations without first determining the regulation was “necessary” or “appropriate” and therefore the regulations were vacated. CFTC appealed the District Court’s decision in November 2012, but until the appeal is completed CFTC’s requirements are not in effect for market participants. In another example, in July 2011 the United States Court of Appeals for the District of Columbia Circuit overturned SEC’s rule on proxy access requirements on the basis that SEC had failed to perform an adequate cost-benefit analysis of the rule’s impact. Although this rule was not mandated by the Dodd-Frank Act, SEC staff told us that because of this decision, they have been spending additional time on developing cost-benefit analyses for the rules they must develop under the act, which has lengthened the time needed for rulemaking. The need to establish new regulatory bodies or offices mandated by the act affected the pace of implementation of some reforms, as illustrated by the following examples: The staff responsible for establishing the new federal consumer financial protection agency—CFPB—faced the challenge of simultaneously forming its agency structure, initiating supervision and oversight responsibilities, and creating rules mandated by the act. After the act was passed in July 2010, staff detailed from Treasury offices and other federal agencies began hiring new staff and establishing internal administrative procedures and structures. Although rulemaking and other authorities relating to the consumer financial laws transferred to CFPB in July 2011, the agency did not have a director until January 2012. Until then, it was limited in its ability to issue certain rules and conduct certain oversight of entities other than banks. As of October 2012, the agency had about 1,000 staff and anticipates reaching approximately 1,300 staff sometime in 2013. While establishing regulatory operations, its staff also had to develop various rulemakings required by the act. As noted previously, CFPB had been working on a complex rule that would promote responsible mortgage lending by requiring creditors to consider a consumer’s repayment ability before making a residential mortgage loan. CFPB staff acknowledged that establishing their agency, conducting its operations, and developing various rulemakings has been challenging and likely slowed progress in some areas. The creation of new offices in SEC also has affected the pace of that agency’s rulemakings. More specifically, the Dodd-Frank Act required the creation of five new offices in SEC—including an Office of Credit Ratings. This office was established when SEC named its director in June 2012. As a result, some activities were started by other SEC divisions and offices—including finalizing rules for credit rating agencies that require them to disclose the information and assumptions used in ratings they issue—according to SEC officials. OFR also has faced the challenge of trying to build a world-class research organization from the ground up while meeting shorter-term goals and responsibilities. For example, as a new, relatively unknown entity OFR had to overcome a lack of name recognition as it has sought to hire researchers and other staff. OFR officials told us that the organization has been making steady progress to overcome this challenge, and has attracted highly qualified researchers and others to senior staff positions. The absence of a Senate-confirmed director for the organization until January 2013 slowed the process. While establishing itself, OFR also has been conducting work to further its mission to provide ongoing support to FSOC and standardize the types and format of data collected and reported by financial regulators. According to some regulators, their efforts to fully implement the reforms also have been delayed due to resource constraints their agencies face. For example, the Dodd-Frank Act increased SEC’s and CFTC’s responsibilities, including their rulemaking responsibilities. However, according to SEC and CFTC staff, their agencies did not receive commensurate increases in appropriations. As a result, staff from both CFTC and SEC told us that attempting to finalize so many interrelated and often complex rules with their existing staffing levels has been challenging. CFTC staff told us that personnel responsible for some rulemakings have had to do the work of more than one person, which increases the potential for errors and delays that interrupt the normal flow of rulemaking. Looking forward, CFTC and SEC staff expressed concerns about their ability to carry out rule enforcement. To mitigate these concerns, CFTC requested 305 additional full-time equivalent positions in its 2013 budget request. Likewise, SEC requested an additional 196 full- time equivalent positions in its 2013 budget request. Although the act addressed a number of weaknesses of the regulatory system that were exposed by the recent or past financial crises, some risks remain and others have emerged. In 2009, we reported on many of the limitations in the U.S. financial regulatory system that the 2007-2009 crisis once again revealed. For example, we noted that regulators had struggled, and often failed, to mitigate the systemic risks posed by large or interconnected financial conglomerates and to help ensure they adequately manage their risks. Problems in financial markets also resulted from the activities of less-regulated market participants—such as nonbank mortgage lenders, hedge funds, and credit rating agencies— some of which played significant roles in the financial markets. In addition, we noted that the increasing prevalence of new and more complex investment products posed challenges for regulators, investors, and consumers. In our report, we offered a framework for evaluating regulatory reform proposals that described characteristics that should be reflected in any new regulatory system (see table 2). This framework can serve as a useful lens for examining how weaknesses were addressed through the act and where additional work remains. In a number of ways, the act’s reforms—if implemented effectively—could address many characteristics of our framework. For example, the consistency of consumer protection could be increased through the establishment of CFPB, which consolidated certain of the consumer protection rulemaking, supervision, and enforcement authorities possessed by seven different federal agencies. The creation of FSOC could help to address the framework’s call for a systemwide focus on risks. Other Dodd-Frank Act reforms also address additional areas on which the framework touches. For example, if the new resolution authority—OLA—is effective, it could reduce the potential for additional taxpayer exposure arising from the failure of large financial institutions. Furthermore, regulations that will expand disclosures about mortgage- backed securities and require issuers to retain a portion of the credit risk of these securities could improve investor protection. Nevertheless, some potential risks remain and others have emerged in the years following the 2007-2009 crisis, including the following: Regulatory structure. In the framework, we called for a more effective and efficient regulatory system. Specifically, we noted several characteristics of effective and efficient oversight, including eliminating overlapping federal regulatory missions where appropriate, and minimizing regulatory burden without sacrificing effective oversight. To this end, the Dodd-Frank Act abolished the Office of Thrift Supervision, transferring its functions to OCC, FDIC, and the Federal Reserve. However, the act did not otherwise extensively consolidate the roles and responsibilities of the financial regulators and created new entities, such as OFR and CFPB. Consequently, multiple regulators may oversee different components of the same large, complex financial institutions while retaining their independence, differing approaches, and specific statutory duties and authorities, including rulemaking and enforcement. Given the fragmented regulatory structure, regulators must continue to coordinate actions across multiple agencies and try to reconcile differing approaches and authorities to better ensure effective oversight of large financial firms. Without sufficient coordination, financial institutions could seek to take advantage of variations in how agencies implement regulatory responsibilities in order to be subject to less scrutiny. We have previously noted the role that FSOC could play in promoting coordination among its member agencies, including during the rulemaking process. However, FSOC’s Chairperson has noted that he does not have the authority to force agencies to coordinate, and neither he, nor FSOC as a whole, can force agencies to adopt compatible policies and procedures. Fannie Mae and Freddie Mac. Our 2009 framework emphasizes that effective reform would minimize taxpayer exposure to financial risk, particularly when market participants encounter financial difficulties. However, the act did not address the futures of Fannie Mae and Freddie Mac that together support the majority of single-family mortgage loans. Given mounting losses, in September 2008 the enterprises were put into conservatorship and provided access to federal assistance through Senior Preferred Stock Purchase Agreements with the U.S. Treasury; together they have received over $187 billion in federal assistance as of the end of fiscal year 2012. Although recently the enterprises began earning profits that are being returned to the U.S. Treasury, the act did not address the existing taxpayer exposure from the enterprises or provide a road map to mitigate potential future losses related to them. In late 2008, a combination of government-led actions ensured the secondary mortgage market kept functioning, including Treasury’s financial backstop of these enterprises’ debt and mortgage-backed securities (MBS) holders; and MBS purchases by Treasury and the Federal Reserve. infrastructure for the secondary mortgage market, gradually contracting the enterprises’ dominant presence in the marketplace while simplifying and shrinking their operations, and maintaining foreclosure prevention activities and credit availability for both new and refinanced mortgages. In August 2012, FHFA took two actions affecting the enterprises. First, to encourage greater participation in housing markets by private firms, FHFA directed the enterprises to raise the fees they charge lenders for securitizing their mortgage loans to reduce the cost difference between securitizations done by the enterprises and those done by private firms. Second, FHFA, in conjunction with Treasury, revised the senior preferred stock purchase agreements to have the enterprises pay dividends to the U.S. Treasury based on their net worth (when positive) rather than a fixed percentage of the outstanding senior preferred stock. Among other things, this change should eliminate the need for the enterprises to borrow from Treasury to pay such dividends. In October 2012, FHFA also sought public comment on a proposal for developing a new mortgage securitization platform to process payments and perform other functions that could be used by multiple issuers that would replace the enterprises’ proprietary systems. Although such proposals and plans have been put forward, as of December 2012, no definitive plan had been developed and the enterprises remain in conservatorship, which places taxpayers at continued risk. Furthermore, given the large role that the enterprises play in the mortgage market, the future of mortgage lending depends, in part, on how the enterprises are resolved. The Treasury and HUD plan acknowledges that changes in the role of the enterprises will also require changes in the activities of HUD’s mortgage insurance and guarantee programs to ensure that the private market rather than the government expands its market share. Money market funds. The framework calls for improving the regulatory system by ensuring a focus on risks that could affect the system as a whole. However, one risk that continues to raise significant concerns is the potential systemic risk posed by money market funds (MMF). MMFs are mutual funds that seek to offer investors three primary features: return of principal, liquidity, and a market-based rate of return. During the financial crisis, runs on MMFs led to severe disruptions in the short-term credit markets in which the funds played a significant role. After a number of MMFs recorded significant decreases in the value of portfolio holdings when the market for asset-backed commercial paper collapsed in the summer and fall of 2007, these funds’ sponsors absorbed these losses. However, in 2008, the sponsor of the Reserve Primary Fund did not provide support for the relatively small losses incurred by this MMF, which led to a general run of investors withdrawing their money from money market funds, creating severe funding pressures for issuers of commercial paper. The run was stopped by unprecedented interventions by Treasury and the Federal Reserve to provide guarantees and liquidity support to the industry.stated that the events of the financial crisis highlighted that the risks posed by MMFs stem from flaws inherent in the structure of these funds (such as valuation methods that make funds susceptible to runs and a reliance on discretionary sponsor support for stability). She further stated that she considers the structural reform of money market funds one of the pieces of unfinished business from the financial crisis. The former SEC Chairman—Mary Schapiro— In 2010, the Commission adopted the first round of reforms to boost the resilience of MMF portfolios. For example, SEC required MMFs to hold more highly liquid assets and to disclose their portfolio holdings monthly. Some market observers contend these reforms are sufficient to address any risk from these funds and that further reforms are unnecessary. However, regulators and others continue to be concerned. According to a paper issued by the International Monetary Fund, strengthening the regulation of MMFs is critical especially because U.S. regulators are now prohibited from using the types of emergency authorities they employed in the recent crisis, such as the government-backed guarantees of MMFs’ obligations to shareholders that prevented further problems. In June 2012, the SEC Chairman discussed the need for SEC to pursue additional reforms, including potentially requiring funds to have a floating net asset value per share or to maintain a capital buffer of assets to absorb day-to-day fluctuations in the value of the funds’ portfolio securities. The group that represents mutual funds—the Investment Company Institute— issued a letter noting that SEC’s 2010 reforms improved the credit quality, maturity, liquidity, and transparency of money market funds and arguing that the additional changes contemplated by the SEC Chairman would effectively put an end to money market funds as an investment vehicle, which would harm investors and eliminate a funding source for many businesses. In August 2012, a majority of the SEC commissioners informed the SEC Chairman that they would not support a staff proposal to reform the structure of money market funds without further study. In September 2012, these commissioners posed several questions to SEC staff regarding various aspects of money market funds, which were addressed in a study issued in November 2012. However, as of December 2012, no official agency action had occurred. FSOC has urged SEC and other members to take certain actions to address the risks posed by cash management vehicles similar to MMFs. For instance, in July 2012 FSOC recommended that its members align regulation of cash management vehicles within their regulatory jurisdiction to limit the susceptibility of these vehicles to the risk of runs. Furthermore, at a November 2012 meeting, FSOC—under its authority to recommend that a primary financial regulatory agency apply new or heightened standards or safeguards to financial activities or practices conducted by bank holding companies or nonbank financial companies that create or increase the risk of significant liquidity, credit, or other problems—issued several proposed recommendations for reforming MMFs for a 60-day public comment period. Similar to those proposed by the SEC Chairman, these proposed alternatives for reform include requiring MMFs to have a floating net asset value per share, maintain a buffer of assets of up to 1 percent of net asset value to absorb day-to-day fluctuations in the value of the funds’ portfolio securities and allow the funds to maintain a stable net asset value.also noted that it was still preferable for the responsible regulator—SEC— to take the appropriate actions but absent such SEC actions, other regulators might have to act. However, although FSOC can make such recommendations and agencies must respond to such recommendations, FSOC cannot require that such changes be implemented. At the November meeting, the FSOC Chairman Concentration of risks. The framework also calls for the U.S. regulatory system to subject all activities posing risks to appropriate oversight and protections. However, market observers have raised concerns that key areas—the tri-party repurchase (repo) market and swaps clearinghouses—in which financial risks have been concentrated lack adequate protections. The financial crisis revealed weaknesses in the design of the U.S. tri-party repo market, a funding mechanism used by major broker-dealers to finance their inventories of securities. However, currently only two institutions provide credit to facilitate transactions in this market. According to the Federal Reserve Bank of New York, these weaknesses could rapidly elevate and propagate systemic risk. For instance, it became apparent during the crisis that the market’s infrastructure to settle transactions had fundamental flaws that could lead to serious instability during periods of market stress. In its 2012 Annual Report, FSOC notes that the elimination of most intraday credit exposure and the reform of collateral practices in this market continue to be areas of intense focus for the council. The resiliency of the tri-party repo market is important for a number of reasons. First, the market serves as a tool for cash and liquidity management and for short-term borrowing for a range of financial intermediaries, including money market funds, insurance companies, banks, and securities dealers, all of which play an important role in supporting the savings and investment programs of households, small businesses, and nonfinancial corporations. Second, the tri-party repo market is currently the source of funding for some $1.8 trillion in securities held by securities dealers and only two banks currently act as agents and clearing organizations in the vast majority of tri-party repurchase agreements. Managing the interdependency of financial products is an important factor in reducing systemic risk and enhancing the stability of the U.S. financial system. Market participants and regulators have made some progress in addressing the tri-party repo market shortcomings and enhancing protections. For instance, the current tri-party repo market is smaller than at its peak and generally funds higher-quality collateral than it did before the crisis. However, certain vulnerabilities remain. According to testimony by a Federal Reserve official, the reliance on discretionary intraday credit in the tri-party settlement process poses difficult dilemmas for cash lenders, borrowers, and clearing banks during periods of market stress, which could result in securities dealers experiencing a sudden and acute loss of funding. Furthermore, key stakeholders believe that not as much progress has been made—or made as quickly—as warranted by the seriousness of the risks this market poses. Consequently, a task force of market participants that regulators convened issued a final report in February 2012 calling for a settlement process that relies less on extensions of credit. The Federal Reserve also has acted to reduce the reliance of market participants on this form of funding by encouraging market participants over which it has direct authority to implement the task force recommendations in a timely fashion. However, in congressional testimony, a Federal Reserve official acknowledged continued work is needed to generate additional solutions for reducing systemic risk. Another source of concentrated financial risks arises from the activities of clearinghouses for financial products, and some of the reforms of the act could expand this risk. For instance, by requiring that most swaps be cleared through clearinghouses rather than the OTC market, the act attempts to reduce the vulnerability of the financial system to the failure of one or a few of the major swap dealers by transferring credit risk from the swap counterparties to the clearinghouse. However, some experts noted this reform concentrates credit risk at the clearinghouses and, in effect, creates a source of systemic risk. For example, a former regulatory official told us that clearinghouses in the new swaps market will be “too big to fail” and pose the same moral hazard problem as large financial institutions because the Dodd-Frank Act includes a provision allowing the Federal Reserve to assist certain clearinghouses. In addition, experts commented that clearinghouses that become engaged in clearing less- standardized swaps could expose themselves to greater risks and more complex risk-management challenges. Regulators have taken some actions that could mitigate the risk posed by these clearinghouses. In July 2012, FSOC designated several clearinghouses as systemically important financial market utilities, which will subject these entities to heightened prudential oversight by the Federal Reserve. Although many of the Dodd-Frank Act’s reforms and these other regulatory efforts seek to address risks arising from large institutions and other concentrations of risk, some market observers noted that risks that could have systemic implications could also arise from other sources. For example, one academic noted that during the crisis the activities of some smaller institutions, such as those involved with asset-backed securitizations, were not individually problematic but became so as numerous institutions experienced losses, which, in turn, spread to affect others due to the interconnectedness of the system. Such threats to financial stability could stem from a large number of institutions that encounter trouble with certain risky products or from soundness problems that arise at a group of smaller institutions, such as regional banks. The act includes some reforms that, if effectively implemented, could minimize such threats, such as minimum capital standards for banks and FSOC’s ability to monitor and respond to a broad range of threats. However, their effectiveness will be greatly affected by how they are implemented and the vigorousness of regulators’ oversight efforts. Overall, the federal financial regulators have considerable work under way to implement reforms that could improve the financial system in many of the ways that our 2009 framework envisions. However, much work remains to implement the Dodd-Frank Act reforms. As of December 2012, regulators had finalized a little less than half of the provisions we identified as requiring rulemakings or other key actions. Moreover, completing the rulemaking process does not mean that reforms are fully implemented. Rather, it will take time—beyond the time spent on finalizing the rulemakings—for regulators and industry to adopt the reforms contained in the rulemakings, and even longer to determine whether the reforms have had their intended outcomes. We provided a draft of this report to CFPB, CFTC, FDIC, the Federal Reserve, FHFA, FSOC, OCC, OFR, and SEC for their review and comment. The SEC Chairman provided written comments on our draft. The Chairman’s letter notes that implementation of the Dodd-Frank Act continues to be a major undertaking of SEC and other agencies. She also describes progress SEC has made in issuing required rules and studies. These comments are reprinted in appendix II. We also obtained technical comments from CFPB, FDIC, FSOC, OCC, OFR, and SEC, which we have incorporated as appropriate. The Federal Reserve, FHFA, and CFTC did not provide comments. We are sending copies of this report to CFPB, CFTC, FDIC, the Federal Reserve, FHFA, FSOC, OCC, OFR, and SEC, interested congressional committees, members, and others. This report will also be available at no charge on our website at http://www.gao.gov. Should you or your staff have questions concerning this report, please contact me at (202) 512-8678 or [email protected]. 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 II. Our objectives in this report were to examine what is known about the (1) the overall status of U.S. financial regulatory reforms arising from the act, (2) challenges affecting the implementation of these reforms, and (3) areas that pose continued risk. To address our first two objectives, we synthesized GAO’s body of work on the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) reforms and other financial regulatory reform efforts and challenges. We also reviewed and analyzed government, academic, and other studies on Dodd-Frank Act reforms and implementation. To examine regulators’ efforts to implement the provisions of the Dodd-Frank Act, we focused on eight major reform areas: capital requirements; resolution of financial institutions; proprietary trading; derivatives; consumer protection; mortgage reforms; expanded regulation of institutions and products; and investor protection. We also obtained and analyzed information from a database maintained by the law firm Davis Polk and Wardwell LLP that identified provisions of the Dodd Frank Act that require or authorize regulators to take actions, and tracks the status of regulators’ efforts to implement these provisions. We focused our analysis on provisions that required rulemakings or other key actions, but excluded other requirements, such as those to publish studies. We took several steps to determine the number of provisions requiring regulators to issue rulemakings or take other key actions as well as the status of regulators’ efforts to implement the provisions. For example, after we identified provisions that we believed required regulators to issue rulemakings or take other key actions, we discussed these provisions with staff from eight agencies that are responsible for implementation of the majority of these efforts. In some cases, the law firm’s staff had identified provisions in the act as requiring separate actions, but which regulators saw as the same required action and had responded to the provisions by issuing a single rule. In other cases, regulators acknowledged that the act had called for separate actions but they had chosen to respond to these provisions in a single rule. For purposes of our report, we counted a provision as calling for a separate requirement if it appeared in our professional judgment to be a distinct requirement, regardless of how an agency combined or separated it for rulemaking purposes. In cases in which multiple regulators were required to implement one provision, we counted the provision as being finalized when at least one regulator had finalized a rule, and we counted a rule as having been proposed when at least one of the regulators had proposed a rule. Finally, our analysis focused on regulators’ progress implementing rulemakings and taking other key actions from the act’s passage through December 2012. Using different sources, assumptions, and judgments in compiling the list of provisions could result in different totals, and therefore the information we provide should not be taken as a definitive count of all actions required by the act. During the course of our work, staff from several regulatory agencies noted that the private law firm’s data we used as the initial source to identify provisions of the Dodd-Frank Act that required rulemakings and other key actions by regulators overstates the number of required actions. This is because the database presents as separate requirements various Dodd-Frank Act provisions that regulators may view as one requirement with multiple elements and thus may be addressed through a single rule. However, because we have used various additional sources, including input from the relevant regulators, to compile the list of provisions requiring regulatory action, we maintain that the total we present in this report—which is significantly less than the total required actions reported by the original source—has been compiled using reasonable methods and treats requirements consistently across agencies. Moreover, we have disclosed the steps we took to compile the list of provisions and the limitations of our analysis. For our first two objectives, we also interviewed officials from seven financial federal regulators—Board of Governors of the Federal Reserve System (Federal Reserve), Bureau of Consumer Financial Protection (CFPB), Commodity Futures Trading Commission (CFTC), Federal Deposit Insurance Corporation (FDIC), Federal Housing Finance Agency (FHFA), Office of the Comptroller of the Currency (OCC), and Securities and Exchange Commission (SEC)—as well as staff from the Financial Stability Oversight Council (FSOC) about their implementation of various Dodd-Frank reforms, challenges they are facing, and areas that continue to pose risk. In addition, we interviewed industry and consumer groups about these same issues and obtained the views from market observers and experts who have written about various Dodd-Frank Act reforms. For the third objective, we compared key reforms (as identified for objective one) of the act against GAO’s 2009 framework for evaluating regulatory reform. We analyzed documentation and reports issued by federal regulators, market participants and observers, GAO, and congressional committees that identify areas of the U.S. financial system that undermine its stability and were not addressed by recent reforms. Finally, we interviewed regulatory officials, market participants, and observers to obtain their viewpoints about what areas, issues, or products could decrease the stability of the financial system that would benefit from additional or enhanced reforms, and any progress taken by the regulators to address these issues. We conducted this performance audit from June 2012 to 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 obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Cody J. Goebel (Assistant Director), Anne A. Akin, William R. Chatlos, Camille K. Jennings, Waterankwa Kadzai, Jon D. Menaster, Marc W. Molino, Barbara M. Roesmann, and Jessica M. Sandler made significant contributions to this report. Financial Regulatory Reform: Financial Crisis Losses and Potential Impacts of the Dodd-Frank Act. GAO-13-180. Washington, D.C.: January 16, 2013. Dodd-Frank Act: Agencies’ Efforts to Analyze and Coordinate Their Rules. GAO-13-101. Washington, D.C.: December 20, 2012. Community Banks and Credit Unions: Impact of the Dodd-Frank Act Depends Largely on Future Rule Makings. GAO-12-881. Washington, D.C.: September 13, 2012. Financial Stability: New Council and Research Office Should Strengthen the Accountability and Transparency of Their Decisions. GAO-12-886. Washington, D.C.: September 11, 2012. Municipal Securities: Options for Improving Continuing Disclosure. GAO-12-698. Washington, D.C.: July 19, 2012. Bankruptcy: Agencies Continue Rulemakings for Clarifying Specific Provisions of Orderly Liquidation Authority. GAO-12-735. Washington, D.C.: July 12, 2012. Credit Rating Agencies: Alternative Compensation Models for Nationally Recognized Statistical Rating Organizations. GAO-12-240. Washington, D.C.: January 18, 2012. Bank Capital Requirements: Potential Effects of New Changes on Foreign Holding Companies and U.S. Banks Abroad. GAO-12-235. Washington, D.C.: January 17, 2012. Dodd-Frank Act Regulations: Implementation Could Benefit from Additional Analyses and Coordination. GAO-12-151. Washington, D.C.: November 10, 2011. Federal Reserve System: Opportunities Exist to Strengthen Policies and Processes for Managing Emergency Assistance. GAO-11-696, Washington, D.C.: July 21, 2011. Bankruptcy: Complex Financial Institutions and International Coordination Pose Challenges. GAO-11-707. Washington, D.C.: July 19, 2011. Mortgage Reform: Potential Impacts in the Dodd-Frank Act on Homebuyers and the Mortgage Market. GAO-11-656. Washington, D.C.: July 19, 2011. Dodd-Frank Act: Eleven Agencies’ Estimates of Resources for Implementing Regulatory Reform. GAO-11-808T. Washington, D.C.: July 14, 2011. Proprietary Trading: Regulators Will Need More Comprehensive Information to Fully Monitor Compliance with New Restrictions When Implemented. GAO-11-529. Washington, D.C.: July 13, 2011. Financial Assistance: Ongoing Challenges and Guiding Principles Related to Government Assistance for Private Sector Companies. GAO-10-719. Washington, D.C.: August 3, 2010. Financial Markets Regulation: Financial Crisis Highlights Need to Improve Oversight of Leverage at Financial Institutions and across System. GAO-09-739. Washington, D.C.: July 22, 2009. Systemic Risk: Regulatory Oversight and Recent Initiatives to Address Risk Posed by Credit Default Swaps. GAO-09-397T. Washington, D.C.: March 5, 2009. Financial Regulation: A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System. GAO-09-216. Washington, D.C.: January 8, 2009. | The 2007-2009 financial crisis resulted in unprecedented government actions to respond to the unfolding turmoil in the markets, including providing capital to many financial institutions and government conservatorship for others. Although many factors likely contributed to the crisis, gaps and weaknesses in the supervision and regulation of the U.S. financial system generally played an important role. In recognition of the need to improve the regulation of financial markets and institutions to minimize the potential for future crises, in 2009 GAO designated reform of the U.S. financial regulatory system as one of the high-risk issues facing the federal government. In July 2010, the Dodd-Frank Act directed regulators to implement reforms across a range of areas. To assess these efforts, GAO examined the (1) overall status of U.S. financial regulatory reforms arising from the act, (2) challenges affecting the implementation of the act, and (3) areas that pose continued risk. GAO analyzed data from private and regulatory sources on the status of required rulemakings, synthesized GAO's body of work on Dodd-Frank Act reforms, and interviewed financial regulators and industry and consumer groups on the status of and challenges to implementing reforms. Implementation of financial regulatory reform is ongoing. Although regulators have made progress in implementing some key reforms required by the Dodd- Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), others remain incomplete. Moreover, the effectiveness of some implemented reforms, as illustrated below, remains to be seen. The Financial Stability Oversight Council (FSOC) was established to, among other things, identify systemic threats, and it has taken steps to carry out its responsibilities. However, GAO recently made a number of recommendations to enhance the accountability and transparency of FSOC's decisions and activities and improve collaboration among its members. Regulators have taken actions to implement some key reforms intended to reduce systemic risk. For example, FSOC developed--and is currently implementing--a process and criteria to determine whether certain nonbank financial institutions should be designated for supervision. But, to date, no such designations have been made. Although not directly required by the act, regulators have also proposed rules implementing international standards to enhance capital requirements for banks. These also are not yet final and their protections are proposed to phase in over the next 10 years. Key aspects of new liquidation authorities and other reforms for resolving troubled financial firms have been implemented, with certain institutions having submitted required resolution plans--"living wills"-- that would guide their rapid and orderly resolution in a bankruptcy, if needed. However, market observers noted the effectiveness of these provisions would not be known until the first large failure. Overall, GAO identified 236 provisions of the act that require regulators to issue rulemakings across nine key areas. As of December 2012, regulators had issued final rules for about 48 percent of these provisions; however, in some cases the dates by which affected entities had to comply with the rules had yet to be reached. Of the remaining provisions, regulators had proposed rules for about 29 percent, and rulemakings had not occurred for about 23 percent. A variety of challenges affected regulators' progress in implementing the act's reforms. Regulators noted that completing rules has taken time because of the number and complexity of the issues, and because many rules are interconnected. For example, to implement the act's ban on proprietary trading-- trading activities conducted by financial institutions for their own accounts as opposed to those of their clients--the regulators issued draft rules that contained over 750 questions for the public's input and spurred over 19,000 comment letters. Further, regulators said that implementing the act's reforms requires a great deal of coordination at the domestic and international levels. Although regulators have established mechanisms to facilitate coordination and believe coordination efforts have improved the quality of the rulemakings, several regulators indicated that coordination increased the amount of time needed to finalize rulemakings. Finally, regulators noted that they have prioritized developing responsive, appropriate rules over meeting tight statutory deadlines. As a result, some important rules may take the longest to develop. Although the act addressed a number of weaknesses of the regulatory system that were exposed by the recent financial crisis, some risks remain and others have emerged. In 2009, GAO established a framework for evaluating financial regulatory reform proposals; it outlines nine characteristics that should be reflected in any new regulatory system. This framework provides a useful lens through which to consider how weaknesses were addressed through the act and where additional work remains. For example, the creation of the Consumer Financial Protection Bureau could help to ensure broader and more consistent oversight of firms and issues affecting consumers. Additionally, the creation of FSOC could help to provide a systemwide view and identify potential threats before they create a disruption. In contrast: The efficiency of the regulatory system was not materially changed as a large, fragmented regulatory structure with numerous regulators remains. This requires regulators to coordinate actions and try to reconcile or balance differing approaches to ensure that regulated entities are subject to appropriate scrutiny. GAO and others have raised concerns about the failed housing government-sponsored enterprisesFannie Mae and Freddie Macthat have operated under federal conservatorships since 2008, and as of December 2012 have received $187 billion in federal assistance. Until their status is resolved, these entities continue to represent financial exposures for the federal government, a risk to taxpayers, and an impediment to the transition to a housing market that functions effectively without the current level of substantial federal support. Although the act took steps to increase the regulatory systems focus on systemic threats, regulators have expressed concerns that the current structure of money market mutual funds may represent an unresolved risk. These funds provide short-term funding to many financial institutions but lack capital buffers and other protections that could reduce the likelihood of destabilizing runs on their holdings. However, some have questioned the need for additional recent reforms affecting these funds. Certain credit risk concentrations also pose potential systemic implications, such as the failure of one of the two institutions that provide credit to facilitate transactions in the tri-party repurchase (repo) market that provides short-term funding to many institutions. While these concentrations of credit risks create potential threats to stability, some observers caution that threats also can emerge from other sources, such as from risky products or large numbers of failures among smaller institutions. Although various proposals for action to address these risks have been put forward, definitive actions have yet to be taken to implement them. GAO is not making any new recommendations in this report, but has previously made over 25 recommendations to the federal financial regulators related to Dodd- Frank reforms implementation. |
Our work on Customs’ efforts to interdict drugs has focused on four distinct areas: (1) internal controls over Customs’ low-risk cargo entry programs; (2) the missions, resources, and performance measures for Customs’ aviation program; (3) the development of a specific technology for detecting drugs; and (4) Customs drug intelligence capabilities. In July 1998, at the request of Senator Dianne Feinstein, we reported on Customs’ drug-enforcement operations along the Southwest border of the United States. Our review focused on low-risk, cargo entry programs in use at three ports—Otay Mesa, California; Laredo, Texas; and Nogales, Arizona. To balance the facilitation of trade through ports with the interdiction of illegal drugs being smuggled into the United States, Customs initiated and encouraged its ports to use several programs to identify and separate low-risk shipments from those with apparently higher smuggling risk. One such program is the Line Release Program, designed to expedite cargo shipments that Customs determined to be repetitive, high volume, and low risk for narcotics smuggling. The Line Release Program was first implemented on the Northern border in 1986 and was expanded to most posts along the Southwest border by 1989. This program requires importers, brokers (companies who process the paperwork required to import merchandise), and manufacturers to apply for the program and to be screened by Customs to ensure that they have no past history of narcotics smuggling and that their prior shipments have been in compliance with trade laws and Customs’ commercial importing regulations. In 1996, Customs implemented the Land Border Carrier Initiative Program, which required that the Line Release shipments across the Southwest border be transported by Customs-approved carriers and driven by Customs-approved drivers. After the Carrier Initiative Program was implemented, the number of Southwest Border Line Release shipments dropped significantly. At each of the three ports we visited, we identified internal control weaknesses in one or more of the processes used to screen Line Release applicants for entry into the program. These weaknesses included (1) an absence of specific criteria for determining applicant eligibility at two of the three ports, (2) incomplete documentation of the screening and review of applicants at two of the three ports, and (3) lack of documentation of supervisory review for aspects of the applicant approval process. During our review, Customs representatives from northern and southern land- border cargo ports approved draft Line Release volume and compliance eligibility criteria for program applicants and draft recertification standards for program participants. The Three Tier Targeting Program—a method of targeting high-risk shipments for narcotics inspection—was used at the three Southwest border ports that we visited. According to officials at the three ports, they lost confidence in the program’s ability to distinguish high- from low-risk shipment because of two operational problems. First, there was little information available in any database for researching foreign manufacturers. Second, local officials doubted the reliability of the designations. They cited examples of narcotics seizures from shipments designated as “low-risk” and the lack of a significant number of seizures from shipments designated as “high-risk.” Customs suspended this program until more reliable information is developed for classifying low- risk importations. One low-risk entry program—the Automated Targeting System—was being pilot tested at Laredo. It was designed to enable port officials to identify and direct inspectional attention to high-risk shipments. That is, the Automated Targeting System was designed to assess shipment entry information for known smuggling indicators and thus enable inspectors to target high-risk shipments more efficiently. Customs is evaluating the Automated Targeting System for expansion to other land-border cargo ports. In September 1998, we reported on Customs’ aviation program missions, resources, and performance measures. Since the establishment of the Customs Aviation Program in 1969, its basic mandate to use air assets to counter the drug smuggling threat has not changed. Originally, the program had two principal missions: border interdiction of drugs being smuggled by plane into the United law enforcement support to other Customs offices as well as other federal, state, and local law enforcement agencies. In 1993, the administration instituted a new policy to control drugs coming from South and Central America. Because Customs aircraft were to be used to help carry out this policy, foreign counterdrug operations became a third principal mission for the aviation program. Since then, the program has devoted about 25 percent of its resources to the border interdiction mission, 25 percent to foreign counterdrug operations, and 50 percent to other law enforcement support. Customs Aviation Program funding decreased from about $195 million in fiscal year 1992, to about $135 million in fiscal year 1997—that is, about 31 percent in constant or inflation-adjusted dollars. While available funds decreased, operations and maintenance costs per aircraft flight hour increased. Customs Aviation Program officials said that this increase in costs was one of the reasons they were flying fewer hours each year. From fiscal year 1993 to fiscal year 1997, the total number of flight hours for all missions decreased by over one-third, from about 45,000 hours to about 29,000 hours. The size of Customs’ fleet dropped in fiscal year 1994, when Customs took 19 surveillance aircraft out of service because of funding reductions. The fleet has remained at about 114 since then. The number of Customs Aviation Program onboard personnel decreased, from a high of 956 in fiscal year 1992 to 745 by the end of fiscal year 1997. Customs has been using traditional law enforcement measures to evaluate the aviation program (e.g., number of seizures, weight of drugs seized, number of arrests). These measures, however, are used to track activity, not measure results or effectiveness. Until 1997, Customs also used an air threat index as an indicator of its effectiveness in detecting illegal air traffic. However, Customs has discontinued use of this indicator, as well as some other performance measures, because Customs determined that they were not good measures of results and effectiveness. Having recognized that these measures were not providing adequate insights into whether the program was producing desired results, Customs said it is developing new performance measures in order to better measure results. However, its budget submission for fiscal year 2000 contained no new performance measures. The pulsed fast neutron analysis (PFNA) inspection system is designed to directly and automatically detect and measure the presence of specific materials (e.g., cocaine) by exposing their constituent chemical elements to short bursts of subatomic particles called neutrons. Customs and other federal agencies are considering whether to continue to invest in the development and fielding of this technology. The Chairman and the Ranking Minority Member of the Subcommittee on Treasury and General Government, Senate Committee on Appropriations, asked us to provide information about (1) the status of plans for field testing a PFNA system and (2) federal agency and vendor views on the operational viability of such a system. We issued the report responding to this request on April 13, 1999. Customs, the Department of Defense (DOD), the Federal Aviation Administration (FAA), and Ancore Corporation—the inspection system inventor—recently began planning to field test PFNA. Because they were in the early stage of planning, they did not expect the actual field test to begin until mid to late 1999 at the earliest. Generally speaking, agency and vendor officials estimated that a field test covering Customs’ and DOD’s requirements will cost at least $5 million and that the cost could reach $8 million if FAA’s requirements are included in the joint test. Customs officials told us that they are working closely with the applicable congressional committees and subcommittees to decide whether Customs can help fund the field test, particularly given the no-federal-cost language of Senate Report 105-251. In general, a complete field test would include (1) preparing a test site and constructing an appropriate facility; (2) making any needed modifications to the only existing PFNA system and its components; (3) disassembling, shipping, and reassembling the system at the test site; and (4) conducting an operational test for about 4 months. According to agency and Ancore officials, the test site candidates are two seaports in California (Long Beach and Oakland) and two land ports in El Paso, Texas. Federal agency and vendor views on the operational viability of PFNA vary. While Customs, DOD, and FAA officials acknowledge that laboratory testing has proven the technical feasibility of PFNA, they told us that the current Ancore inspection system would not meet their operational requirements. Among their other concerns, Customs, DOD, and FAA officials said that a PFNA system not only is too expensive (about $10 million to acquire per system), but also is too large for operational use in most ports of entry or other sites. Accordingly, these agencies question the value of further testing. Ancore disputes these arguments, believes it can produce an operationally cost-effective system, and is proposing that a PFNA system be tested at a port of entry. The Office of National Drug Control Policy has characterized neutron interrogation as an “emerging” or future technology that has shown promise in laboratory testing and thus warrants field testing to provide a more informed basis for deciding whether PFNA has operational merit. At the request of the Subcommittee on National Security, International Affairs and Criminal Justice, House Committee on Government Reform and Oversight, in June 1998 we identified the organizations that collect and/or produce counterdrug intelligence, the role of these organizations, the federal funding they receive, and the number of personnel that support this function. We noted that more than 20 federal or federally funded organizations, including Customs, spread across 5 cabinet-level departments and 2 cabinet-level organizations, have a principal role in collecting or producing counterdrug intelligence. Together, these organizations collect domestic and foreign counterdrug intelligence information using human, electronic, photographic, and other technical means. Unclassified information reported to us by counterdrug intelligence organizations shows that over $295 million was spent for counterdrug intelligence activities during fiscal year 1997 and that more than 1,400 federal personnel were engaged in these activities. The Departments of Justice, the Treasury, and Defense accounted for over 90 percent of the money spent and personnel involved. Customs spent over $14 million in 1997 on counterdrug intelligence, and it is estimated that 63 percent of its 309 intelligence research specialists’ duties involved counterdrug intelligence matters. Among its many missions, Customs is the lead agency for interdicting drugs being smuggled into the United States and its territories by land, sea, or air. Customs’ primary counterdrug intelligence mission is to support its own drug enforcement elements (i.e., inspectors and investigators) in their interdiction and investigation efforts. Customs is responsible for producing tactical, operational, and strategic intelligence concerning drug-smuggling individuals, organizations, transportation networks, and patterns and trends. In addition to providing these products to its own drug enforcement elements, Customs is to provide this information to other agencies with drug enforcement or intelligence responsibilities. Customs is also responsible for analyzing the intelligence community’s reports and integrating them with its own intelligence. Customs’ in-house collection capability is heavily weighted toward human intelligence, which comes largely from inspectors and investigators who obtain information during their normal interdiction and investigation activities. In 1998, we reported on selected aspects of the Customs Service’s process for determining its need for inspectional personnel—such as inspectors and canine enforcement officers—for the commercial cargo or land and sea passengers at all of its 301 ports. Customs officials were not aware of any formal agencywide efforts prior to 1995 to determine the need for additional cargo or passenger inspectional personnel for its 301 ports. However, in preparation for its fiscal year 1997 budget request and a new drug enforcement operation called Hard Line,Customs conducted a formal needs assessment. The needs assessment considered (1) fully staffing all inspectional booths and (2) balancing enforcement efforts with the need to move complying cargo and passengers quickly through the ports. Customs conducted two subsequent assessments for fiscal years 1998 and 1999. These assessments considered the number and location of drug seizures and the perceived threat of drug smuggling, including the use of rail cars to smuggle drugs. However, all these assessments were focused exclusively on the need for additional personnel to implement Hard Line and similar initiatives, limited to land ports along the Southwest border and certain sea and air ports considered to be at risk from drug smuggling, conducted each year using generally different assessment factors, and conducted with varying degrees of involvement by Customs’ headquarters and field units. We concluded that these limitations could prevent Customs from accurately estimating the need for inspectional personnel and then allocating them to ports. We further concluded that, for Customs to implement the Results Act successfully, it had to determine its needs for inspectional personnel for all of its operations and ensure that available personnel are allocated where they are needed most. We recommended that Customs establish an inspectional personnel needs assessment and allocation process, and Customs is now in the process of responding to that April 1998 recommendation. Customs has awarded a contract for the development of a resource allocation model, and Customs officials told us that the model was delivered in March 1999 and that they are in the early stages of deciding how to use the model and implement a formal needs assessment system. Under the Results Act, executive agencies are to develop strategic plans in which they, among other things, define their missions, establish results- oriented goals, and identify strategies they plan to use to achieve those goals. In addition, agencies are to submit annual performance plans covering the program activities set out in the agencies’ budgets (a practice which began with plans for fiscal year 1999); these plans are to describe the results the agencies expect to achieve with the requested resources and indicate the progress the agency expects to make during the year in achieving its strategic goals. The strategic plan developed by the Customs Service addressed the six requirements of the Results Act. Concerning the elements required, the mission statement was results oriented and covered Customs’ principal statutory mission—ensuring that all goods and persons entering and exiting the United States do so in compliance with all U.S. laws and regulations. The plan’s goals and objectives covered Customs’ major functions—processing cargo and passengers entering and cargo leaving the United States. The plan discussed the strategies by which Customs hopes to achieve its goals. The strategic plan discussed, in very general terms, how it related to annual performance plans. The plan discussed some key factors, external to Customs and beyond its control, that could significantly affect achievement of the strategic goals, such as the level of cooperation of other countries in reducing the supply of narcotics. Customs’ strategic plan also contained a listing of program evaluations used to prepare the plan and provided a schedule of evaluations to be conducted in each of the functional areas. In addition to the required elements, Customs’ plan discussed the management challenges it was facing in carrying out its core functions, including information and technology, finance, and human resources management. However, the plan did not adequately recognize Customs’ need to improve financial management and internal control systems, controls over seized assets, plans to alleviate Year 2000 problems, and plans to improve computer security. We reported that these weaknesses could affect the reliability of Customs’ performance data. Further, our initial review of Customs’ fiscal year 2000 performance plan showed that it is substantially unchanged in format from the one presented for 1999. Although the plan is a very useful document for decisionmakers, it still does not recognize Customs’ need to improve its internal control systems, control over seized assets, or plans to improve computer security. You asked us to comment on the performance measures proposed by Customs, which are to assess whether Customs is achieving its goals. Customs has included 26 performance measures in its fiscal year 2000 performance plan. These measures range from general information on the level of compliance of the trade community with trade laws and Customs’ regulations (which Customs has traditionally used) to very complex measures, such as transportation costs of drug smuggling organizations. Many of these complex measures were still being developed by Customs when the fiscal year 2000 performance plan was issued. In addition, Customs did not include performance targets for 8 of the 26 measures in its fiscal year 2000 plan. Computing Crisis: Customs Has Established Effective Year 2000 Program Controls (GAO/AIMD-99-37, Mar. 29, 1999). responsible for ranges from 1 to 37. The first action plan was issued in February 1999 and has since been updated three times. According to the plan, it is Customs’ intention to implement all action items included in the plan by 2000. Customs’ Director for Planning is to manage and monitor the plan on an ongoing basis. He told us that items are usually added at the behest of the Commissioner. The Management Inspection Division (part of the Office of Internal Affairs) is responsible for verifying and validating the items that have been reported as completed, including determining whether the action taken was effective. The action plan of May 7—the latest version available—shows that 91 of the 203 items had been completed; 110 were ongoing, pending, or scheduled; and 2 had no description of their status. Overall, use of this kind of management tool can be very helpful in communicating problems and proposed solutions to executives, managers, and the Customs Service workforce, as well as to other groups interested in Customs such as this Committee and us. Mr. Chairman, this completes my statement. I would be pleased to answer any questions. 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 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 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. | Pursuant to a congressional request, GAO discussed efforts by the Customs Service to interdict drugs, allocate inspectional personnel, and develop performance measures, including information on Customs' action plan for resolving management problems. GAO noted that: (1) Customs initiated and encouraged its ports to use several programs to identify and separate low-risk shipments from those with apparently higher smuggling risk; (2) GAO identified internal control weaknesses in one or more of the processes used to screen Line Release program applicants for entry into the program; (3) the Three Tier Targeting program was used at the Southwest border ports where officials say they lost confidence in the program's ability to distinguish high- from low-risk shipments; (4) Customs is evaluating the Automated Targeting System for expansion to other land-border cargo ports; (5) Customs has been using traditional law enforcement measures to evaluate the Aviation program; (6) these measures, however, are used to track activity, not measure results or effectiveness; (7) Customs has discontinued the use of the threat index as an indicator of its effectiveness in detecting illegal air traffic, as well as some other performance measures, because Customs determined that they were not good measures of results and effectiveness; (8) Customs, Department of Defense (DOD), Federal Aviation Administration (FAA), and Ancore Corporation recently began planning to field test the pulsed fast neutron analysis (PFNA) inspection system; (9) while Customs, DOD, and FAA officials acknowledge that laboratory testing has proven the technical feasibility of PFNA, they told GAO that the Ancore inspection system would not meet their operational requirements; (10) agency officials said that a PFNA system not only is too expensive, but also is too large for operational use in most ports of entry or other sites; (11) Customs officials were not aware of any formal agencywide efforts prior to 1995 to determine the need for additional cargo or passenger inspectional personnel for its 301 ports; (12) in preparation for its fiscal year 1997 budget request, Customs conducted a formal needs assessment; (13) GAO concluded that the assessments had limitations that could prevent Customs from accurately estimating the need for inspectional personnel and then allocating them to ports; (14) GAO found that Customs' strategic plan contained weaknesses that could affect the reliability of Customs' performance data; (15) Customs' first action plan was issued in February 1999 and has since been updated three times; (16) it is Customs' intention to implement all action items included in the plan by 2000; and (17) use of this kind of management tool can be very helpful in communicating problems and proposed solutions to executives, managers, and the Customs Service workforce. |
The Arms Export Control Act gives the President authority to sell defense articles and services to eligible foreign countries, generally at no cost to the U.S. government. While the Defense Security Assistance Agency (DSAA) has overall responsibility for administering the FMS program, the Army, Navy, and Air Force normally execute the sales agreements—commonly referred to as sales cases. Foreign military sales are made on an individual case basis. The cases are initiated by a foreign country representative sending a letter of request to DOD asking for various information, such as precise price data. Once the customer decides to proceed with the purchase, DOD prepares a Letter of Offer and Acceptance (LOA) stating the terms of the sale for the goods and services being provided. The Arms Export Control Act requires that, after September 30, 1976, letters of offer for the sale of major defense equipment shall include a proportionate amount of nonrecurring costs related to the research, development, and production of major defense equipment. DOD interpreted the act as requiring the recovery of these costs on a pro rata basis. The military services calculate the pro rata rate by dividing the total research and development and other one-time production costs by the anticipated total number of units to be produced for both domestic and foreign use. A separate charge is calculated for each item of major defense equipment and is included in the LOA as part of the price that FMS customers are to pay for the purchase of major defense equipment. After the LOA is accepted, the FMS customer is generally required to pay, in advance, amounts necessary to cover costs associated with the sales agreement, including any nonrecurring costs. These advance payments are held in an FMS trust fund by the Department of the Treasury. DOD then uses these funds to pay private contractors and reimburse DOD activities for the costs of executing and administering the FMS agreement. In addition, as deliveries of major defense equipment occur, the military services are to prepare delivery reports and related cost statements which, among other things, are used as support to charge FMS customers’ trust fund accounts for applicable nonrecurring research, development, and production costs. Nonrecurring costs collected from the FMS trust funds are to be deposited into the general fund of the Treasury. The funds are returned to the Treasury instead of to DOD since the Congress had previously provided DOD with appropriated funds to pay for the research, development, and production costs of major defense equipment. If, for some reason, DOD fails to process the charges to recover applicable nonrecurring costs from the FMS customers’ trust fund, amounts paid in advance to reimburse the U.S. government for nonrecurring costs would eventually be returned to the FMS customer. As deliveries of major defense equipment are made, the military services are to report the detailed delivery and recovery of nonrecurring costs within 30 days to a central accounting activity—the Defense Finance and Accounting Service (DFAS), Denver Center—which maintains records of each country’s trust fund balance and issues quarterly statements to foreign customers summarizing deliveries and amounts charged to their cases. The objective of this assignment was to determine if the Air Force and Navy were correctly recovering nonrecurring research, development, and production costs owed by FMS customers for purchases of major defense equipment. To determine the regulatory requirements for charging and collecting these nonrecurring costs from FMS customers, we obtained and reviewed applicable laws, policies, procedures, regulations, and guidance. During our visits to DOD locations, we gathered and analyzed financial information from pertinent accounting reports and records to identify data on reported deliveries of major defense equipment items and related charges for nonrecurring research, development, and production costs. We judgmentally selected 30 FMS cases for detailed review from a total of 93 Air Force and Navy FMS sales cases listed on their March 1998 reports entitled Recoupment of Nonrecurring Costs on Sales of USG Products and Technology (RCS DSAA (Q) 1112). According to DOD accounting officials, the quarterly reports are to include only ongoing current FMS cases since all nonrecurring costs should be recovered and transferred to the general fund of the Treasury before a case is completed and closed. The reports generally included the country, case, item description, quantity of items to be sold, scheduled delivery dates, quantity of items delivered to date, amount of nonrecurring research, development, and production costs to be collected, and amount of nonrecurring research, development, and production costs collected to date. We selected the 30 FMS cases for detailed review based on whether the unrecovered amount of nonrecurring research, development, and production costs was large and whether the report showed, among other things, that (1) items had been delivered to the customers, but that there had been little or no recovery of nonrecurring costs or (2) scheduled delivery dates were for March 1998 or earlier and no or few deliveries had been made. The 30 FMS cases accounted for about $266 million (40 percent) of the two services’ total unrecovered nonrecurring research, development, and production costs of over $655 million. For the selected cases, we contacted the staff responsible for managing the case or other responsible officials knowledgeable about the case, to determine the (1) quantity of items to be delivered, (2) quantity of items delivered to date, (3) total amount of nonrecurring costs to be recovered, and (4) total amount of nonrecurring costs recovered to date. We also asked the staff to provide an explanation for why nonrecurring research, development, and production costs that should have been recovered earlier had not yet been recovered. The dollar values of nonrecurring research, development, and production costs related to major defense equipment items discussed in this report were obtained from DOD reports or responsible program officials. We did not independently verify these costs. We performed our work at the headquarters, departments of the Navy and Air Force; Defense Security Assistance Agency; Office of the Under Secretary of Defense (Comptroller), Washington, D.C.; Naval Air Systems Command, Patuxent River, Maryland; Naval Sea Systems Command, Arlington, Virginia; Air Force Aeronautical Systems Center and Air Force Security Assistance Center, Wright Patterson Air Force Base, Dayton, Ohio; and the Defense Finance and Accounting Service centers in Denver, Colorado, and Columbus, Ohio. We performed our work between February 1998 and August 1998 in accordance with generally accepted government auditing standards. We requested written comments on a draft of this report from the Secretary of Defense or his designee. The Under Secretary of Defense (Comptroller) provided written comments. These comments are discussed in the “Agency Comments and Our Evaluation” section and throughout the report where appropriate and are reprinted in appendix I. We found that the Air Force and Navy were not following prescribed policies and procedures for reporting the delivery of items to FMS customers in order to recover the nonrecurring research, development, and production costs. As a result, FMS customers’ trust fund accounts were not being charged for millions of dollars of these costs for major defense equipment items they had received. Volume 15 of DOD’s Financial Management Regulation 7000.14-R, entitled Security Assistance Policy and Procedures, states that “Charges for nonrecurring costs are earned as items are physically delivered to the FMS customer.” It also requires that deliveries be reported to DFAS Denver within 30 days of shipment. While the DOD policy is not specific about the length of time after delivery during which an activity is to charge an FMS customer’s trust fund account for the nonrecurring costs, responsible DOD accounting officials told us that the nonrecurring costs should be recouped as items are delivered. According to the DOD accounting officials, DOD activities should prepare the delivery report, recover the nonrecurring costs, and submit both the delivery and recovery of costs data to DFAS Denver within 30 days of shipment of the items. Therefore, DOD policy recognizes delivery reporting as a key step toward initiating the charges to recover nonrecurring costs from FMS customers’ trust funds. The following describes what generally should be a typical transaction flow to report the delivery of major defense equipment and recovery of nonrecurring research, development, and production costs. The military service program office is generally responsible for reporting the delivery of items as they are made. It also prepares a cost statement, which serves as the supporting documentation for recording earnings, and forwards these data along with the delivery report to its budget or finance office. The budget or finance office reviews the information and reports the delivery to DFAS Denver. The budget or finance office also attaches a letter to the cost statement requesting that the area accounting office prepare a voucher to collect the nonrecurring costs. The letter and cost statement are then forwarded to the area accounting office for processing. The area accounting office processes the transaction to charge the FMS trust fund and transfer the amount to the general fund of the Treasury and reports the transaction to DFAS Denver, which records the charge against the FMS customer’s trust fund account. DOD’s reports on nonrecurring costs for current sales cases show that as of March 1998, the Air Force and Navy had over $655 million of nonrecurring research, development, and production costs for major defense equipment sales that had not been recovered from FMS customers. Our analysis and discussions with program officials concerning $266 million of this amount found that at least $183 million of the reported outstanding nonrecurring costs was related to equipment that had been delivered, and therefore, should have already been recovered from the FMS customers’ trust fund accounts and deposited in the general fund of the Treasury. In most cases where nonrecurring costs had not been recovered, we found that the military activities’ program offices generally had failed to provide the budget or finance office or appropriate accounting station with the proper delivery or cost documentation to support the recoupment of the nonrecurring costs. Following are several examples of FMS cases where nonrecurring research, development, and production costs were not recovered. From July 1993 through November 1995, 48 F-16 aircraft were delivered to South Korea. While DOD’s accounting records showed that the FMS customer’s account had been charged for over $1.3 billion to pay the contractor and DOD activities for their costs, the Air Force program office had not completed the necessary delivery and cost reports in order to recover the U.S. government’s nonrecurring costs of $1,018,050 per aircraft. As a result, as of May 1998, 5 years after the first aircraft had been delivered and over 2 years after the delivery of the 48th aircraft, nearly $49 million of nonrecurring research, development, and production costs, which should have been charged against South Korea’s trust fund account and transferred to the general fund of the Treasury, was still outstanding. The program official responsible for preparing the delivery reports could not explain why he had not reported the deliveries of the aircraft. Air Force officials agreed that they had not prepared the delivery reports to recoup the nonrecurring costs and told us that, in response to our finding, they were in the process of preparing the necessary delivery reports and cost statements in order to recover the nearly $49 million from South Korea’s trust fund account. Between April 1996 and March 1998, the Air Force reported that it had delivered a total of 78 F-16 aircraft to Taiwan. Based on these reported deliveries, the Air Force should have charged Taiwan’s trust fund account $49,920,000 for nonrecurring research, development, and production costs—$640,000 for each delivered aircraft. We found, however, that while Taiwan’s trust fund account had been charged over $2.3 billion to pay the contractor and other costs, only $1,574,366 of nonrecurring research, development, and production costs had been charged against the trust fund account. In discussing this case with officials in the program and budget offices, we found that the program office had reported the delivery of the items to the budget office and DFAS Denver but that the delivery report did not include the cost statement, which the budget office required for processing nonrecurring costs charges. As a result, over $48 million of nonrecurring costs had not been charged to Taiwan’s trust fund account and transferred to the general fund of the Treasury. Air Force officials agreed with our finding and told us that they have instructed the program office to include the cost statement with the delivery report so that this does not happen again, and that they have begun the process of preparing the necessary cost statements for the aircraft that have already been delivered. The officials anticipate that they will recover the $48 million from Taiwan’s trust fund account. A review of the nonrecurring costs report for another Taiwan case, this one managed by the Navy, showed that between June 1993 and February 1998, Taiwan had received 43 attack helicopters, 53 night target systems, and 20 spare engines. Based on these reported deliveries, the Navy should have charged Taiwan’s trust fund account for $19,819,858 of nonrecurring research, development, and production costs. While our review of financial records disclosed that Taiwan’s trust fund account had over $600 million recorded against it for contractor payments and other miscellaneous charges, we found that none of the over $19 million of nonrecurring costs had been charged to Taiwan’s account. Navy program officials responsible for reporting the delivery of the items agreed that Taiwan’s trust fund account had not been charged for nonrecurring costs but could not explain why this was allowed to happen. They added that they were not aware of this problem until we brought it to their attention. They now plan to take the necessary actions to charge Taiwan’s trust fund account for the over $19 million of outstanding nonrecurring costs. A review of the nonrecurring costs report for a Navy sale of 482 target detectors to Japan showed that all of the items had been delivered as of 1989. However, the report showed that only $163,398 of the $557,444 of the nonrecurring research, development, and production costs associated with the items had been recovered. At our request, the Navy program official reviewed the case and told us that the original amount had been miscalculated and should have been $376,442, not the $557,444 shown on the report. He told us that based on his new calculations, an additional $213,044 of nonrecurring costs should have been charged to Japan’s trust fund account; but he could not tell us why this amount had not been recovered earlier. He told us that the Navy plans to recoup the $213,044 of outstanding nonrecurring costs from Japan’s trust fund account. As noted earlier, our review focused only on 30 of the 93 FMS cases that were included in the March 1998 reports, which should only include current ongoing cases, of DOD recoupment of nonrecurring costs of U.S. government products and technology. Over the years DOD has routinely closed FMS cases as they were completed. In response to our request for nonrecurring cost data on these closed cases, DOD officials told us that a query of their FMS system’s database disclosed that over 11,000 cases, involving major defense equipment, had been closed since 1976. However, their database did not include information on the total amounts of nonrecurring costs owed or collected. The officials did acknowledge, however, that there would have been hundreds of millions of dollars of nonrecurring research, development, and production costs associated with these closed cases. Because of the magnitude of nonrecurring research, development, and production costs we identified that had not been charged to FMS customers’ trust fund accounts as a result of the services’ noncompliance with established DOD policies and procedures for recovering these costs, some FMS cases may have been erroneously closed before all nonrecurring costs were recovered from FMS customers’ trust fund accounts. A responsible DOD accounting official agreed that this was a major concern and acknowledged that, given the level of the services’ noncompliance with DOD’s policies and procedures for reporting the deliveries of items and recovery of applicable nonrecurring costs, FMS cases could have easily been closed before all nonrecurring costs were recovered. Not recovering nonrecurring research, development, and production costs from the FMS trust fund promptly after major defense equipment is delivered to the FMS customer represents a poor financial management practice that delays the transfer of millions of dollars into the general fund of the Treasury. Also, it raises the risk that amounts will never be recovered and that these funds, deposited in advance into the FMS trust fund for this purpose, will erroneously be returned to customers. The Air Force and Navy should begin to comply with DOD’s established policies and procedures for reporting the delivery of major defense equipment and recouping applicable nonrecurring research, development, and production costs. This will help ensure that all amounts of nonrecurring research, development, and production costs associated with the sale of major defense equipment are promptly recovered and deposited in the general fund of the Treasury and that no FMS cases are erroneously closed before all costs are recovered. We recommend the Secretary of Defense direct the Under Secretary of Defense (Comptroller) to require the Air Force and Navy to recover the over $183 million identified in this report as nonrecurring research, development, and production costs that have not been charged to FMS customers’ trust fund accounts for major defense equipment that has already been delivered, review all the other open FMS cases that require FMS customers to pay a proportionate amount of nonrecurring research, development, and production costs for major defense equipment and recoup nonrecurring costs that have not yet been recovered for items that have already been delivered to FMS customers, and follow DOD policies and procedures for reporting the delivery of major defense equipment so that the FMS customers’ accounts can be charged with nonrecurring research, development, and production costs and amounts transferred to the general fund of the Treasury within the 30 days required by DOD policy. We also recommend that the Secretary of Defense direct the Under Secretary of Defense (Comptroller) to direct the Air Force and Navy to review closed FMS cases to ensure that all nonrecurring research, development, and production costs for delivered major defense equipment have been recouped. Initially, this review of closed cases could be limited to a specific period. For example, the review could include FMS cases that were closed during the last 5 fiscal years. If this review discloses that there have been FMS cases closed before all nonrecurring research, development, and production costs were recouped, (1) any amounts due the U.S. government should be recovered from the FMS customer and (2) the review should be expanded to include closed cases for additional fiscal years. The Under Secretary of Defense (Comptroller) agreed to instruct the Navy and Air Force to recover all applicable nonrecurring costs we identified as not billed to FMS customers. The Comptroller also agreed to require the Navy and Air Force to review all other open cases for outstanding nonrecurring costs and to instruct them to follow DOD policies and procedures for reporting the delivery of defense articles and the collection of applicable nonrecurring costs. He also agreed with our recommendation that a review be conducted of closed foreign military sales cases to determine if any cases were closed before all nonrecurring costs were recovered. However, he pointed out that since the Air Force and Navy retain their respective records for the closed foreign military sales cases, it would be appropriate that they conduct those reviews rather than the Defense Security Assistance Agency. We have revised our recommendation accordingly. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate Committee on Armed Services, the Senate Committee on Governmental Affairs, the House Committee on Government Reform and Oversight, the House and Senate Committees on Appropriations, and the House Subcommittee on Government Management, Information and Technology; the Secretary of Defense; the Secretary of the Navy; the Acting Secretary of the Air Force; the Director of the Office of Management and Budget; and other interested parties. We will make copies available to others upon request. Please contact me at (202) 512-6240 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix II. Frank Maguire, Senior Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) ability to account for and report on the full costs of the foreign military sales (FMS) program, focusing on DOD's: (1) recoupment of monies owed by FMS customers for the U.S. government's research, development, and production costs of major defense equipment; and (2) accountability over expenditures of FMS customers' funds. GAO focused on Air Force and Navy activities. GAO noted that: (1) the Air Force and Navy were not always recovering nonrecurring research, development, and production costs from the FMS trust fund as major defense equipment items were delivered to the FMS customer; (2) specifically, GAO identified over $183 million of nonrecurring costs related to items that were delivered--some as long ago as 1989--that had not been charged to the FMS customers' trust fund account; (3) for example, between July 1993 and November 1995, South Korea received 48 F-16 aircraft on a FMS case managed by the Air Force; (4) GAO's review of the case disclosed that no deliveries had been reported for the purpose of recovering nonrecurring research, development, and production costs; (5) had the Air Force followed DOD's procedures and reported the deliveries and recouped the nonrecurring costs within 30 days of physical delivery of the aircraft, it would have already charged South Korea's trust fund account for over $49 million of nonrecurring research, development, and production costs; and (6) Air Force and Navy officials agreed that FMS customers were not being properly charged for millions of dollars of nonrecurring costs for major defense equipment items they had received and have begun to take actions to recover the outstanding amounts. |
The United Nations comprises (1) the Security Council, the General Assembly, the Economic and Social Council, and other governing bodies of member states that set the work requirements, or mandates, for U.N. programs and departments; (2) the Secretariat, headed by the Secretary General, which carries out a large part of the mandated work; and (3) the funds and programs, such as the U.N. Development Program, which are authorized by the General Assembly to conduct specific lines of work. Many funds and programs have their own governing bodies and budgets (mainly paid for by voluntary contributions from participating nations). The Secretary General’s reform initiatives do not apply to specialized agencies—such as the World Health Organization and the Food and Agricultural Organization—and programs that have their own governing bodies. Calls to reform the United Nations began soon after its creation in 1945. Despite cycles of reform, U.N. member states have had concerns about inefficient operations; problems of fragmentation, duplication, and poor coordination; and the proliferation of mandates. As one of the 191 member states, the United States played a significant role in promoting U.N. reform, calling for financial, administrative, and programmatic changes. The State Department and the U.S. Mission to the United Nations actively promoted these reforms such as establishing inspector general’s offices, many of which have been implemented. The State Department continues to promote further reforms and reports on the status of major reform initiatives to the U.S. Congress (see fig. 1). In July 1997, the Secretary General proposed a broad reform program to transform the United Nations into an efficient organization focused on achieving results as it carried out its mandates. Although the Secretary General does not have direct authority over specialized agencies and many funds and programs, the reforms at the Secretariat were intended to serve as a model for U.N.-wide reforms. In May 2000, we reported that the Secretariat had substantially restructured its leadership and operations and partly implemented a performance-oriented human capital management system. However, performance-oriented programming and budgeting proposals had not yet been adopted. In September 2002, the Secretary General released a second set of reform initiatives with 36 reform actions, some expanding on previous reform initiatives introduced in 1997 and others reflecting new priorities for the organization. The overall goal was to align U.N. activities with the priorities defined by the Millennium Declaration and the new security environment. As of December 2003, 60 percent of the 1997 reforms and 38 percent of the 2002 reforms were fully or substantially in place—or 51 percent overall (see app. II for the status of U.N. reforms). The Secretary General set a target date of 1999 for the implementation of reforms in the 1997 agenda, which consisted of initiatives that he could implement on his own authority and those that required member states’ approval. Of these reforms, the Secretary General implemented 70 percent of those reforms under his authority, while 44 percent of reforms requiring member states’ approval were in place. However, the outputs of many reforms, such as developing a written plan or establishing a new office, are only the first step in achieving the Secretary General’s overall reform goals. Although many of these reforms are in place, departments and offices in the Secretariat are still institutionalizing these new plans to improve U.N. operations in the long term. Since our May 2000 report, the United Nations continued to implement reforms from the Secretary General’s 1997 reform agenda and began to implement initiatives from the 2002 agenda (see fig. 2). We found that 60 percent of the 88 reform initiatives in the 1997 agenda were in place, compared with 38 percent of the 66 reform initiatives in the 2002 agenda. Overall, 51 percent of reforms from the 1997 and 2002 agendas were in place. We identified a total of 154 reform initiatives from the 1997 and 2002 reform agendas. This number differs from U.N. figures because many of the Secretary General’s reform action items had several components that we identified and counted as separate initiatives. To determine the implementation status of these reforms, we interviewed senior U.N. officials and reviewed relevant reports, bulletins, and resolutions. We then rated the reforms as in place or substantially so—that is, the reform had been approved and most key and minor elements were in place; partly in place—that is, the reform had been approved, and some key elements, as well as some or most minor elements, were in place; or not in place—that is, the reform had not been formally approved and minor elements could be in place, but no key elements were in place (see app. I for a more detailed description of our methodology). The implementation of reforms under the Secretary General’s authority advanced faster than those under the authority of the member states. We found that 70 percent of the 56 reform initiatives in the 1997 reform agenda under his authority are fully or substantially in place, compared with 44 percent of the 32 initiatives requiring member state approval (see fig. 3). The 2002 agenda did not differentiate between initiatives that the Secretary General could implement on his own authority and those that required member states’ approval. In particular, the Secretariat made the most progress on the 1997 reforms to restructure U.N. operations to provide more unified leadership and coordination across departments, programs, and offices; institute a new human capital management system that sets expectations and rates staff performance; and adopt results-based budgeting. However, the General Assembly did not adopt many reforms, such as those to further shorten the length and reduce the cost of its annual meetings; focus the assembly’s yearly debates on a few priority areas; and institute time limits, or sunset provisions, for all new U.N. programs. Delays in acquiring member state approval are due, in part, to the longer time needed for the General Assembly to reach agreement. To pass resolutions in favor of most specific reforms, the General Assembly generally requires a majority vote from the 191 member states. Although the Secretary General acknowledged that these reforms would take longer to implement, he set the end of 1999 as the target date to complete the 1997 reforms. However, we found that approximately 40 percent of these reforms are not fully in place. More than one-quarter of the Secretary General’s completed reforms, such as developing a written plan or establishing a new office, only represent the first steps in achieving longer-term and more important goals. The Secretariat’s departments and offices must then use these new plans and offices to improve U.N. operations for the long term. For example, the Secretary General directed the Secretariat to develop a plan to improve its information technology systems. We found that the Secretariat implemented a plan to upgrade software programs, enhance inter-office communication between headquarters and the field, and train staff in the use of these new systems. However, member states must continue to invest the necessary resources for the plan’s implementation to ensure that the technology does not become obsolete and to have an impact on U.N. operations in the long term. In addition, the Secretary General created several new offices as part of his reform initiatives. These include a strategic planning office in the Secretariat, an office to coordinate emergency humanitarian relief programs, and an office in Vienna to manage the U.N.’s interrelated programs to combat crime, drugs, and terrorism. Although the establishment of any new office can be counted as a completed reform, it is only the first step toward impacting the effectiveness of U.N. operations and achieving the Secretary General’s overall reform goals. GAO has previously reported that building an effective department that can meet overall objectives requires several components, including a staff, financial resources, and performance goals to measure progress toward objectives. We found that the U.N. has implemented many reforms in four key areas: (1) human capital management, (2) performance-oriented budgeting, (3) public information activities, and (4) the human rights program. Although numerous key initiatives are in place, other tasks are not yet complete, such as strengthening the U.N.’s monitoring and evaluation mechanisms to measure program impact and issuing additional guidelines on the new worldwide staff rotation, or mobility, policy. Therefore, the impact of these reforms on the effectiveness of U.N. operations is unclear. In response to human capital concerns raised by U.N. officials and outside observers, including the extensive time required to recruit and hire staff, the Secretariat developed a reform strategy to address the key elements of human capital management. The strategy included the implementation of a new recruitment and placement system that decentralized hiring authority and, according to U.N. officials, significantly reduced the average time to hire staff. Additional steps are needed, however, to fully implement reforms and address remaining challenges. For example, U.N. officials cited the need to develop a system to efficiently screen the increased number of applications received through the online hiring system. The Secretary General’s reform strategy called for changes to the Secretariat’s human capital management to create a results-oriented organizational culture supporting high performance, increased training, and more effective management. The United Nations’ human capital management had long been criticized by U.N. officials and external observers for the extensive time required for recruiting and hiring, the need for increased accountability for performance, and limited development and promotion opportunities. In his 1997 plan, the Secretary General stated that human capital management has been characterized by labor-intensive day-to-day staff administration and cumbersome rules and processes. He further stated that these rules and processes were seen as impeding program delivery and not maximizing staff contributions. The reform initiatives also attempted to bring human capital policies up to date with changes that had taken place within the organization, such as the move from being primarily headquarters-based to having an increasingly large field presence. In 2000, the Secretariat expanded the reforms by developing a broader human capital reform strategy. GAO has developed a human capital model that highlights the steps that organizations can take in managing human capital strategically. This model encompasses four human capital cornerstones that, when taken together, embody an approach to human capital management that is fact-based and focused on program results and mission accomplishment. We found that the Secretariat’s reform strategy includes actions in the areas of GAO’s four cornerstones of strategic human capital management—leadership; strategic human capital planning; acquiring, developing, and retaining talent; and results-oriented organizational cultures (see fig. 4). Leadership is defined as the demonstrated commitment of top leaders to continuously improve human capital management and support efforts to integrate human capital approaches with organizational goals. Soon after taking office, the Secretary General developed the 1997 reform plan for the Secretariat. He established a new leadership and management structure and began overhauling human capital policies to align the organization’s human capital capacity with its mission and structure. The Secretary General also established core organizational values and competencies to develop a results-oriented culture and has used this model to improve recruitment, staff development, and performance management processes. The Secretary General’s 2002 reform plan further emphasized the need for human capital improvements, including increased opportunities for staff mobility and expanded career prospects for support staff. The leadership cornerstone also emphasizes that human capital professionals have an expanded role, beyond paperwork processing, to become more integrated in the work of the organization. The Secretariat’s Office of Human Resources Management (OHRM) has begun to take on additional responsibilities, including developing human capital policies, monitoring compliance with these policies, and providing guidance on human capital issues. In addition, OHRM has begun to provide more automated services to employees. For example, the office has streamlined human capital rules and procedures and has made the Human Resources Handbook and personnel forms available online. U.N. employees reported in a survey that the streamlining of rules and procedures was the most successful human capital reform implemented since 2000. To improve strategic human capital planning, the second cornerstone, the Secretariat is developing its workforce planning activities through analysis of the demographic characteristics of Secretariat staff, while departmental staffing goals are being integrated with the organization’s broader human capital objectives. The Secretariat’s departments and offices also are preparing action plans, which incorporate human capital goals and indicators. OHRM holds planning sessions with the head of each department to develop measurable targets for achieving human capital goals, including targets for hiring staff from unrepresented or underrepresented countries. OHRM monitors the implementation of these action plans through semiannual reviews of the departments’ progress in meeting their goals. The Secretariat also is making increased use of information technology in implementing reforms. The electronic Human Resources Handbook, the online hiring system, and the electronic performance appraisal system are new technology tools that the Secretariat is using to manage human capital. Historically, the Secretariat had unique job profiles for most positions, but the new recruiting and placement system makes use of generic job descriptions in advertising job openings. U.N. officials stated that these generic job profiles have increased the accessibility and transparency of the application and hiring process and have facilitated staff’s ability to move to positions in other departments or offices. To acquire, develop, and retain talent, the third cornerstone, the Secretariat introduced a new recruitment and placement system in 2002 that entrusts program managers with the responsibility and accountability for hiring decisions. U.N. officials stated that the new hiring system has streamlined the hiring process, contributing to a significant reduction in the average time to hire an employee. In addition, an online tool allows individuals to submit their applications through the Internet. U.N. officials stated that this tool provides information on the status of applications and on management indicators, such as the gender balance and geographic distribution of applicants. The Secretariat also increased the emphasis on training and developing managers’ skills. Although U.N. officials acknowledged that more resources are needed for training, the organization is providing mandatory people management training for supervisory staff. The Secretariat also has implemented a career development policy based on the newly developed core competencies for managers and staff. Under this policy, managers must demonstrate support for their staff’s development and career progress. Finally, the Secretariat has implemented new initiatives to improve the work environment for staff. For example, employees now have more flexible work arrangements to address their personnel needs. The key to developing results-oriented organizational cultures, the fourth cornerstone, is to create a clear link between individual performance and organizational success. To do this, the Secretary General is holding senior managers accountable for accomplishing human capital goals through the use of annual performance agreements. On an annual basis, the Secretary General meets individually with department heads to discuss human capital priorities and goals for the upcoming year and to review indicators, such as the percentage of women in staff and management positions and the percentage of vacant positions. For these indicators, the managers’ departments are measured against the Secretariat’s overall average and their targets for the year. Program managers have been able to electronically track these and other indicators daily using a new tool developed by the Department of Management. The Secretary General also implemented a new electronic performance appraisal system, introduced in 2002. Rather than having performance management take place once a year, the new system emphasizes regular conversations and feedback between staff and supervisors related to staff performance. Under the system, staff also are assessed against newly developed organizationwide competencies. Examples of the Secretariat’s core staff competencies include communication, teamwork, commitment to continuous learning, and technological awareness. Managers also are assessed under additional competencies such as leadership, empowering others, and building trust. In addition, the new performance appraisal system links the individual’s performance to departmental or team goals and provides mechanisms for dealing with poor performers. Staff that have not met performance expectations under the appraisal system may have their salary increases withheld or could face the termination of their employment contracts. The Secretariat has made progress in implementing its reform agenda, but it must address additional human capital challenges if it is to meet the Secretary General’s overall reform goals. Key challenges include (1) delegating increased authority and accountability for personnel actions to managers, (2) implementing the organization’s staff mobility policy, (3) developing a long-range workforce planning capacity, and (4) screening the significant increase in applications received through the new recruiting system. In addition, although the Secretariat has an overall reform strategy in place, this strategy does not include specific time frames to complete reform actions. Establishing time frames at the outset provides a baseline for assessing the Secretariat’s progress in implementing reforms and achieving its overall human capital reform goals. First, U.N. officials we met with stated that OHRM has not gone far enough in delegating authority for personnel decisions to program managers, a component of the leadership cornerstone. For example, U.N. officials stated that offices and programs working on humanitarian or development assistance often needed to hire staff quickly during crisis situations around the world. However, according to these officials, U.N. rules and procedures have been a barrier to the hiring process. These officials pointed out that the delegated hiring authority is only for employees under regular budget positions on longer-term contracts. Field-based programs and offices often hire staff under short-term contracts. U.N. officials stated that the authority to hire these staff has not been decentralized. In his 2002 reform plan, the Secretary General also acknowledged the need to further delegate responsibilities to managers. Second, one of the Secretary General’s major reform initiatives was the implementation of a staff mobility policy intended to facilitate the movement of staff within and between offices and duty stations. The policy establishes time limits of either 5 or 6 years for staff to occupy a position, depending on the staff’s grade level. Although the human capital office is developing incentives for staff to move to hardship duty stations, U.N. officials have identified key challenges that may impede the successful implementation of the mobility policy when the requirements go into effect in 2007. U.N. staff, for example, are employed under different types of contracts, some of which place restrictions on the duration of employment and the type of work an employee can undertake. U.N. officials stated that the differences in employment contracts would make it difficult to move staff to certain positions or locations. Another barrier to staff mobility is spousal employment. Some countries place visa and work permit restrictions on hiring U.N. employees’ spouses. The Secretary General has begun to negotiate with countries to ease the restrictions on the employment of U.N. spouses. A related challenge is the need for further improvements in strategic workforce planning, linked to strategic goals and objectives. Long-range workforce planning will enable the organization to remain aware of and be prepared for its current and future needs as an organization. The Secretary General has recognized the need for building this capacity, emphasizing the need for more systematic succession planning to account for the expected increase in retirement of U.N. staff. Ultimately, the success of an organization’s workforce planning process can be judged by its results— how well it helps the agency attain its mission and strategic goals. We have reported that other countries’ succession planning and management initiatives have addressed specific human capital challenges, such as retention and the identification of staff with critical skills. Finally, U.N. officials stated that the Secretariat’s new recruiting and placement system has made screening the increased number of incoming applications a challenge. These officials stated that the organization now receives an average of approximately 1,000 applications for each vacancy announcement, compared with a previous average of about 100 applications per opening. U.N. officials have recognized that it will be a challenge to develop an electronic mechanism to effectively and accurately screen the growing numbers of applications received. The United Nations has begun to adopt performance-oriented budgeting, but it lacks an adequate monitoring and evaluation system to measure program performance and results. GAO has reported that a performance- oriented budgeting framework includes three key elements: (1) a budget that reflects a results-based budgeting structure, linking budgeted activities to performance expectations; (2) a monitoring and evaluation system; and (3) procedures for shifting resources to meet program objectives. In December 2000, the United Nations adopted a results-based structure for its budgets. We found that this format at the United Nations has resulted in clearer linkages between program activities and expected results, but some performance indicators lack clear measures to assess results. We also found that existing U.N. monitoring and evaluation activities do not systematically measure program performance and impact. Consequently, the Secretariat has developed and is implementing a strategy to improve performance monitoring and evaluation. In December 2003, the General Assembly also adopted an initiative to strengthen the role of one of its oversight committees responsible for monitoring and evaluating programs, but the General Assembly does not evaluate the Secretariat’s program results to reallocate resources to new priorities. The Secretariat has implemented the first key element of the U.N.’s performance-oriented budgeting framework by adopting a budget that reflects a results-based budgeting format, which involves specifying program costs, objectives, expected results, and specific performance indicators to measure the results. GAO previously reported that linking funding to specific performance goals is a critical first step in supporting the transition to a more results-oriented and accountable organization. Expected results and performance indicators are intended to allow the Secretariat to track the progress its programs make to meet objectives. By approving the budget, the General Assembly can hold the Secretariat accountable for meeting expected results. The Office of Program Planning, Budget and Accounts, which prepares and reviews the Secretariat’s budget, issued guidelines and provided training sessions to assist program managers and other staff in preparing budget proposals in a results-based format. This office also created a Web site, which is updated regularly, to post information on best practices and lessons learned. The Advisory Committee on Administrative and Budgetary Questions noted an improvement in the clarity and detail of expected results and performance indicators between the 2002-2003 biennium budget, which was the first submitted in a results-based format, and the 2004-2005 budget. Figure 5 compares the 2002-2003 performance indicators for the deployment of peacekeeping police units with those developed for the 2004-2005 budget. For the first time, the 2004-2005 budget includes specific performance targets and baseline data for many performance indicators that can help measure performance over time and could allow program managers to compare actual achievements to expected results. For example, the Department of Peacekeeping Operations plans to use baseline data at the end of the budget period to determine whether it will be able to deploy police units for peacekeeping operations more quickly. However, oversight committees also reported that some programs still lack clear and concise expected outcomes and performance indicators. For example, the Secretariat established an indicator to measure increased coordination among U.N. agencies and programs, the Bretton Woods institutions, and the World Trade Organization, and called for “closer collaboration” to improve the delivery of economic assistance and development projects. The associated performance target consists of the estimated number of meetings among these institutions, but does not describe what these meetings are to accomplish or how they will improve coordination. The Advisory Committee on Administrative and Budgetary Questions reported that it cannot determine the impact of these activities, which would cost close to $10 million in the 2004-2005 budget period. It recommended that indicators, such as “closer collaboration” or “full utilization of resources,” should be replaced with more specific and concrete measurements. The vagueness of some of these indicators, however, stems from the fact that baseline information has not been collected or is missing due to inconsistent monitoring of program activities, according to officials from the Office of Program Planning, Budget and Accounts. The Secretariat does not systematically monitor and evaluate program impact or resultsthe second key element of performance-oriented budgeting. U.N. regulations require that programs should be regularly monitored and evaluated to determine their relevance, effectiveness, and impact in relation to their objectives. Program managers are responsible for monitoring and evaluating programs to assess their impact and to determine the extent to which changes are needed to meet expected results. However, in 2002, the Office of Internal Oversight Services (OIOS) found that program managers and department and office heads were not complying with U.N. regulations. For example, both OIOS and oversight committees reported in 2002 that nearly half of program managers were not regularly monitoring and evaluating program performance. In addition, program managers were not held directly accountable for meeting program objectives because U.N. regulations prevent linking program effectiveness and impact with program managers’ performance. U.N. officials told us that a more mature program monitoring and evaluation system is needed before program managers can be held responsible for program performance. We found that there were a variety of problems related to the Secretariat’s monitoring and evaluation of program results and impact. Most programs do not have comprehensive monitoring and evaluation plans and, in many cases, no systematic management review of evaluations. For example, department heads and program managers did not directly review the results of evaluation activities, consistent with U.N. guidance, in 13 out of 25 programs surveyed in 2001. OIOS reported that, overall, evaluation findings were not used to improve program performance. In some cases, such as with the Office of the High Commissioner for Human Rights, monitoring and evaluation responsibilities were assigned to low-level staff with minimal oversight from program managers. Further, adequate levels of staff time and other resources needed to conduct evaluations have never been assessed and programs were not regularly monitored and evaluated, according to the U.N.’s oversight office. For example, all U.N. programs supporting the economic and social development of Asia and the Pacific, which cost approximately $25 million for the biennium, were not evaluated in 2000 and 2001. Lastly, for the majority of programs, no resources have been specifically allocated for activities related to monitoring and evaluation. To address these weaknesses, the Secretary General tasked the Monitoring, Evaluation, and Consulting Division of OIOS to develop a strategy to systematically monitor and evaluate program results and to introduce information systems needed to implement results-based budgeting. The division began to implement its strategy in 2002 and expects to have a complete system by 2006. As part of its strategy, OIOS introduced an Internet-based system that allows program managers to prepare periodic assessments of program impact against stated objectives. Program managers are required to submit performance assessments after 12 and 18 months, and at the end of the budget period. OIOS officials stated that this would allow them to adjust the direction of their program to meet objectives before the end of the budget cycle. In addition, OIOS is updating its guidelines on monitoring and evaluation, which describe new data collection methods, such as online surveys, to monitor results and evaluation methods to report on results. We found that the final component of performance-oriented budgeting— procedures to review evaluation results, eliminate obsolete programs, and move resources to new priority programs—is not in place. The Advisory Committee on Administrative and Budgetary Questions reported in 2003 that it did not receive systematic information from the Secretariat on program impact and effectiveness to determine whether a program was meeting its expected results. The Secretariat’s strategy to improve program monitoring and evaluation is part of an effort to provide the General Assembly with better program assessments. However, in 2003, the Secretary General reported that the General Assembly’s oversight system was ill-suited to review the Secretariat’s evaluation results and to determine how best to distribute resources. In his 2002 reform agenda, the Secretary General proposed redefining the roles of U.N. oversight committees to focus on reviewing program results. In December 2003, the General Assembly passed a resolution changing the role of the Committee for Program and Coordination, the first step toward shifting the focus of oversight responsibility to assessing program impact. The committee now focuses exclusively on reviewing activities planned to meet program objectives and no longer reviews budgeting information. Although several committees review the U.N.’s planning and budgeting documents for the next biennium period, these committees do not systematically review programs to assess the impact of previous activities and determine the appropriate level of funding (see fig. 6). According to the Joint Inspection Unit, the planning and budgeting review process was duplicative and redundant. In addition, the costs of preparing and printing documents, servicing close to 300 meetings, and staff time for this review have exceeded $20 million a biennium, with little emphasis placed on evaluating program performance. To shift the focus to evaluating results, the General Assembly in December 2003 required the Committee for Program and Coordination to submit a proposal on ways to improve its ability to monitor and evaluate program impact. The Secretary General recommended that the committee assess the results achieved at the end of the budget period and establish priorities to guide the allocation of resources. This would support performance-oriented budgeting, according to Joint Inspection Unit officials. In August 2003, the Advisory Committee on Administrative and Budgetary Questions concluded that the General Assembly could not eliminate programs and shift resources until it received evaluations that addressed program impact. Performance information is necessary for decision- making bodies to determine whether programs are meeting their stated objectives. Program performance reports provided to member states focused on outputs (such as the number of staff recruited, reports issued, meetings held, or computers purchased), instead of measuring program impact. To address this concern, OIOS changed the format of the performance report, which now requires program managers to link resources to program activities and to use performance indicators to measure program impact. The program performance report for the 2002- 2003 biennium, which will be submitted by March 2004, will be the first prepared using the new format. In December 2003, the General Assembly approved the elimination of 912 outputs in the 2004-2005 program budget based on the Secretariat’s review of program activities and more than 50,000 outputs. In addition, as a result of this review, the General Assembly has shifted resources from these activities—deemed obsolete and inefficient by the Secretariat—to more immediate U.N. priorities. In 2003, the Advisory Committee on Administrative and Budgetary Questions and the Committee for Program and Coordination recommended that program managers in the Secretariat continue to identify obsolete outputs in U.N. budgets in compliance with U.N. regulations. The committees also reported that many sections in the budget lacked justifications for continuing certain outputs. We found that the Secretariat had implemented some reforms related to U.N. public information activities, but most were still in the early phases. With a biennium budget of approximately $156 million, the Department of Public Information undertakes news coverage of U.N. events through radio, video, and the Internet in six official languages; manages the U.N. Web site; manages its overseas branch offices; and oversees the Dag Hammarskjold library and coordinates with depository libraries worldwide. Following a series of management reviews of U.N. public information activities, the Secretary General restructured the department to improve its ability to develop coherent, cost-effective communications strategies to promote the U.N.’s priorities. In addition, the Secretary General consolidated department branch offices in Western Europe into a regional branch office in Brussels, Belgium. However, we found that reforms of other public information activities are not yet in place. For example, reforms related to the Department of Public Information’s program monitoring and evaluation and library management, as well as the Secretariat’s publications oversight, are still in the early stages of implementation and have had a limited effect on the effectiveness of public information activities, according to U.N. officials. Since 1948, internal oversight bodies and external groups have conducted at least seven periodic management reviews of public information policies and activities. However, these reviews resulted in few changes to the Department of Public Information’s operations. Member states continued to criticize the department, claiming that it did not adequately assess the impact of its activities. In his 2002 reform agenda, the Secretary General highlighted that fact that the department suffered from fragmented programs because of too many mandates and missions. To better align the Department of Public Information’s structure with its mandated activities, highlight priorities, and reduce fragmentation, the Secretary General reorganized the department into three divisions in November 2002: (1) the Outreach Division, which focuses on relationships with civil society, including outreach to educational institutions, and manages the Dag Hammarskjold Library in New York; (2) the News and Media Division, which aims to expand the United Nations’ access to media organizations worldwide; and (3) the Strategic Communications Division, which develops the U.N’s communications strategies in partnership with the Secretariat’s departments and manages the network of overseas branch offices. Within this third division, the department created focal points that work across the Secretariat’s departments in priority areas— including development, peace and security, Africa, human rights, Palestine, and decolonization—to identify communications strategies and reduce duplicative programs. In its spring 2003 session, delegates to the Committee on Information commented that the department’s new structure should help focus the department’s activities and maximize the use of its resources. To improve the cost efficiency of the department’s field operations, the Secretary General proposed changes to the structure of public information branch offices. Branch offices in developed countries—including the United States, Japan, Australia, and the European Union—accounted for 40 percent of all branch office expenditures, as of September 2002. Therefore, the Department of Public Information was devoting a large amount of funding to information activities in countries where available technology permitted greater online access to its services in the field. In 2003, internal auditors concluded that the department should evaluate these offices and consider options such as consolidation, regionalization, or closure. Based in part on these findings, the Secretary General created a regional branch office in Brussels in January 2004 and consolidated offices in nine European Union countries as part of his 2002 reform agenda. At its spring 2004 session, the Committee on Information will review a progress report on the implementation of the regionalization proposal to determine the feasibility of applying the initiative in other regions. The Secretariat has begun implementing additional reforms of other public information activities, but we found that these initiatives are only partly in place. The Secretary General stated that the department had historically devoted minimal attention to assessing the impact of its activities and that a comprehensive evaluation of the impact of its activities had never been conducted. Therefore, in 2003, the Department of Public Information and internal auditors began a 3-year joint process to evaluate the effectiveness and impact of the department’s activities through an annual review process. As part of its efforts to promote monitoring and evaluation, the department provides ongoing training for staff in results-based management within existing resources—a challenge, according to public information officials. Although these activities are still under way, an official from the Deputy Secretary General’s office stated that the department had taken positive steps to implement reforms to improve its monitoring and evaluation mechanisms. Reforms of U.N. libraries are also in the early phases. The United Nations has library collections in each of its headquarters offices and regional commissions, as well as libraries in many of the 62 branch offices and other depositories worldwide. The Secretary General reported in 2002 that the public information department needed to centralize library policy management and increase its use of technology in providing library services. In response, it established a steering committee in March 2003 to oversee the implementation of reforms, such as increasing the use of online archival systems for library collections and expanding information sharing among libraries to reduce duplication. The department plans to report to the Committee on Information in 2004 on its progress in implementing these reforms. Lastly, the implementation of reforms of publications activities is still under way. The Secretary General directed all departments to identify outdated or duplicative publications from more than 1,200 produced annually. We reported in 2000 that a review of U.N. publications in the economic and social affairs area found considerable redundancy and overlap. Publications activities are also extremely costly. For example, the U.N. Chronicle—a publication for teachers and students of world affairs—produced by the public information department—costs more than $1 million annually to publish. In his 2002 reform agenda, the Secretary General called for a review of the feasibility and cost of increasing online publications delivery, as opposed to printing certain publications. This review is not yet complete. To improve publications oversight, the relevant executive committees must approve all new publications proposed by the Secretariat pursuant to the 2002 reform plan. Overall, officials stated that the implementation of publications reform will depend on the willingness of Secretariat officials and the General Assembly to identify unneeded publications and discontinue duplicative mandates. On a positive note, in December 2003, the General Assembly approved the Secretary General’s 2004-2005 budget proposal calling for the discontinuation of 192 publications and reports. In recent years, management of the Secretariat’s human rights office has been complicated by several factors, such as weak financial and program management and a heavy reliance on voluntary funding to administer core activities. In addition to technical assistance, training, publications, and human rights advocacy, the office provides support to other parts of the human rights program outside the Secretariat, such as the U.N. Commission on Human Rights. We found that the office has implemented reforms to address its management deficiencies. In addition, we found that the human rights office has implemented reforms to improve its support to the actors outside the Secretariat, including requesting funding for additional staff. However, the Secretary General only has authority over the management of the Secretariat’s human rights office and cannot implement reforms across the entire U.N. human rights program, according to human rights officials. Several factors affect the management of the Office of the High Commissioner for Human Rights—the Secretariat’s human rights office. For example, in 2002, OIOS concluded that the human rights office had poor financial controls and human capital management, as well as weak internal oversight procedures. According to a senior human rights official, for example, the office did not accurately track its unused voluntary funding in the past. According to the human rights office, this problem has been rectified and the office is tracking voluntary funding levels. In addition, the office relies heavily on voluntary funding to administer its core activities. Regular budget funding accounted for about 38 percent, or $24.2 million, of the office’s activities in 2002, whereas voluntary contributions accounted for about 62 percent, or $40 million (see fig. 6 for funding trends for the human rights office). Human rights officials stated that the heavy reliance on voluntary funding poses management challenges, including the resulting uncertainty of funding for future projects and low morale among staff unsure about job security. As shown in figure 8, the human rights office also provides administrative, technical, and substantive support to parts of the human rights program outside the Secretariat, including the U.N. Commission on Human Rights, which is a functional commission of the Economic and Social Council that meets annually to discuss human rights issues and standards and governments’ adherence to them; independent reporters and working groups, appointed by the commission to examine, monitor, and publicly report on human rights situations in specific countries or territories or on major human rights themes—there are reporters who focus on the right to education and on the situation of human rights in the Democratic Republic of the Congo; and independent committees, established by international human rights treaties, comprising independent experts that monitor governments’ compliance with treaty obligations. The workload generated by these independent groups affects the human rights office’s management. For example, the office provides administrative support, such as report processing, to the monitoring committees and national governments to ensure compliance with treaty reporting requirements. As the number of signatories increases, the Secretariat’s administrative burden increases. In addition, the Secretary General reported in 2002 that the more than 40 human rights reporters and working groups pose a management burden for the human rights office because they have grown in recent years in an ad hoc fashion and without clear rules for their responsibilities. The fragmentation and lack of clear working guidelines complicated the office’s support to these individuals and groups in the preparation of reports to the commission. As an independent body, the Commission on Human Rights appoints new human rights reporters. However, OIOS reported that the General Assembly has not provided commensurate additional regular budget funding to the human rights office for their support. As a result, the office has increasingly resorted to using voluntary funding to recruit additional staff to fulfill its responsibilities to the commission and monitoring committees. The Secretary General’s reform agendas called for the Secretariat’s human rights office to develop a strategy to strengthen its financial and human capital management and internal oversight procedures, among other things. We found that the office has developed and is implementing this strategy. For example, it established both the senior-level Management Board and Project Review Committee, in 1997 and 1998, respectively, to monitor the planning, budgeting, and implementation of the office’s programs and to identify outdated or nonpriority activities. The human rights office reported that it strengthened its program oversight and planning throughout 2003. Officials stated that the 2004 annual appeal, for example, presented a more strategic work plan than in prior years, which resulted in a 12 percent decline in voluntary funding requirements for the 2004 annual appeal, from $62.5 million in 2003 to $54.8 million in 2004. In addition, the office established the Advisory Panel on Personnel Issues in March 1999 to evaluate the office’s use of temporary staff and staff funded with voluntary resources and ensure the equitable geographic distribution of staff from member states. It also restructured its three main branches to reduce duplicative activities and leverage its personnel and financial resources. We found that the human rights office has also implemented reforms that indirectly address areas of the U.N. human rights program outside the Secretary General’s authority. For example, to help improve the quality of human rights reports, the office developed an induction kit for human rights reporters and working groups. The kit is updated regularly and used to brief new reporters on their rules and procedures. In addition, the office is working to keep them informed about the latest General Assembly resolutions that may affect reporting procedures, such as page limits and submission deadlines. In December 2003, the General Assembly also approved the Secretary General’s request for funding in the 2004-2005 budget for additional staff to improve the office’s ability to respond to increasing demands from the Commission on Human Rights and its human rights reporters and working groups. Nevertheless, the implementation of the Secretary General’s proposals is incomplete because he does not have authority over human rights activities outside the Secretariat’s human rights office. For example, because the majority of human rights reporters are selected by the chair of the Commission on Human Rights, the Secretariat’s human rights office could only recommend that the commission consider developing criteria for their selection. Moreover, only the commission can determine standard entrance criteria for its reporters and working groups. Thus, any reform related to the human rights reporters is dependent upon the support of commission members. In addition, in his September 2002 reform agenda, the Secretary General stated that governments should be allowed to submit a single report to the monitoring committees summarizing their adherence to human rights treaty obligations. Given his lack of authority over the monitoring committees, the Secretary General requested that the human rights office consult with the committees on methods of streamlining the governments’ various treaty-reporting requirements. The monitoring committees, however, resisted the concept of a single report, according to the human rights office. The proposal resulting from these consultations instead calls for an expanded core report containing standard information pertinent to all of the monitoring committees, with separate, more detailed reports going to individual committees. We identified several challenges that may impact the Secretariat’s ability to meet the overall reform goals: (1) the Secretariat does not conduct periodic, comprehensive assessments of the status and impact of reforms; (2) the Secretary General did not differentiate between short- and long- term goals in the 2002 reform plan; (3) resistance from managers and staff has slowed the implementation of reforms; and (4) potential financial and personnel resource implications are associated with some reforms. First, we found that the Secretariat does not conduct systematic, comprehensive assessments of the status and impact of the Secretary General’s reforms. Without such assessments, the Secretariat is not able to determine where further improvements are needed. In 1998 and 2003, the Secretary General issued reports on the status of the 1997 and 2002 reforms, respectively. These reports, however, did not include a comprehensive impact assessment. We found that individual departments and offices within the Secretariat oversee specific reforms within their area of work; for example, the Office of the High Commissioner for Human Rights oversees the implementation of reforms of the U.N. human rights program. However, the Deputy Secretary General, who is responsible for overseeing the overall reform process, has only one full-time professional staff member dedicated to this effort. The Steering Committee on Reform and Management—comprising department heads within the Secretariat and chaired by the Deputy Secretary General—also tracks key reform issues and policy implementation. However, the Deputy Secretary General’s office neither systematically assesses departments’ performance in implementing reforms nor holds managers directly accountable. Furthermore, OIOS only monitors and evaluates the impact of select reforms and is not responsible for overseeing the implementation of the overall reform agendas. Second, the Secretary General has not differentiated between short- and long-term goals in his 2002 reform plan, and he has not consistently established time frames or milestones for their completion. GAO has identified the setting of implementation goals and a timeline to build momentum and show progress as key practices for organizations undertaking change management initiatives. We found that a few reforms required departments and offices to conduct evaluations and report their findings to the Secretary General by a certain date, but many reforms did not specify time frames for completing these actions. For example, the Secretary General called for the Department of Public Information and OIOS to complete an evaluation of the impact and cost effectiveness of the department’s activities within a three-year period (which started in 2003). However, when the Secretary General called for a review of the feasibility and cost of increasing the Secretariat’s delivery of online versus printed publications, he did not specify a deadline. Without prioritizing efforts and establishing deadlines, it is difficult to hold managers accountable for completing the reforms. Third, according to budget and human capital officials, some program managers and staff have resisted implementing certain reform initiatives. Human capital officials stated that program managers, for example, have raised concerns about the staff mobility policy because they fear losing expertise when staff rotate to new positions. In addition, OIOS reported that about half of program managers across the Secretariat have not complied with U.N. regulations to monitor and evaluate the performance of program activities. The Secretariat lacks clear rules and procedures for conducting regular monitoring and evaluation exercises, according to OIOS officials. Some managers also stated that they lacked resources to support this work and were concerned that these evaluation requirements would detract time and money from their regular work responsibilities. Consequently, the Secretariat is providing training to all departments to assist managers and staff in conducting self-monitoring and evaluation exercises to comply with performance-oriented budgeting and overcome resistance. Managers’ support is critical for the institutionalization of reforms in the long term. Fourth, U.N. officials stated that they have encountered delays in implementing reforms due to a lack of available regular budget resources. For example, public information officials stated that their department did not have a specific budget for new monitoring and evaluation activities—a key aspect of public information reform. In addition, human capital officials stated that they developed the online recruiting and hiring system after receiving resources from another department in the Secretariat. The Secretary General stated that departments would need to implement reforms within existing resources because additional funding would not be available in the regular budget. He also stated that program managers should streamline operations and eliminate obsolete activities to make resources available to implement reforms. According to U.N. officials, the Secretariat did not complete a comprehensive assessment of the personnel and budgetary implications during the development of his 2002 reform agenda. Rather, departments have conducted resource assessments for individual reforms on a case-by-case basis as a part of the budget process. In 1997 and 2002, the Secretary General proposed sweeping reforms of the United Nations in response to recurring calls to improve its efficiency and effectiveness in spending member states’ contributions. Many reforms have been completed since our 2000 report, including key measures to improve human capital management, focus the United Nations on results- based management, and strengthen the management of the human rights program. However, the United Nations faces many challenges to completing reforms, including potential resource constraints. Moreover, the Office of the Deputy Secretary General does not periodically and comprehensively assess the impact of reforms on the effectiveness of U.N. operations. Given that the Secretary General does not provide regular, comprehensive reports on the overall status and impact of reforms, it is difficult to hold staff accountable for implementing these reforms and their impact is unclear. In addition, the 2002 reform agenda did not specify short- and long-term goals or establish expected time frames for their completion—practices that increase the transparency and accountability of the reform process. Adopting key practices in management, oversight, and accountability for reforms, such as systematic monitoring and evaluation, could facilitate the achievement of the Secretary General’s overall reform goals. As the U.N.’s largest financial contributor and a proponent of reform, the United States would also benefit from the adoption of these practices. To promote full implementation and accountability of the Secretary General’s overall reform actions, we recommend that the Secretary of State and the Permanent Representative of the United States to the United Nations work with other member states to encourage the Secretary General to report regularly through an existing U.N. reporting mechanism on the status and impact of the 1997 and 2002 reforms and other reforms that may follow; differentiate between short- and long-term reform goals and establish time frames for completion for those reforms that are not in place; and conduct assessments of the financial and personnel implications needed to implement the reforms. The Department of State and the United Nations provided written comments on a draft of this report (see apps. III and IV). State agreed with our recommendations, stating that it will continue to encourage the full implementation of all reform initiatives at the United Nations. In particular, State noted several efforts it is pursuing through the General Assembly, including further reforms related to human capital management and the Department of Public Information, among others. Moreover, State agreed with our conclusion that many reforms from the 1997 and 2002 agendas are first steps in achieving the Secretary General’s overall reform goals. State also said that the report provides a comprehensive analysis of the status of U.N. reforms and the challenges affecting their implementation. State noted that our report did not contain an in-depth analysis of reforms of the Department of Peacekeeping Operations—a point that we acknowledge in our scope and methodology (see app. I). In addition, State provided technical comments on our draft report, which were incorporated into the text, where appropriate. The United Nations also provided written comments on a draft of this report. Although we did not make recommendations directly to the United Nations, it generally agreed with the report’s findings. In particular, the United Nations acknowledged that the implementation of certain reforms is proceeding more slowly than others. The United Nations also provided observations regarding its efforts to implement its ambitious reform agenda. In addition, the United Nations provided technical comments, which were incorporated into the text where appropriate. We are sending copies of this report to other interested Members of Congress. We are also providing copies of this report to the Secretary of State, the Permanent Representative of the United States to the United Nations, and the United Nations. We will also make copies available to others upon request. In addition, this 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 about this report, please contact me at (202) 512-8979 or [email protected], or Phyllis Anderson at (202) 512- 7364 or [email protected]. In addition to the persons named above, Jeremy Latimer, Leland Cogliani, Lynn Cothern, Martin de Alteriis, Kathryn Hartsburg, and Monica Wolford made key contributions to this report. At the request of the Chairman of the Senate Committee on Foreign Relations and Committee member Michael Enzi, we examined the status of U.N. reform activities to follow up on GAO’s 2000 report. Specifically, we assessed (1) the overall status of U.N. reforms proposed in 1997 and 2002 by the Secretary General; (2) the Secretariat’s efforts to implement reforms in four key areas: human capital management, performance- oriented budgeting, public information activities, and the human rights program; and (3) the challenges facing the implementation of U.N. reforms. We focused our work on the Secretary General’s 1997 and 2002 reform agendas. These reforms applied to the Secretariat and member state governing bodies, including the General Assembly, the Economic and Social Council, and the Security Council. We did not include U.N. specialized agencies or funds and programs in our review. We did, however, meet with officials and collect information from the International Labour Organization, the United Nations High Commissioner for Refugees, and the World Health Organization to discuss their progress and challenges in implementing management reforms similar to those that the Secretary General is undertaking. Overall, we identified 88 reform initiatives in the 1997 reform agenda and 66 in the 2002 agenda, for a total of 154 reform initiatives. This number differs from U.N. figures because many of the Secretary General’s reform action items had several components that we identified and counted as separate initiatives. For example, one of the Secretary General’s action items called for improving the information technology systems of the United Nations, which involved upgrading the U.N.’s Web site; modernizing internal systems that produce, store and disseminate documents; and adopting an information technology strategy for New York headquarters and field offices. We counted each one of those actions as separate initiatives, while the Secretariat grouped them into one action item. To determine the overall status of the reforms, we developed a methodology to code them as (1) substantially or completely in place, (2) partly in place, or (3) not in place (see table 1 for our definitions). We discussed our methodology with U.N. officials, and they agreed to its utility for assessing the status of U.N. reforms. We defined a key element as one that is critical or central to the reform. We considered that reforms could not be implemented or institutionalized without these key elements (e.g., staff or budget). All other elements were considered as minor. We considered a reform to be in place if it had moved from the planning stage to implementation. Implementation should have been well under way, though it may not have been completed and the reform may not have been institutionalized. For reforms with more than one key element, we considered the following factors to determine whether some or most key elements were in place: (1) the number of elements, (2) the relative importance of the elements, (3) the relative difficulty of implementation, and (4) the degree of implementation of each of the elements. To assess the status of the reforms, we reviewed the Secretary General’s 1997 and 2002 reform plans and obtained and reviewed official reports of the Secretariat and the Office of Internal Oversight Services (OIOS), budget documents, General Assembly resolutions, Secretary General bulletins, Web sites, and statements from U.N. officials. We interviewed senior officials from U.N. departments in New York City and Geneva. Specifically, we met with the Deputy Secretary General and her staff, and officials from the Department of Management, the Office of Human Resources Management (OHRM), the Office of Program Planning, Budget, and Accounts (OPPBA), the Department of Public Information (DPI), and the Acting High Commissioner for Human Rights. We also met with officials from OIOS and the Joint Inspection Unit (JIU). During the course of our review, we also discussed the status of U.N. reforms with U.S. Department of State officials in Washington, D.C.; New York; and Geneva. We selected reforms in the areas of human capital management, the performance-oriented budgeting system, public information activities, and the human rights program to assess in more detail. In our discussions with U.N. and U.S. officials, and in our review of U.N. documents, we determined that these were key areas of the Secretary General’s 1997 and 2002 reform plans. A detailed assessment of the reforms for peacekeeping and improving the coordination among U.N. departments and offices and between the U.N. and civil society was beyond the scope of this review. To assess the status of human capital management reforms, we compared the Secretariat’s human capital reform strategy with criteria from GAO’s model of strategic human capital management. This model provides a framework for examining an organization’s human capital practices and is based upon the actions that are characteristic of high-performing organizations. To collect information on the Secretariat’s progress in implementing its reform strategy, we reviewed internal and public human resources documents detailing the new recruitment and hiring system, the performance appraisal system, human resources action plans, and a survey of U.N. staff views on human capital reforms. We discussed human capital management reforms with OHRM officials who are planning and implementing the office’s reform initiatives. We also met with the chief personnel officer for the U.N. Geneva Office, as well as personnel officers at the Office for the High Commissioner for Human Rights, the U.N. High Commissioner for Refugees, and the Internal Labour Organization, to discuss the status and problems of human capital reforms in their organizations. We did not evaluate the effectiveness of implemented human capital reforms. To assess the implementation of budgeting and monitoring and evaluation reforms, we analyzed the last three U.N. biennium budget documents (2000-2001, 2002-2003, and 2004-2005) to determine changes in the budget’s format after the adoption of a results-based budgeting format. We also examined budget-related documents prepared by the Committee for Program and Coordination and the Advisory Committee on Administrative and Budgetary Questions. In addition, we examined Secretariat documents on program monitoring and evaluation activities to determine the U.N.’s ability to report on and assess program results and impact, as well as strategies the Secretariat developed to strengthen the monitoring and evaluation system. We discussed performance-oriented budgeting reforms with OPPBA, JIU, and OIOS officials from the Monitoring, Evaluation, and Consulting Division. We also met with budget officers at the International Labour Organization and the World Health Organization to discuss the status and lessons learned from implementing performance-oriented budgeting at their organizations. To determine the status of reforms of U.N. public information activities, including DPI’s reorganization, the restructuring of the department’s branch offices, library management, and publications, we reviewed reports from OIOS, the General Assembly’s Committee on Information, and the Secretary General. We also spoke with DPI officials, including the Under Secretary General, the department’s senior managers, and senior library officials in New York. In addition, we interviewed officials from DPI’s branch office and U.N. library in Geneva to determine the extent to which operations in the field have been affected by these reforms. To determine the status of efforts to reform the U.N. human rights program, we reviewed official reports from the Office of the High Commissioner for Human Rights (OHCHR)— including annual appeals and reports—detailing the steps the office is taking to implement these reforms. We also reviewed internal audit reports and external reviews by independent contractors highlighting the key management challenges facing OHCHR and its efforts to improve in these areas. In addition, we interviewed human rights officials in Secretariat offices in Geneva and New York. To assess the Secretariat’s efforts to improve the management of the human rights program, we spoke with the Acting High Commissioner for Human Rights and senior management officials responsible for implementing the Secretary General’s reforms. To determine the status of reforms related to the monitoring committees and human rights reporters and working groups, we analyzed relevant Secretary General, General Assembly, and Commission on Human Rights reports, resolutions, and other official documentation, and we spoke with OHCHR officials. We did not review the work or membership of the Commission on Human Rights or the performance of individual human rights reporters. To determine the challenges facing the implementation of U.N. reforms, we reviewed reports and documentation of the Secretariat, General Assembly, OIOS, and JIU. We also reviewed reports from outside observers of the U.N. system, including nongovernmental organizations and members of academia. In addition, we spoke with U.N. officials in New York and Geneva. These included officials from the Office of the Deputy Secretary General, the Department of Management, OHRM, OPPBA, DPI, OHCHR, OIOS, and JIU. We also spoke with U.S. officials in Washington, New York, and Geneva. We conducted our work from June 2003 through January 2004, in accordance with generally accepted government auditing standards. | The U.N. Secretary General launched two reform agendas, in 1997 and 2002, to address the U.N.'s core management challenges--poor leadership of the Secretariat, duplication among its many offices and programs, and the lack of accountability for staff performance. In 2000, GAO reported that the Secretary General had reorganized the Secretariat's leadership and structure, but that the reforms were not yet complete. As the largest financial contributor to the United Nations, the United States has a strong interest in the completion of these reforms. GAO was asked to assess the (1) overall status of the 1997 and 2002 reforms, (2) implementation of reforms in four key areas, and (3) potential challenges to reform. As of December 2003, 60 percent of the 88 reform initiatives in the 1997 agenda and 38 percent of the 66 initiatives in the 2002 agenda were in place. In general, reforms under the Secretary General's authority were progressing more quickly than those requiring member states' approval. Since 1997, the Secretariat has implemented reforms to provide more unified leadership and coordination across departments and offices. However, the Secretariat has implemented other reforms, such as developing a written plan or establishing a new office, that are only the first step in achieving the Secretary General's overall goals. Reforms in four key areas of U.N. operations are in various stages. First, the Secretariat has taken positive steps to strengthen its human capital management, but reforms in this area are ongoing and additional challenges remain. Second, the U.N. has begun to adopt results-oriented budgeting, but its monitoring and evaluation system does not measure program impact. Third, although the Secretariat reorganized its public information department, reforms of library management and publications are not fully in place. Fourth, the Secretariat's human rights office implemented the majority of its management reforms but does not have the authority to implement reforms outside the Secretariat. U.N. reform faces several challenges. For example, the Secretariat does not conduct comprehensive assessments of the status and impact of U.N. reforms. In addition, the reform agendas lack clearly stated priorities, interim goals, and target dates for overall completion. Other challenges include resistance to change from program managers and possible resource constraints. |
Project Management Institute, A Guide to the Project Management Body of Knowledge (PMBOK® Guide), Fifth Edition, (Newton Square, PA: 2013). United States. Second, those not eligible for the Visa Waiver Program and not otherwise exempt from the visa requirement must obtain a visa from a U.S. consular office overseas. Upon arriving at a port of entry, nonimmigrants must undergo inspection by CBP officers, who determine whether or not they may be admitted into the United States. If CBP determines a nonimmigrant is admissible, he or she is granted an authorized period of admission. This period may be for a specific length of time, which CBP designates by assigning a specific “admit until” date, or for as long as the nonimmigrant maintains a particular status. For example, in general, foreign students are eligible to remain in the United States for “duration of status,” meaning as long as they are enrolled in and attending a qualified education program or engaging in authorized practical training following completion of studies. An overstay is a nonimmigrant who is legally admitted to the United States for an authorized period but remains in the country illegally after that period expired without obtaining an extension of stay or a change of status or meeting other specific conditions, such as claiming asylum. This includes a nonimmigrant admitted for duration of status who fails to maintain that status, such as a student who is no longer pursuing a full course of study at an approved educational institution or engaging in authorized practical training following completion of studies. In-country overstays refer to nonimmigrants who have exceeded their authorized periods of admission and remain in the United States without lawful status, while out-of-country overstays refer to individuals who have departed the United States but who, on the basis of arrival and departure information, stayed beyond their authorized periods of admission. Federal law establishes consequences for foreign nationals who overstay their authorized periods of admission. Three DHS components and offices—CBP, ICE, and OBIM—are primarily responsible for taking action to identify and address overstays, as shown in table 1. In addition, the Department of State is responsible for ensuring that individuals who have previously overstayed and are ineligible for a visa do not receive one when applying for a visa to the United States at consular offices overseas. Federal agencies use various databases to determine whether nonimmigrants have potentially overstayed their authorized periods of admission to the United States. As shown in table 2, several databases, in particular, provide key information on foreign nationals’ arrival in and departure from the United States, foreign nationals’ applications to change status once in the United States, and the status of foreign students. ICE primarily analyzes biographic entry and exit data collected at land, air, and sea ports of entry to identify potential overstays. ICE identifies both in-country and out-of-country overstays by analyzing and comparing biographic data maintained in ADIS against information in other databases to find matches that demonstrate that a nonimmigrant may have, for instance, departed the country or filed an application to change status and thus is not an overstay. In particular, ICE analysts use ADIS to identify arrival records for which the subject’s admit until date has passed and for whom DHS does not have a corresponding departure record (unmatched arrival records), which may indicate that the subject of the record is an in-country overstay. For these records of potential overstays, ICE analysts conduct automated searches, such as searching for immigration benefit application information through U.S. Citizenship and Immigration Services. ICE analysts also determine whether the subject of the record meets ICE’s overstay enforcement priorities based on national security and public safety criteria. ICE prioritizes investigation of overstay leads based on the perceived risk each lead is likely to pose to national security and public safety as determined by threat analysis. In order to prioritize investigation of overstay leads, ICE uses an automated system to assign each overstay lead a priority ranking based on threat intelligence information. For the records that meet ICE’s overstay enforcement priorities, ICE analysts then conduct manual searches of other databases to determine, for example, if the individual applied for refugee or asylum status. For these priority records, if ICE analysts are unable to identify evidence of a departure or a change in status, they search for the nonimmigrant’s current U.S. address, and if they are able to identify an address, they send the lead to the relevant ICE HSI field office for investigation. For cases in which ICE’s analysis shows that a nonimmigrant visa holder departed the United States after the admit until date—an out-of-country overstay—and the departure was more than 90 days after the nonimmigrant’s authorized period of admission expired, ICE creates a lookout that CBP officers at ports of entry and State Department officials at overseas consulates can access to determine whether that nonimmigrant is eligible for readmission at ports of entry or can receive a new visa upon application at a U.S. consulate. Beginning in 1996, federal law has required the implementation of an integrated entry and exit data system for foreign nationals. Additionally, the Immigration and Naturalization Service Data Management Improvement Act of 2000 required implementation of an integrated entry and exit data system for foreign nationals that would provide access to and integrate foreign national arrival and departure data that are authorized or required to be created or collected under law and are in an electronic format in certain databases, such as those used at ports of entry and consular offices. In 2003, DHS initiated the US-VISIT program to develop a comprehensive entry and exit system to collect biometric data from aliens traveling through United States ports of entry. In 2004, US-VISIT initiated the first step of this program by collecting biometric data on aliens entering the United States at 115 airports and 14 sea ports. The Intelligence Reform and Terrorism Prevention Act of 2004 required the Secretary of Homeland Security to develop a plan to accelerate full implementation of an automated biometric entry and exit data system that matches available information provided by foreign nationals upon their arrival in and departure from the United States. Since 2004, we have issued a number of reports on DHS’s efforts to implement a biometric entry and exit system. For example, in February and August 2007, we found that DHS had not adequately defined and justified its proposed expenditures for exit pilots and demonstration projects and that it had not developed a complete schedule for biometric In September 2008, we further reported that DHS exit implementation. was unlikely to meet its timeline for implementing an air exit system with biometric indicators, such as fingerprints, by July 1, 2009, because of several unresolved issues, such as opposition to the department’s published plan by the airline industry. In November 2009, we found that DHS had not adopted an integrated approach to scheduling, executing, and tracking the work that needed to be accomplished to deliver a In our prior reports, we have made comprehensive exit solution.recommendations intended to help ensure that biometric exit was planned, designed, developed, and implemented in an effective and efficient manner. DHS generally agreed with our recommendations. DHS has implemented or taken actions to implement some of these recommendations; however, DHS has not addressed others. For example, in March 2012, DHS reported that the US-VISIT office was adopting procedures to comply with the nine scheduling practices we recommended in our November 2009 report and has conducted training on our scheduling methodology. However, DHS did not implement our February 2007 recommendations to (1) report to Congress on US-VISIT program risks associated with not fully satisfying legislative conditions, such as compliance with Office of Management and Budget capital planning and investment control guidance, and (2) limit planned expenditures for program management-related activities until such investments are economically justified and have well-defined plans. DHS reviewed a backlog of records of potential overstays that we DHS uses ADIS to match departure previously identified in April 2011.records to arrival records and subsequently close records for individuals with matching arrival and departure records because either (1) the individual departed prior to the end of his or her authorized period of admission and is therefore not an overstay, or (2) the individual departed after the end of his or her authorized period of admission and is therefore an out-of-country overstay. Unmatched arrival records—those records in ADIS that do not have corresponding departure records—remain open and indicate that those individuals are potential in-country overstays. In April 2011, we reported that, as of January 2011, ADIS contained a backlog of 1.6 million unmatched arrival records that DHS had not reviewed through automated or manual processes. This backlog included prior nonpriority overstay leads that had not been reviewed, nonpriority leads that continued to accrue on a daily basis, and leads generated in error as a result of CBP system changes. DHS officials attributed this backlog to resource constraints and US-VISIT’s focus on reviewing leads that met ICE’s priorities. In the summer of 2011, DHS completed a review of these 1.6 million records against various national security and law enforcement databases to determine if the subjects of these records had already left the United States and to help identify if the subjects posed any potential national security or public safety threats. As a result, DHS closed approximately 863,000 records for individuals who had departed, were in status, or had adjusted status, and removed them from the backlog by conducting additional automated checks. Second, DHS reviewed the remaining 757,000 records against national security and law enforcement databases to identify potential national security or public safety threats. As part of this national security and public safety review, DHS also reviewed approximately 82,000 additional records identified by CTCEU that were unresolved or had not yet undergone full review because they did not meet ICE’s enforcement priorities (a total of approximately 839,000 combined records). As a result of these reviews, DHS reprioritized 1,901 of the 839,000 records because the subjects of the records could pose national security or public safety concerns and provided them to CTCEU for further review and consideration for enforcement action. Table 3 describes how CTCEU resolved these leads. According to our analysis of DHS documentation, since completing this review of the backlog of records of potential overstays in the summer of 2011, as new records have accrued, DHS has continued to review all records of potential overstays through national security and law enforcement databases to identify potential threats, regardless of whether the subjects of the records meet ICE’s priorities for enforcement action. DHS also regularly rereviews these records using various national security and law enforcement databases to identify new information on individuals who were not previously identified as threats. ICE’s continual review of records of potential overstays enables it to prioritize and investigate individuals who pose a potential national security or public safety threat; however, most records of potential overstays do not result in enforcement action because they do not meet HSI’s overstay enforcement priorities. CTCEU provides those records that do not meet HSI’s overstay enforcement priorities for possible investigation to ICE’s ERO for review to determine if the subjects of these records could be within the scope of one of ERO’s programs. For example, ERO oversees the Criminal Alien Program, which seeks to identify, arrest, and remove priority aliens who are incarcerated within federal, state, and local prisons and jails. According to ERO officials, upon receiving records from CTCEU, ERO may also determine through this program that the subject of the record has committed a crime and is incarcerated or at large. In fiscal years 2011 and 2012, the number of nonpriority records of potential overstays sent to ERO (more than 420,000) was almost three times the number of priority records that CTCEU reviewed for potential homeland security investigations (about 147,000) (see app. I for additional data on ICE’s enforcement actions). According to ERO officials, ERO does not initiate investigations of records of potential overstays it receives unless there is evidence at the time ERO receives the record that the subject meets ERO’s priorities. ERO officials stated that few records of potential overstays have met ERO’s priorities. In April 2011, we found that ICE was assessing funding and resources needed to shift more overstay enforcement responsibilities to ERO, but ICE had not established a time frame for completing that assessment. We recommended that ICE establish a target time frame for completing the assessment and use the results to inform its decision on whether to assign ERO additional responsibility for overstay enforcement. DHS concurred with our recommendation and took action to address it. In June 2011, ICE conducted a pilot study and completed its assessment later that year in which it concluded that significant resources would be required to establish ERO teams dedicated to enforcement against overstays. As a result, ICE did not change ERO’s overstay enforcement responsibilities. Since DHS conducted its review of the previous backlog in 2011, additional unmatched arrival records have accrued, and as of June 2013, DHS has more than 1 million unmatched arrival records in ADIS (that is, arrival records for which ADIS does not have a record of departure or status change), which do not meet ICE’s enforcement priorities. Some of these individuals are overstays, while others have either departed or changed immigration status without an ADIS record of their departure or status change. For example, the individual may have departed via a land port of entry without providing a record of departure or the individual may have applied for immigration benefits using a different name that does not match the ADIS arrival record. DHS conducts ongoing automated reviews of these records to rule out potential national security or public safety threats should updated information become available. In certain circumstances, such as when a record of a potential overstay meets one of ICE’s enforcement priorities, DHS also manually searches additional databases to locate evidence of a departure or change of status. However, DHS’s automated reviews have not produced evidence that the subjects of these 1 million unmatched arrival records meet its enforcement priorities. Thus, DHS has not manually reviewed them and does not plan to take enforcement action against these individuals. Until such evidence becomes available, DHS will continue to maintain this set of unmatched records. In November 2012, DHS’s set of unmatched arrival records not manually reviewed totaled approximately 1.2 million records, and we analyzed data on these records to assess trends by admission class (e.g., tourist or temporary agricultural worker), mode of travel (i.e., air, land, or sea), and time elapsed since the travelers were expected to leave the country. Our analysis of the records by admission class shows that 44 percent of the unmatched arrival records were nonimmigrants who traveled to the United States on a tourist visa, while 43 percent were tourists admitted to the country under the Visa Waiver Program. Figure 1 presents our analysis of unmatched arrival records by admission class. With regard to mode of travel, our analysis of the 1.2 million unmatched arrival records from November 2012 indicates that most of the records were for air arrivals (64 percent), and roughly one-third were for land arrivals (32 percent). The remaining 4 percent of the records were for arrivals by sea. Figure 2 presents the results of this analysis. DHS has reported a similar distribution for modes of travel for nonimmigrants arriving in fiscal years 2010 and 2011—roughly one-third by land and two- thirds by other modes, which would include air and sea arrivals. We also analyzed the records to assess the amount of time that has elapsed since travelers were expected to depart the country, based on travelers’ admit until date. Figure 3 presents our analysis of the amount of time elapsed, as of November 2012, since the admit until date. The average amount of time elapsed for the unmatched arrival records we analyzed was 2.7 years. Our analysis indicates that the majority of unmatched arrival records correspond to travelers who were expected to depart within the past 2 years. According to DHS officials, this may reflect that overstays are more likely to depart the United States as time proceeds. For example, the overstays may choose to return to their countries of origin. Since April 2011, DHS has taken various actions to improve its data on potential overstays. In April 2011, we found that DHS’s efforts to identify and report on overstays were hindered by unreliable data, and we identified various challenges to DHS’s efforts to identify potential overstays, including the incomplete collection of departure data from nonimmigrants at ports of entry, particularly land ports of entry, and the lack of mechanisms for assessing the quality of leads sent to HSI field offices for investigation. Since that time, DHS has taken action to strengthen its processes for reviewing records to identify potential overstays, including (1) streamlining connections among DHS databases used to identify potential overstays and (2) collecting information from the Canadian government about those exiting the United States and entering Canada through northern land ports of entry. First, DHS has taken steps to improve connections among its component agencies’ databases used to identify potential overstays and reduce the need for manual exchanges of data. For example: In August 2012, DHS enhanced data sharing between ADIS and a U.S. Citizenship and Immigration Services database, the Computer- Linked Application Information Management System 3 (CLAIMS), to enable automatic transfers of immigration status or benefits information from CLAIMS to ADIS. For example, this enhancement has enabled CLAIMS to automatically provide data to ADIS when an individual files a work authorization application form with U.S. Citizenship and Immigration Services, and CLAIMS also provides data to ADIS daily on whether an application is pending, approved, or denied. In August 2012, DHS enhanced data sharing between ADIS and IDENT. This improved connection provides additional data to ADIS to improve the matching process based on fingerprint identification. For example, when an individual provides a fingerprint as part of an application for immigration benefits from U.S. Citizenship and Immigration Services or a visa from the State Department, or when apprehended by law enforcement, IDENT now sends identity information, including a fingerprint identification number, for that individual to ADIS. This additional source of data is intended to help allow ADIS to more effectively match the individual’s entry record with a change of status, thereby closing out more unmatched arrival records. Beginning in April 2013, ICE’s Student and Exchange Visitor Information System (SEVIS) began automatically sending data to ADIS on a daily basis, allowing ADIS to review SEVIS records against departure records and determine whether student visa holders who have ended their course of study departed in accordance with the terms of their stay. Prior to this date, DHS manually transferred data from SEVIS to ADIS on a weekly basis. According to DHS officials, these exchanges were unreliable because they did not consistently include all SEVIS data—particularly data on “no show” students who failed to begin their approved course of study within 30 days of being admitted into the United States. Also in April 2013, DHS automated the exchange of records of potential overstays between ADIS and CBP’s Automated Targeting System (ATS), a CBP system used to improve the collection, use, analysis, and dissemination of information on terrorism and other violations of United States laws. This exchange is intended to allow DHS to more efficiently (1) transfer data between the systems for the purpose of identifying national security and public safety concerns, and (2) use matching algorithms in ATS that differ from those in ADIS to close additional records for individuals who departed. Second, DHS is implementing the Beyond the Border initiative to collect additional data to strengthen the identification of potential overstays. In October 2012, DHS and the Canada Border Services Agency began exchanging entry data on travelers crossing the border at selected land ports of entry. Because an entry into Canada constitutes a departure from the United States, DHS will be able to use Canadian entry data as proxies for U.S. departure records. We found in April 2011 that DHS faced challenges in its ability to identify overstays because of unreliable collection of departure data at land ports of entry. The Beyond the Border Initiative would help address those challenges by providing a new source of data on travelers departing the United States at land ports on the northern border. In the pilot phase, DHS exchanged data with the Canada Border Services Agency on third-country nationals at four of the five largest ports of entry on the northern border.entries from September 30, 2012, through January 15, 2013. DHS’s analysis of the 413,222 records received through the pilot showed that DHS was able to match 97.4 percent of Canadian entry records to a U.S. entry record in ADIS. DHS was able to use Canadian entry records to verify the departure of approximately 11,400 subjects prior to the end of their authorized period of admission who would otherwise have been thought to be potential overstays. DHS determined that roughly 4,300 subjects with indeterminate status (meaning that DHS lacked exit records for those individuals) had left the United States after their authorized period of admission, meaning that they had overstayed while in the United States and are now considered out-of-country overstays. DHS plans to expand this effort to collect data from additional ports of entry and to share data on additional types of travelers. Specifically, according to DHS officials, as of June 30, 2013, DHS began exchanging data for third-country nationals at all automated ports of entry along the northern border. During this phase of the initiative, in accordance with the agreement between the United States and Canada, DHS also plans to begin using these data for operational purposes (e.g., taking enforcement action against overstays, such as working with the State Department to have their visas revoked or imposing bars on readmission to the country based on the length of time they remained in the country unlawfully).travelers, including U.S. and Canadian citizens, at all automated ports of entry along the northern border. Both DHS and Canadian officials with whom we spoke stated that the initiative is proceeding on schedule. After June 30, 2014, DHS plans to exchange data on all The Beyond the Border initiative provides DHS with additional data that should enable it to close out potential overstay leads for individuals who depart across the northern border; however, according to DHS and CBP officials, the southern land border poses unique challenges that make an approach similar to Beyond the Border difficult to implement there. Mexican entry procedures differ from those in Canada. For example, according to DHS officials, at some border crossings, Mexican officials may not collect entry data until travelers reach a station located miles past the border. Therefore, Mexican border authorities may not collect information on every traveler entering Mexico. In addition, according to DHS officials, Mexican information technology systems may be less compatible with U.S. systems than are the Canadian systems. DHS is conducting informal outreach to the Mexican government regarding the potential to share entry data in the future, but according to DHS officials, such a program would be years away. Since 1994, neither DHS nor its predecessor has regularly reported annual overstay rates to Congress because of concerns about the reliability of the department’s overstay data. According to statute, DHS is to submit an annual report to Congress providing numerical estimates of the number of aliens from each country in each nonimmigrant classification who overstayed an authorized period of admission that expired during the fiscal year prior to the year for which the report is made. Overstay rates are among the statutory criteria that determine a participant’s termination from the Visa Waiver Program. Therefore, we have previously concluded that reliable and valid estimates of the number of overstays are important to manage the program. In April 2011, we reported that DHS officials stated that the department had not reported overstay estimates because it had not had sufficient confidence in the quality of its overstay data. DHS officials stated at the time that, as a result, the department could not reliably report overstay estimates in accordance with the statute. See testimony of Janet Napolitano, Secretary, Department of Homeland Security, before the Committee on the Judiciary, United States Senate, Washington, D.C.: February 13, 2013. 2012 and the first half of fiscal year 2013 for all travelers and classes of admission at all air, land and sea ports of entry. DHS has also calculated overstay rates by country for these time periods by determining the number of overstays (in-country plus out-of-country) divided by the total number of confirmed nonimmigrants arrivals (who were expected to depart during the identified period). However, the department is still in the process of determining what methodology it will use to generate the data it plans to report by the end of the year. In addition, DHS officials stated that the department has not yet determined whether to report data from fiscal year 2012 or fiscal year 2013, and whether to report certain overstay data publicly. Moreover, DHS continues to face challenges in ensuring the reliability of its overstay data. In September 2008, we reported on limitations in overstay data that affect the reliability of overstay rates, such as weaknesses in departure data. We recommended that the Secretary of Homeland Security explore cost-effective actions necessary to further improve, validate, and test the reliability of overstay data. DHS concurred with this recommendation and has explored actions to improve overstay data, as discussed above, but has not yet validated or tested their reliability. According to DHS Office of Policy officials, the department is better positioned than in the past to describe the limitations in the overstay data. However, challenges to reporting reliable overstay estimates remain. Although DHS has improved connections among its various databases used to help identify potential overstays, these improvements do not address some of the underlying data quality and reliability issues we previously identified. For example, in April 2011, we found that DHS faced challenges in collecting accurate and complete information from nonimmigrants departing the United States through land ports of entry. The Beyond the Border initiative is intended to help address this issue by collecting proxy data on individuals exiting from the United States at northern border ports of entry; however, DHS has not yet identified mechanisms for collecting data on individuals exiting through southern border ports of entry. Further, inaccuracies in passenger data provided by air carriers may lead to incorrect records of potential overstays if passengers’ departures are not accurately recorded. For example, according to CBP officials, CBP learned in early 2011 that some carriers were inadvertently transmitting passenger data without properly recording the passengers’ departure after DHS noticed an increase in the number of potential overstays. According to these officials, the issue was resolved in April 2011, but because of the errors in the data, an unknown number of those passengers were incorrectly identified as potential overstays. Moreover, DHS Office of Policy and ICE officials stated that, prior to the April 2013 improvements between ADIS and SEVIS, ADIS was receiving limited information on foreign students; therefore, the overstay estimates prior to April 2013 do not fully account for the extent to which foreign students in the United States were in legal status in the country. These limitations in overstay data may affect DHS’s ability to report reliable overstay estimates unless resolved. Estimates of in-country overstays are based on ADIS’s identification of unmatched arrival records for individuals who were expected to depart during a given year. As discussed earlier in this report, DHS does not manually review all unmatched arrival records in ADIS because many do not meet ICE’s enforcement priorities. Therefore, the reliability of data in ADIS may affect the accuracy of year-end overstay statistics. DHS has documented the results of receiving new departure data in the pilot phase of the Beyond the Border initiative to demonstrate how DHS may be able to close out more records of potential overstays in the future. However, DHS has not assessed and documented how its changes to database connections have improved the reliability of its data for the purposes of reporting overstay rate calculations and has not analyzed the incremental improvements that database changes have made in data quality. According to DHS Office of Policy and ICE officials, DHS has not conducted such an analysis because it is difficult to pull such data from ADIS. DHS has not maintained a separate, mirrored system of ADIS and must therefore pull data directly from the live ADIS system—a resource- intensive process that can take several months. However, there may be other cost-effective ways to assess data improvements, such as conducting quantitative analyses of the number of records closed as a result of the improvements in connections among databases. Standards for Internal Control in the Federal Government states that program managers need operational data to determine whether they are meeting their goals for accountability for effective and efficient use of resources. The standards also require that all transactions be clearly documented in a manner that is complete and accurate in order to be useful for managers and others involved in evaluating operations. Additionally, GAO’s methodology transfer paper on the logic of program evaluation designs, which describes key issues in evaluating federal programs, states that the basic components of an evaluation design include identifying information sources and measures, data collection methods, and an assessment of study limitations, among other things. Moreover, GAO’s standards for assessing computer-processed data, which can provide a framework for assessing DHS’s computer-processed overstay data, states that care should be taken to ensure that collected data are sufficient and appropriate. Data may not be sufficiently reliable if (1) significant errors or incompleteness exists in some of or all the key data elements, and (2) using the data would probably lead to an incorrect or unintentional message. Without an assessment and documentation of improvements in the reliability of the data used to develop overstay estimates and any remaining limitations in how the data can be used, decision makers will not have the information needed to use these data for policy-making purposes. DHS has not yet fulfilled the 2004 statutory requirement to implement a biometric exit capability, but has planning efforts under way to report to Congress in time for the fiscal year 2016 budget cycle on the costs and benefits of such a capability at airports and seaports. In 2004, the Intelligence Reform and Terrorism Prevention Act required DHS to develop a plan to accelerate full implementation of an automated biometric entry and exit system at air, sea, and land ports of entry. However, development and implementation of a biometric exit capability has been a long-standing challenge for DHS. With regard to an exit capability at airports, in an October 2010 memo, DHS identified three primary reasons why it has been unable to determine how and when to implement a biometric solution: (1) the methods of collecting biometric data could disrupt the flow of travelers through air terminals; (2) air carriers and airport authorities had not allowed DHS to examine mechanisms through which DHS could incorporate biometric data collection into passenger processing at the departure gate; and (3) challenges existed in capturing biometric data at the point of departure, including determining what personnel should be responsible for the capture of biometric information at airports. With regard to an exit capability at land ports of entry, in 2006, we reported that according to DHS officials, for various reasons, a biometric exit capability could not be implemented without incurring a major impact on land facilities. As a result, as of April 2013, according to DHS officials, the department’s planning efforts focus on developing a biometric exit capability for airports, with the potential for a similar solution to be implemented at seaports, and DHS’s planning documents, as of June 2013, do not address plans for a biometric exit capability at land ports of entry. According to DHS officials, the challenges DHS identified in October 2010 continue to affect the department’s ability to implement a biometric air exit system. For example, in 2009, DHS conducted pilot programs for biometric air exit capabilities in airport scenarios. In August 2010, we found that there were limitations with the pilot programs—for example, the pilot programs did not operationally test about 30 percent of the air exit requirements identified in the evaluation plan for the pilot programs—that hindered DHS’s ability to inform decision making for a long-term air exit solution and pointed to the need for additional sources of information on air exit’s operational impacts. According to DHS officials, the department’s approach to planning for biometric air exit since that time has been partly in response to our recommendation that DHS identify additional sources for the operational impacts of air exit not addressed in the pilot programs’ evaluation and to incorporate these sources into its air exit decision making and planning. Figure 4 depicts a timeline of DHS’s efforts to develop a biometric exit capability and key findings from our prior reports. Move mouse over the blue shaded text boxes to get more information on GAO’s findings and recommendation, click on text box to open the referenced GAO report. For an accessible and printable version of this graphic please see appendix II. April 2003 The Department of Homeland Security (DHS) initiated the United States Visitor and Immigrant Status Indicator Technology (US-VISIT) program to develop a comprehensive biometric entry and exit system. January 2004 US-VISIT began collecting biometric data on aliens entering the United States at 115 air and 14 sea ports of entry. October 2005 US-VISIT began collecting biometric data on aliens entering the United States at all ports of entry. DHS directed its Science and Technology Directorate (S&T), in coordination with other DHS component agencies, to research long-term options for biometric exit. May 2012 DHS reported internally on the results of S&T’s analysis and made recommendations to support the planning and development of a biometric air exit capability. December 2004 The Intelligence Reform and Terrorism Prevention Act of 2004 required a plan to accelerate full implementation of an automated biometric entry and exit system. DHS operated two biometric air exit pilots from May 2009 until July 2009, and DHS submitted its evaluation report for these pilots to Congress in October 2009. June 2003 GAO issued a report entitled Information Technology: Homeland Security Needs to Improve Entry Exit System Expenditure Planning. February 2005 GAO issued a report entitled Homeland Security: Some Progress Made, but Many Challenges Remain on U.S. Visitor and Immigrant Status Indicator Technology Program. August 2007 GAO issued a report entitled Homeland Security: U.S. Visitor and Immigrant Status Program's Long- standing Lack of Strategic Direction and Management Controls Need to Be Addressed. November 2009 GAO issued a report entitled Homeland Security: Key US- VISIT Components at Varying Stages of Completion, but Integrated and Reliable Schedule Needed. August 2010 GAO issued a report entitled Homeland Security: US-VISIT Pilot Evaluations Offer Limited Understanding of Air Exit Options. In 2011, DHS directed S&T, in coordination with other DHS component agencies, to research long-term options for biometric air exit. In May 2012, DHS reported internally on the results of S&T’s analysis of previous air exit pilot programs and assessment of available technologies, and the report made recommendations to support the planning and development In that report, DHS concluded that the of a biometric air exit capability.building blocks to implement an effective biometric air exit system were available. In addition, DHS’s report stated that new traveler facilitation tools and technologies—for example, online check-in, self-service, and paperless technology—could support more cost-effective ways to screen travelers, and that these improvements should be leveraged when developing plans for biometric air exit. However, DHS officials stated that there may be challenges to leveraging new technologies to the extent that U.S. airports and airlines rely on older, proprietary systems that may be difficult to update to incorporate new technologies. Furthermore, DHS reported in May 2012 that significant questions remained regarding (1) the effectiveness of current biographic air exit processes and the error rates in collecting or matching data, (2) methods of cost-effectively integrating biometrics into the air departure processes (e.g., collecting biometric scans as passengers enter the jetway to board a plane), (3) the additional value biometric air exit would provide compared with the current biographic air exit process, and (4) the overall value and cost of a biometric air exit capability. The report included nine recommendations to help inform DHS’s planning for biometric air exit, such as directing DHS to develop explicit goals and objectives for biometric air exit and an evaluation framework that would, among other things, assess the value of collecting biometric data in addition to biographic data and determine whether biometric air exit is economically justified. DHS reported in May 2012 that it planned to take steps to address these recommendations by May 2014; however, according to DHS Office of Policy and S&T officials, the department does not expect to fully address these recommendations by then. In particular, DHS officials stated that it has been difficult coordinating with airlines and airports, which have expressed reluctance about biometric air exit because of concerns over its effect on operations and potential costs. To address these concerns, DHS is conducting outreach and soliciting information from airlines and airports regarding their operations. In addition, DHS officials stated that the department’s efforts to date have been hindered by insufficient funding. However, in fiscal year 2012, DHS requested that Congress release funds allocated to the biometric exit program and funds being withheld pending the full implementation of a biometric exit system so that these funds could be applied to DHS’s efforts to enhance the biographic exit system. In its fiscal year 2014 budget request for S&T, DHS requested funding for a joint S&T-CBP Air Entry/Exit Re-Engineering Apex project. Apex projects are crosscutting, multidisciplinary efforts requested by DHS components that are high-priority projects intended to solve problems of strategic operational importance. According to DHS’s fiscal year 2014 budget justification, the Air Entry/Exit Re-Engineering Apex project will develop tools to model and simulate air entry and exit operational processes. Using these tools, DHS intends to develop, test, pilot, and evaluate candidate solutions. As of April 2013, DHS Policy and S&T officials stated that they expect to finalize goals and objectives for a biometric air exit system in the near future and are making plans for future scenario-based testing. Although DHS’s May 2012 report stated that DHS would take steps to address the report’s recommendations by May 2014, DHS officials told us that the department’s current goal is to develop information about options for biometric air exit and to report to Congress in time for the fiscal year 2016 budget cycle regarding (1) the additional benefits that a biometric air exit system provides beyond an enhanced biographic exit system and (2) costs associated with biometric air exit. However, DHS has not yet developed an evaluation framework, as recommended in its May 2012 report, to determine how the department will evaluate the benefits and costs of a biometric air exit system and compare it with a biographic exit system. According to DHS officials, the department needs to finalize goals and objectives for biometric air exit before it can develop such a framework, and in April 2013 these officials told us that the department plans to finalize these elements in the near future. However, DHS does not have time frames for when it will subsequently be able to develop and implement an evaluation framework to support the assessment it plans to provide to Congress. According to A Guide to the Project Management Body of Knowledge, which provides standards for project managers, specific goals and objectives should be conceptualized, defined, and documented in the planning process, along with the appropriate steps, time frames, and milestones needed to achieve those results. In fall 2012, DHS developed a high-level plan for its biometric air exit efforts, which it updated in May 2013, but this plan does not clearly identify the tasks needed to develop and implement an evaluation framework. For example, the plan does not include a step for developing the methodology for comparing the costs and benefits of biometric data against those for collecting biographic data, as recommended in DHS’s May 2012 report. Furthermore, the time frames in this plan are not accurate as of June 2013 because DHS is behind schedule on some of the tasks and has not updated the time frames in the plan accordingly. For example, DHS had planned to begin scenario-based testing for biometric air exit options in August 2013; however, according to DHS officials, the department now plans to begin such testing in early 2014. A senior official from DHS’s Office of Policy told us that DHS has not kept the plan up to date because of the transition of responsibilities within DHS; specifically, in March 2013, pursuant to the explanatory statement for DHS’s 2013 appropriation, DHS established an office within CBP that is responsible for coordinating DHS’s entry and exit policies and operations. This transition was in process as of June 2013, and CBP plans to establish an integrated project team in July 2013 that will be responsible for more detailed planning for the department’s biometric air exit efforts. Without robust planning that includes up-to-date time frames and milestones to develop and implement an evaluation framework for its assessment of biometric air exit benefits and costs, DHS does not have reasonable assurance that it will be able to provide this assessment to Congress as planned for the fiscal year 2016 budget cycle. DHS Policy and S&T officials agreed that setting time frames and milestones is important to ensure timely development and implementation of the evaluation framework in accordance with DHS’s May 2012 recommendations. According to DHS officials, implementation of a biometric air exit system will depend on the results of discussions between the department and Congress after the department provides this assessment of options for biometric air exit. Any delays in providing the assessment to Congress could further affect implementation of a biometric air exit system, and without reasonable assurance when DHS will be able to provide this assessment to Congress, it remains unclear when DHS will make progress toward addressing the statutory requirements for a biometric exit system. Addressing the large number of foreign visitors who have entered the United States legally but then overstayed has been a long-standing challenge. Given the government’s finite resources for addressing overstays, and competing priorities, reliable data and analysis are of particular importance to both DHS and Congress. Without clear assessment and reporting of the extent to which the reliability of the data used to develop overstay estimates has improved and any remaining limitations in how the data can be used, decision makers may not have complete information needed to use these data for policy-making purposes. Furthermore, DHS has faced long-standing challenges in making progress toward meeting the statutory requirement for biometric exit capabilities since 2004. DHS plans to provide Congress with an assessment of the benefits and costs of various options for pursuing a biometric exit system at airports, but without robust planning that includes time frames and milestones to develop and implement an evaluation framework for this assessment, DHS lacks reasonable assurance that it will be able to provide this assessment to Congress for the fiscal year 2016 budget cycle as planned. Furthermore, any delays in providing this information to Congress could further affect possible implementation of a biometric exit system to address statutory requirements. To help improve confidence in the quality of overstay data that DHS plans to report in December 2013 in accordance with statutory reporting requirements, we recommend that the Secretary of Homeland Security direct relevant DHS components to assess and document the extent to which the reliability of the data used to develop any overstay estimates has improved and any remaining limitations in how the data can be used. To provide reasonable assurance of when DHS will be able provide an assessment of the benefits and costs of biometric air exit options to Congress, we recommend that the Secretary of Homeland Security establish time frames and milestones for developing and implementing an evaluation framework to be used in conducting the department’s assessment of biometric air exit options. We provided a draft of this report to DHS and the Department of State for their review and comment. DHS provided written comments, which are summarized below and reproduced in full in appendix III. DHS concurred with our two recommendations and described actions under way or planned to address them. Regarding our first recommendation, that DHS assess and document the extent to which the reliability of the data used to develop any overstay estimates has improved and any remaining limitations in how the data can be used, DHS indicated that it is establishing a working group that will include representation from DHS component agencies with responsibility for collecting, recording, and analyzing entry and exit data and that this working group will be functional by January 31, 2014. According to DHS, the component agencies that oversee information systems used to identify overstays will be responsible for the data captured in their respective systems, and the working group will be responsible for aggregating information across components regarding the validity of the data and defining any limitations to the use of the data. DHS estimated that completion of an initial evaluation of the data would occur by July 31, 2014. To fully address our recommendation, DHS should assess the reliability of, and document any remaining limitations in, any overstay data that the department may report. Regarding our second recommendation, that DHS establish time frames and milestones for developing and implementing an evaluation framework to be used in conducting the department’s assessment of biometric air exit options, DHS indicated that CBP and S&T will finalize the goals and objectives for biometric air exit by January 31, 2014, and that these goals and objectives will be used in the development of an evaluation framework that DHS expects to have completed by June 30, 2014. These actions, when fully implemented, should help address the intent of our recommendations. DHS also provided technical comments, which we incorporated as appropriate. The Department of State did not have formal comments on our draft report, but provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Secretary of Homeland Security, the Secretary of State, appropriate congressional committees, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have questions on matters discussed in this report, please contact me at (202) 512-8777 or [email protected]. 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 IV. In April 2011, we reported that U.S. Immigration and Customs Enforcement (ICE), a component within the Department of Homeland Security (DHS), takes actions to address a small portion of the estimated overstay population because of, among other things, competing priorities. In particular, ICE’s Counterterrorism and Criminal Exploitation Unit (CTCEU), within the Homeland Security Investigations (HSI) directorate, prioritizes in-country overstay leads based on various factors that consider the potential risks overstays may pose to national security and public safety, and HSI field offices investigate those leads that CTCEU identifies as priorities. As it reviews leads for potential overstays, CTCEU closes records for nonimmigrants that have either left the country or changed their status, identifies nonpriority records for processing by ICE Enforcement and Removal Operations, and sends records that do not have a viable address to contractors to continually monitor for new address information. CTCEU assigns valid, high-priority overstay leads to HSI field office agents within their respective geographical areas of responsibility for mandatory investigation. From fiscal years 2004 through 2012, CTCEU processed over 2.2 million records of potential overstays and sent about 44,500 leads to HSI field offices for investigation. Table 4 provides information related to the records of potential overstays that CTCEU has processed from fiscal years 2004 through 2012 (our April 2011 report included the data from fiscal years 2004 through 2010). Out of the approximately 44,500 leads sent to HSI field offices over this period of time, approximately 9,000 (about 20 percent) resulted in arrests. In April 2011, we reported that overstay investigations that do not lead to an arrest result in one of three outcomes: (1) evidence is uncovered indicating that the suspected overstay departed the United States, (2) evidence is uncovered indicating that the subject of the investigation is in-status (e.g., the subject filed a timely application with DHS’s U.S. Citizenship and Immigration Services to change his or her status or extend his or her authorized period of admission in the United States), or (3) investigators exhaust all investigative leads and cannot locate the suspected overstay. If the evidence of departure shows that the individual departed after his or her authorized admit until date (i.e., the individual is an out-of-country overstay), the individual could be subject to administrative enforcement actions including restrictions on readmission to the United States. Figure 5 shows the outcomes of CTCEU investigations from fiscal years 2004 through 2012 that did not result in arrest (our April 2011 report included the data from fiscal years 2004 through 2010). As we reported in April 2011, ICE has reported allocating a small percentage of its resources in terms of investigative work hours to overstay investigations. For this report, we found that, from fiscal years 2005 through 2012, ICE reported devoting from 1.8 to 3.4 percent of its total HSI field office investigative hours to CTCEU overstay investigations, as shown in figure 6 (our April 2011 report included the data from fiscal years 2006 through 2010). Table 5 lists events in DHS’s efforts to develop a biometric exit capability and key findings from our prior reports (see interactive fig. 4) and includes the figure’s rollover information. Rebecca Gambler, (202) 512-8777 or [email protected]. In addition to the contact named above, Kathryn Bernet (Assistant Director), Susan Baker, Frances A. Cook, Alana Finley, Eric Hauswirth, Richard Hung, Lara Miklozek, Amanda Miller, Anthony Moran, Karl Seifert, and Ashley D. Vaughan made significant contributions to this report. | Each year, millions of visitors come to the United States legally on a temporary basis either with or without a visa. Overstays are individuals who were admitted legally on a temporary basis but then overstayed their authorized periods of admission. DHS has primary responsibility for identifying and taking enforcement action to address overstays. In April 2011, GAO reported on DHS's actions to identify and address overstays and made recommendations to strengthen these processes. DHS concurred and has taken or is taking steps to address them. DHS has also reported taking further actions to address overstays. GAO was asked to review DHS's progress since April 2011. This report addresses (1) DHS's efforts to review its records to identify potential overstays, (2) the extent to which DHS's changes in its systems or processes have improved data on potential overstays and DHS's ability to report overstay rates, and (3) the extent to which DHS has made progress toward establishing a biometric exit system. GAO analyzed DHS overstay data and documents-- such as those related to the overstay identification processes and biometric exit plans--and interviewed relevant DHS officials. Since April 2011, the Department of Homeland Security (DHS) has taken action to address a backlog of potential overstay records that GAO previously identified. Specifically, DHS reviewed such records to identify national security and public safety threats, but unmatched arrival records--those without corresponding departure records--remain in DHS's system. GAO had previously reported that, as of January 2011, DHS had a backlog of 1.6 million unmatched arrival records that had not been reviewed through automated or manual processes. DHS tracks arrivals and departures and closes records for individuals with matching arrival and departure records. Unmatched arrival records indicate that the individual is a potential overstay. In 2011, DHS reviewed this backlog of 1.6 million records, closed about 863,000 records, and removed them from the backlog. As new unmatched arrival records have accrued, DHS has continued to review all of these new records for national security and public safety concerns. As of June 2013, DHS's unmatched arrival records totaled more than 1 million. DHS has actions completed and under way to improve data on potential overstays and report overstay rates, but the effect of these improvements is not yet known. Further, DHS continues to face challenges in reporting reliable overstay rates. DHS has streamlined connections among databases used to identify potential overstays. However, these improvements do not address some underlying data quality issues, such as missing land departure data. Federal law requires DHS to report overstay estimates, but DHS or its predecessor has not regularly done so since 1994. In April 2011, GAO reported that DHS officials said that they have not reported overstay rates because DHS has not had sufficient confidence in the quality of its overstay data. In February 2013, the Secretary of Homeland Security testified that DHS plans to report overstay rates by December 2013. However, DHS has not assessed or documented improvements in the reliability of data used to develop overstay estimates, in accordance with federal internal control standards. Without such a documented assessment to ensure the reliability of these data, decision makers would not have the information needed to use these data for policy-making purposes. Developing and implementing a biometric exit capability to collect biometric data, such as fingerprints, which is required by federal law, has been a long-standing challenge for DHS. In May 2012, DHS internally reported recommendations to support the planning for a biometric exit capability at airports--DHS's priority for biometric exit capabilities--that could also be implemented at seaports in the future; however, as of June 2013, DHS's planning did not address a biometric exit capability at land ports of entry. DHS officials stated that the department's goal is to develop information and report to Congress about the benefits and costs of biometric air exit options before the fiscal year 2016 budget cycle. Standard practices for project management state that time frames should be documented as part of the planning process; however, DHS has a high-level plan for a biometric air exit capability, and it does not clearly define the steps, time frames, and milestones needed to develop and implement an evaluation framework, as recommended in DHS's May 2012 report. Without robust planning that includes time frames and milestones, DHS does not have reasonable assurance that it will meet its time frame for developing and implementing an evaluation framework. |
Since the 1960s, the United States has used both polar-orbiting and geostationary satellites to observe the earth and its land, oceans, atmosphere, and space environments. Polar-orbiting satellites constantly circle the earth in an almost north-south orbit, providing global coverage of conditions that affect the weather and climate. As the earth rotates beneath it, each polar-orbiting satellite views the entire earth’s surface twice a day. In contrast, geostationary satellites maintain a fixed position relative to the earth from a high orbit of about 22,300 miles in space. Both types of satellites provide a valuable perspective of the environment and allow observations in areas that may be otherwise unreachable. Used in combination with ground, sea, and airborne observing systems, satellites have become an indispensable part of monitoring and forecasting weather and climate. For example, polar-orbiting satellites provide the data that go into numerical weather prediction models, which are a primary tool for forecasting weather days in advance—including forecasting the path and intensity of hurricanes, and geostationary satellites provide the graphical images used to identify current weather patterns. These weather products and models are used to predict the potential impact of severe weather so that communities and emergency managers can help mitigate its effects. Polar satellites also provide data used to monitor environmental phenomena, such as ozone depletion and drought conditions, as well as long-term data sets that are used by researchers to monitor climate change. For over forty years, the United States has operated two separate operational polar-orbiting meteorological satellite systems: the Polar- orbiting Operational Environmental Satellite series, which is managed by NOAA, and the Defense Meteorological Satellite Program, which is managed by the Air Force. Currently, there is one operational Polar- orbiting Operational Environmental Satellite and two operational Defense Meteorological Satellite Program satellites that are positioned so that they cross the equator in the early morning, midmorning, and early afternoon. In addition, the government is also relying on data from a European satellite, called the Meteorological Operational (MetOp) satellite program. With the expectation that combining the Polar-orbiting Operational Environmental Satellite program and the Defense Meteorological Satellite Program would reduce duplication and result in sizable cost savings, a May 1994 Presidential Decision Directive required NOAA and DOD to converge the two satellite programs into a single satellite program—the National Polar-orbiting Operational Environmental Satellite System (NPOESS)—capable of satisfying both civilian and military requirements. However, in the years after the program was initiated, NPOESS encountered significant technical challenges in sensor development, program cost growth, and schedule delays. Specifically, within 8 years of the contract’s award, program costs grew by over $8 billion, and launch schedules were delayed by over 5 years. In addition, as a result of a 2006 restructuring of the program, the agencies reduced the program’s functionality by decreasing the number of originally planned satellites, orbits, and instruments. Even after this restructuring, however, the program continued to encounter technical issues, management challenges, schedule delays, and further cost increases. Therefore, in August 2009, the Executive Office of the President formed a task force, led by the Office of Science and Technology Policy, to investigate the management and acquisition options that would improve the program. As a result of this review, the Director of the Office of Science and Technology Policy announced in February 2010 that NOAA and DOD would no longer jointly acquire NPOESS; instead, each agency would plan and acquire its own satellite system. Specifically, NOAA and NASA would be responsible for the afternoon orbit, and DOD would be responsible for the early morning orbit. The partnership with the European satellite agencies for the midmorning orbit would continue as planned. When this decision was announced, NOAA immediately began planning for a new satellite program in the afternoon orbit—called JPSS—and DOD began planning for a new satellite program in the morning orbit— called the Defense Weather Satellite System. NOAA transferred management responsibilities to its new satellite program, defined its requirements, and transferred contracts to the new program. Specifically, NOAA established a program office to guide the development and launch of the NPOESS Preparatory Project (NPP)that was developed under NPOESS and managed by the National Aeronautics and Space Administration (NASA)—as well as the two planned JPSS satellites, known as JPSS-1 and JPSS-2. NOAA also worked with NASA to establish its program office to oversee the acquisition, system engineering, and integration of the satellite program. By 2011, the two agencies had established separate—but co-located— JPSS program offices, each with different roles and responsibilities. In addition, DOD established its Defense Weather Satellite System program office, started defining its requirements, and modified contracts to reflect the new program. These efforts, however, have been halted. In early 2012, in response to congressional direction, DOD decided to terminate the program because it still has two satellites to launch within its legacy Defense Meteorological Satellite Program. DOD is currently identifying alternative means to fulfill its future environmental satellite requirements. We have issued a series of reports on the NPOESS program—and the transition to JPSS—highlighting technical issues, cost growth, key management challenges, and key risks of transitioning from NPOESS to In these reports, we made multiple recommendations to, among JPSS.other things, improve executive-level oversight and develop realistic time frames for revising cost and schedule baselines. NOAA has taken steps to address our recommendations, including taking action to improve executive-level oversight, but as we note in our report being released today, the agency is still working to establish cost and schedule baselines. In addition to polar-orbiting satellites, NOAA operates GOES as a two- satellite geostationary satellite system that is primarily focused on the United States. The GOES-R series is the next generation of satellites that NOAA is planning; the satellites are planned to replace existing weather satellites that will likely reach the end of their useful lives in about 2015. NOAA is responsible for overall mission success for the GOES-R program. The NOAA Program Management Council, which is chaired by NOAA’s Deputy Undersecretary, is the oversight body for the GOES-R program. However, since it relies on NASA’s acquisition experience and technical expertise to help ensure the success of its programs, NOAA implemented an integrated program management structure with NASA for GOES-R. Within the program office, two project offices manage key components of the GOES-R system. NOAA has entered into an agreement with NASA to manage the Flight Project Office, including awarding and managing the spacecraft contract and delivering flight- ready instruments to the spacecraft. The Ground Project Office, managed by NOAA, oversees the Core Ground System contract and satellite data product development and distribution. NOAA has made a number of changes to the program since 2006, including the removal of certain satellite data products and a critical instrument (the Hyperspectral Environmental Suite), and a reduction in the number of satellites from four to two. NOAA originally decided to reduce the scope and technical complexity of the GOES-R program because of the expectation that total costs, which were estimated to be $6.2 billion, could reach $11.4 billion. Recently, NOAA restored two satellites to the program’s baseline, making GOES-R a four-satellite program once again. In February 2011, as part of its fiscal year 2012 budget request, NOAA requested funding to begin development for two additional satellites in the GOES-R series. The program estimates that the development for all four satellites in the GOES-R series is to cost $10.9 billion through 2036. The current anticipated launch date for the first GOES-R satellite is planned to be in October 2015, with the last satellite in the series planned for launch in calendar year 2024. In September 2010, we reported that as a result of delays to planned launch dates for the first two satellites in the GOES-R series, NOAA might not be able to meet its policy of having a backup satellite in orbit at all times, which could lead to a gap in satellite coverage if an existing satellite failed prematurely. document plans for the operation of geostationary satellites that included the implementation procedures, resources, staff roles, and time tables needed to transition to a single satellite, an international satellite, or other solution. We recommended that NOAA develop and NOAA has since developed a continuity plan that generally includes the key elements we recommended. As a result, NOAA has improved its ability to fully meet its mission-essential function of providing continuous satellite imagery in support of weather forecasting. NOAA and NASA have made progress on the JPSS program since it was first formed in 2010, but are modifying requirements to limit program costs. After establishing a JPSS program office and transferring contracts to NASA, the program successfully launched the NPP satellite on October 28, 2011. After this launch, NASA began the process of activating the satellite and commissioning the instruments, a process that was completed in March 2012. NOAA is receiving data from the five sensors on the NPP satellite, and has begun calibration and validation. NOAA’s satellite data users began to use validated products from one sensor in May 2012, and NOAA expects that they will increase the amount and types of data they use in the following months. In addition, NOAA established initial requirements for the JPSS program in September 2011. Key components include acquiring and launching JPSS-1 and JPSS-2, developing and integrating five sensors on the two satellites, finding alternate host satellites for selected instruments that would not be accommodated on the JPSS satellites, and providing ground system support. NOAA also developed a cost estimate for the JPSS program, which it reconciled with an independent cost estimate. Specifically, from January to December 2011, the agency went through a cost estimating exercise for the JPSS program. At the end of this exercise, NOAA validated that the cost of the full set of JPSS functions from fiscal year 2012 through fiscal year 2028 would be $11.3 billion. After adding the agency’s sunk costs of $3.3 billion, the program’s life cycle cost estimate totaled $14.6 billion. This amount is $2.7 billion higher than the $11.9 billion estimate for JPSS when NPOESS was disbanded in 2010. Although NOAA has established initial requirements for the program, these requirements could—and likely will—change in the near future, in order to limit program costs. In working with the Office of Management and Budget to develop the president’s fiscal year 2013 budget request, NOAA officials stated that they agreed to fund JPSS at roughly $900 million per year through 2017, to merge funding for two climate sensors into the JPSS budget, and to cap the JPSS life cycle cost at $12.9 billion through 2028. Because this cap is $1.7 billion below the expected $14.6 billion life cycle cost of the full program, our report being released today discusses NOAA’s plans to remove selected elements from the satellite program. These included NOAA potentially discontinuing the development of certain sensors, plans for a network of ground-based receptor stations, planned improvements in the time it takes to obtain satellite data from JPSS-2, and plans to install a data processing system at two Navy locations. Recently, NOAA briefed us on updated plans to address this cost cap by changing the way the agency approached operations and sustainment, and restructuring the free-flyers project. The removal of these elements from the JPSS program will affect both civilian and military satellite data users. The loss of certain sensors could cause a break in the over 30-year history of satellite data and would hinder the efforts of climatologists and meteorologists focusing on understanding changes in the earth’s ozone coverage and radiation budget. The loss of ground-based receptor stations means that NOAA may not be able to improve the timeliness of JPSS-2 satellite data from 80 minutes to the current 30 minute requirement, and as a result, weather forecasters will not be able to update their weather models using the most recent satellite observations. Further, the loss of the data processing systems at the two Navy locations means that NOAA and the Navy will need to establish an alternative way to provide data to the Navy. The major components of the JPSS program are at different stages of development, and important decisions and program milestones lie ahead. NASA’s JPSS program office organized its responsibilities into three separate projects: (1) the flight project, which includes sensors, spacecraft, and launch vehicles; (2) the ground project, which includes ground-based data processing and command and control systems, and (3) the free-flyer project, which involves developing and launching the instruments that are not going to be included on the JPSS satellites (including a data collection system used to transmit ground-based observations from remote locations, such as ocean-based buoys; a search and rescue system, and a total solar irradiance sensor). Within the flight project, development of the sensors for the first JPSS satellite is well under way; however, selected sensors are experiencing technical issues and the impact of these issues has not yet been determined. For example, the program plans to address communication issues that could affect a key sensor’s ability to provide data in every orbit, but they have not identified the potential cost and schedule impact of this issue. The ground project is currently in operation supporting NPP, and NOAA is planning to upgrade selected parts of the ground systems to increase security and reliability. The free-flyer project is still in a planning stage because NOAA has not yet decided which satellites will host the instruments or when these satellites will launch. One of these projects has recently completed a major milestone and one project has its next milestone approaching. Specifically, the flight project completed a separate system requirements review in April 2012, while the ground project’s system requirements review is scheduled for August 2012. Since its inception, NPOESS was seen as a constellation of satellites providing observations in the early morning, midmorning, and afternoon orbits. Having satellites in each of these orbits ensures that satellite observations covering the entire globe are no more than 6 hours old, thereby allowing for more accurate weather predictions. Even after the program was restructured in 2006 and eventually terminated in 2010, program officials and the administration planned to ensure coverage in the early morning, midmorning, and afternoon orbits by relying on DOD satellites for the early morning orbit, the European satellite program for the midmorning, and NOAA’s JPSS program for the afternoon orbit. However, recent events have made the future of the polar satellite constellation uncertain: Early morning orbit—As discussed earlier in this statement, in early fiscal year 2012, DOD terminated its Defense Weather Satellite System program. While the agency has two more Defense Meteorological Satellite Program satellites—called DMSP-19 and DMSP-20—to launch and is working to develop alternative plans for a follow-on satellite program, there are considerable challenges in ensuring that a new program is in place and integrated with existing ground systems and data networks in time to avoid a gap in this orbit. DOD officials stated that they plan to launch DMSP-19 in 2014 and DMSP-20 when it is needed. If DMSP-19 lasts 6 years, there is a chance that DMSP-20 will not be launched until 2020. Thus, in a best- case scenario, satellites from the follow-on program will not need to be launched until roughly 2026. However, civilian and military satellite experts have expressed concern that the Defense Meteorological Satellite Program satellites are quite old and may not work as intended. If they do not perform well, DOD could be facing a satellite data gap in the early morning orbit as early as 2014. Midmorning orbit—The European satellite organization plans to continue to launch MetOp satellites that will provide observations in the midmorning orbit through October 2021. The organization is also working to define and gain support for the follow-on program, called the Eumetsat Polar System-2nd Generation program. However, in 2011, NOAA alerted European officials that, because of the constrained budgetary environment, they will no longer be able to provide sensors for the follow-on program. Due to the uncertainty surrounding the program, there is a chance that the first European follow-on satellite will not be ready in time to replace the final MetOp satellite at the end of its expected life. In that case, this orbit, too, would be in jeopardy. Afternoon orbit—There is likely to be a gap in satellite observations in the afternoon orbit that could last well over one year. According to our analysis, this gap could span from 17 months to 3 years or more. In one scenario, NPP would last its full expected 5-year life (to October 2016), and JPSS-1 would launch as soon as possible (in March 2017) and undergo on-orbit checkout for a year (until March 2018). In that case, the data gap would extend 17 months. In another scenario, NPP would last only 3 years as noted by NASA managers concerned with the workmanship of selected NPP sensors. Assuming that the JPSS-1 launch occurred, as currently scheduled, in March 2017 and the satellite data was certified for official use by March 2018, this gap would extend for 41 months. Of course, any problems with JPSS-1 development could delay the launch date and extend the gap period. Given the history of technical issues and delays in the development of the NPP sensors and the current technical issues on the sensors, it is likely that the launch of JPSS-1 will be delayed. While the scenarios in our analysis demonstrated gaps lasting between 17 and 53 months, NOAA program officials believe that the most likely scenario involves a gap lasting 18 to 24 months. Figure 1 depicts the polar satellite constellation and the uncertain future coverage in selected orbits. According to NOAA, a data gap would lead to less accurate and timely weather prediction models used to support weather forecasting, and advanced warning of extreme events—such as hurricanes, storm surges, and floods—would be diminished. To illustrate this, the National Weather Service performed several case studies to demonstrate how its weather forecasts would have been affected if there were no polar satellite data in the afternoon orbit. For example, when the polar satellite data were not used to predict the “Snowmaggedon” winter storm that hit the Mid-Atlantic coast in February 2010, weather forecasts predicted a less intense storm, slightly further east, and producing half of the precipitation at 3, 4, and 5 days before the event. Specifically, weather prediction models under- forecasted the amount of snow by at least 10 inches. The agency noted that this level of degradation in weather forecasts could place lives, property, and critical infrastructure in danger. The NOAA Administrator and other senior executives acknowledge the risk of a data gap in each of the orbits of the polar satellite constellation and are working with European and DOD counterparts to coordinate their respective requirements and plans; however, they have not established plans for mitigating risks to the polar satellite constellation. NOAA plans to use older polar satellites to provide some of the necessary data for the other orbits. However, it is also possible that other governmental, commercial, or international satellites could supplement the data in each of the three orbits. For example, foreign nations continue to launch polar- orbiting weather satellites to acquire data such as sea surface temperatures, sea surface winds, and water vapor. Also, over the next few years, NASA plans to launch satellites that will collect information on If there are viable options from external precipitation and soil moisture.sources, it could take time to adapt NOAA systems to receive, process, and disseminate the data to its satellite data users. Until NOAA identifies these options and establishes mitigation plans, it may miss opportunities to leverage alternative satellite data sources. While the GOES-R program has made progress in completing its design, many key milestones were completed later than planned. The program demonstrated progress towards completing its design in part by completing its set of preliminary design reviews, which indicated readiness to proceed with detailed design activities. The program and its projects are also making progress towards the final design for the entire GOES-R system, which is expected to be completed at the program’s critical design review planned for August 2012. However, many key design milestones were completed later than the dates established for them in December 2007 (when the flight and ground project plans were established, prior to entering the program’s development phase), and were also later than the dates established following award of the contracts for the instruments, spacecraft, and ground system components. For example, the program’s preliminary design review was completed 19 months later than planned, and its critical design review is expected to be completed 13 months later than planned. The program has also revised planned milestone dates for certain components by at least 3 months—and up to 2 years—since its originally estimated dates. Changes in planned completion dates have occurred for all five flight project instruments, as well as in major components of the ground project. Figure 2 summarizes these changes in planned completion dates. GOES-R has also encountered a number of technical challenges, some of which remain to be fully addressed. For example, in early 2011 the program discovered that the ground project development schedule included software deliveries from flight project instruments that were not properly integrated—they had not yet been defined or could not be met. To address these problems and avoid potential slippages to GOES-R’s launch date, project officials decided to switch to an approach where software capabilities could be delivered incrementally. While the revised plan was to reduce schedule risk with greater schedule flexibility, the plan was also expected to cost an additional $85 million and introduce other risks associated with the incremental development such as additional contractor staff and software development and verification activities that require government oversight and continuous monitoring. So far, NOAA has been able to address certain delays and technical challenges with an available contingency reserve, in which a portion of the program’s budget is allocated to mitigate risks and manage problems as they surface during development, and has not changed its 2007 cost estimates for the development of the first two program satellites. However, contractors’ cost estimates for major project components have increased by $757 million, or 32 percent, between January 2010 and January 2012. Given the recent increases in contract costs, the program plans to determine how to cover these increased costs by reducing resources applied to other areas of program development and support, delaying scheduled work, or absorbing additional life cycle costs. Furthermore, as a result of changes in budget reserve allocations and reserve commitments, the program’s reserves have declined in recent years from $1.7 billion to $1.2 billion. Between January 2009 and January 2012, the program reported that its reserves fell from 42 percent of remaining development costs to 29 percent. NOAA’s ability to effectively limit milestone delays and component cost increases depends in part on having an integrated and reliable programwide schedule—called an integrated master schedule—that defines, among other things, necessary detailed tasks, when work activities and milestone events will occur, how resources will be applied, how long activities will take, and how activities are related to one another. GOES-R has a programwide integrated master schedule that is created manually once a month directly from at least nine subordinate contractor schedules. We analyzed four of these subordinate contractor schedules and discovered instances where certain best practices had been implemented in the schedules, as well as weaknesses in each schedule when compared to nine scheduling best practices. When viewed in conjunction with manual program-level updates, we concluded that the program-level schedule may not be fully reliable. A full set of analysis results is listed in table 1. Selected schedule weaknesses existed across each of the four schedules analyzed. For example, each of the contractor schedules either did not include information on allocation of resources or allocated too much work to many of its resources. In addition, none of the contractors had completed usable schedule risk analyses that included risk simulations. Particularly important is the absence of a valid critical path throughout all the schedules. Establishing a valid program-level critical path depends on the resolution of issues with the respective critical paths for the spacecraft and Core Ground System components. Without a valid critical path, management cannot determine which delayed tasks will have detrimental effects on the project finish date. The program office has taken specific positive actions that address two of the scheduling weaknesses we identified. First, the program implemented a tool that tracks deliverables between the flight and ground projects. This initiative is intended to address a program-recognized need for better integration among the program components. Second, the program conducted a schedule risk analysis designed to identify the probability of completing a program on its target date. This initiative, while not addressing risk analyses for component schedules, is intended to address a program-recognized need to conduct a schedule risk analysis. In addition, GOES-R officials also stated that they are in the process of creating an automated process for updating their integrated master schedule sometime in 2012 and our analysis did find improvements between July 2011 and December 2011 to weaknesses in each of the four contractors’ schedules. While the program has taken positive steps to improve its scheduling, weaknesses that have the potential to cause delays nonetheless still exist as the instruments, spacecraft, and ground project components complete their design and testing phases. For example, according to program officials, the Geostationary Lightning Mapper shipment date remains at risk of a potential slip due to redesign efforts. The current projected delivery for this instrument is August 2013, leaving only 1 month before it is on the critical path for GOES-R’s launch readiness date. As another example, the schedule reserve for the first satellite in the GOES-R series is being counted on to complete activities for the second satellite in the series. As a result, delays to certain program schedule targets for the first satellite could impact milestone commitments for the second satellite. The schedule risk analysis conducted by the program indicated that there is a 48 percent confidence level that the program will meet its current launch readiness date of October 2015. Program officials plan to consult with the NOAA Program Management Council to determine the advisability of moving the launch readiness date to a 70 percent confidence level for February 2016. Even these confidence levels may not be reliable, since the establishment of accurate confidence estimates depends on reliable data that, in turn, results from the implementation of a full set of scheduling best practices not yet in place in the program. Delays in GOES-R’s launch date could impact the continuity of GOES satellite coverage and could produce milestone delays for subsequent satellites in the series. Program documentation indicates that there is a 37 percent chance of a gap in the availability of two operational GOES- series satellites at any one time given the current October 2015 launch readiness date and an orbital testing period, assuming a normal lifespan for the satellites currently on-orbit. Any delays in the launch readiness date for GOES-R, which is already at risk due to increasing development costs and use of program reserves, would further increase the probability of a gap in satellite continuity. This could result in the need for NOAA to rely on older satellites that are not fully functional. Both the JPSS and GOES-R programs face risks going forward during their development; implementing the recommendations in our accompanying reports should help mitigate those risks. In the JPSS report being released today, we recommend that NOAA establish mitigation plans for risks associated with pending satellite data gaps in the afternoon orbit as well as potential gaps in the morning and midmorning orbits. NOAA agreed with our recommendation and noted that the National Environmental Satellite, Data, and Information Service— a NOAA component agency—has performed analyses on how to mitigate potential gaps in satellite data, but has not yet compiled this information into a report. The agency plans to provide a report to NOAA by August 2012. To improve NOAA’s ability to execute GOES-R’s remaining planned development with appropriate reserves, improve the reliability of its schedules, and address identified program risks, we are recommending in our report being released today that NOAA Assess and report to the NOAA Program Management Council the reserves needed for completing remaining development for each satellite in the series. Assess shortfalls in schedule management practices, including creating a realistic allocation of resources and ensuring an unbroken critical path from the current date to the final satellite launch. Execute the program’s risk management policies and procedures to provide more timely and adequate evaluations and reviews of newly identified risks, and provide more information, including documented handling strategies, for all ongoing and newly-identified risks in the risk register. Add to the program’s critical risk list the risk that GOES-S milestonesthat this risk and the program-identified funding stability risk are adequately monitored and mitigated. may be affected by GOES-R development, and ensure In commenting on a draft of our GOES-R report, NOAA agreed with three of our four recommendations. It partially concurred with the fourth recommendation to fully further execute the program’s risk management policies and procedures and to include timely review and disposition of candidate risks. NOAA stated that it did not consider the “concerns” listed in its risk database to be risks or candidate risks and that the risk management board actively determines whether recorded concerns should be elevated to a risk. However, the GOES-R program is not treating concerns in accordance with its risk management plan, which considers these to be “candidate risks” and requires their timely review and disposition, as evidenced by the many concerns in the database that were more than 3 months old and had not been assessed or dispositioned. Unless NOAA follows its risk management plan by promptly evaluating “concerns,” it cannot ensure that it is adequately managing the full set of risks that could impact the program. In summary, after spending about $3.3 billion on the now-defunct NPOESS program, NOAA officials have established a $12.9-billion JPSS program and made progress in launching NPP, establishing contracts for the first JPSS satellite, and enhancing the ground systems controlling the satellites and processing the satellite data. In the coming months, program officials face changing requirements, technical issues on individual sensors, key milestones in developing the JPSS satellite, and important decisions on the spacecraft, launch vehicles, and instruments that are not included on the JPSS satellite. In addition, NOAA has not established plans to mitigate the almost certain satellite data gaps in the afternoon orbit or the potential gaps in the early and mid-morning orbits. These gaps will likely affect the accuracy and timeliness of weather predictions and forecasts and could affect lives, property, military operations, and commerce. Until NOAA identifies its mitigation options, it may miss opportunities to leverage alternative satellite data sources. Completing many of GOES-R’s early design activities is an accomplishment for this complex program, but this accomplishment has been accompanied by milestone delays and increased contractor cost estimates for GOES-R’s components. The unreliability of GOES-R’s schedules adds further uncertainty as to whether the program will meet its commitments. NOAA has taken steps to improve schedule reliability, but until the program implements and uses a full set of schedule best practices throughout the life of the program, further delays to program milestones may occur. Moreover, until all contractor and subcontractor information is included in the program’s integrated master schedule and regular schedule risk assessments are conducted, program management may not have timely and relevant information at its disposal for decision making, undercutting the ability of the program office to manage this high- risk program. Chairman Broun, Chairman Harris, Ranking Member Tonko, Ranking Member Miller, and Members of the Subcommittees, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you have any questions on matters discussed in this testimony, please contact David A. Powner at (202) 512-9286 or at [email protected]. Other key contributors include Colleen Phillips (Assistant Director), Paula Moore (Assistant Director), Shaun Byrnes, Kate Feild, Nancy Glover, Franklin Jackson, Fatima Jahan, and Josh Leiling. 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. | This testimony discusses two satellite acquisition programs within the Department of Commerces National Oceanic and Atmospheric Administration (NOAA). The Joint Polar Satellite System (JPSS) and the Geostationary Operational Environmental Satellite-R (GOES-R) programs are meant to replace current operational satellites, and both are considered critical to the United States ability to maintain the continuity of data required for weather forecasting. As requested, this statement summarizes our two reports being released today on (1) the status, plans, and risks for JPSS and (2) the status, schedule management process, and risk management process within the GOES-R program. We found that the JPSS cost and GOES-R contractor cost data were sufficiently reliable for our purposes. Further, while we found that the GOES-R schedule and management reserve data were not sufficiently reliable, we reported on the datas shortcomings in our report. |
At the federal level, interest in performance budgeting has led to numerous initiatives since World War II, including four that were governmentwide in scope: (1) reforms flowing from the first Hoover Commission in its efforts to downsize the post-World War II government, (2) Planning-Programming-Budgeting-System (PPBS) begun in 1965 by President Johnson, (3) Management by Objectives (MBO) initiated in 1973 by President Nixon, and (4) Zero-Base Budgeting (ZBB) initiated in 1977 by President Carter. Each of these efforts established unique procedures for linking resources with results. The following discussion briefly summarizes and relates each of these initiatives; appendixes II through V provide additional background information. First championed in 1949 by the Hoover Commission, a federal “performance budget” was intended to shift the focus away from the inputs of government to its functions, activities, costs, and accomplishments. Rather than emphasizing items of expenditure—for example, salaries, rent, and supplies—a performance budget was to describe the expected outputs resulting from a specific function or activity—for example, weapons, training, insurance claims, construction projects, or research activities. Consistent with the Commission’s recommendations, the Congress enacted the Budget and Accounting Procedures Act of 1950 (BAPA), which, among other things, required the President to present in his budget submission to the Congress the “functions and activities” of the government, ultimately institutionalized as a new budget presentation: “obligations by activities.” These presentations were intended to describe the major programs, projects, or activities associated with each federal budget request—in a sense, the “performance budget” of a government which at that time was primarily involved in directly providing specific goods and services. Workload and unit cost information began to appear in the President’s Budget, associated with the “obligations by activities” presentations, providing a means of publicly reporting the outputs of federal spending. The Planning-Programming-Budgeting-System (PPBS), mandated governmentwide by President Johnson in 1965, assumed that different levels and types of performance could be arrayed, quantified and analyzed to make the best budgetary decisions. In essence, PPBS introduced a decision-making framework to the executive branch budget formulation process by presenting and analyzing choices among long-term policy objectives and alternative ways of achieving them. Multiyear planning was to be based on an agency’s “program structure,” which was to provide a coherent statement of a national need, an agency’s directive to fill that need, and the activities planned to meet it. Performance was generally defined as agency outputs, with an agency’s program structure linking outputs to long-term objectives. Systems analysis and other sophisticated analytical tools were an intrinsic part of PPBS, with measurement seen as an essential means to better understand federal outputs, benefits, and costs. Management by Objectives, which was primarily a federal management improvement initiative, ultimately sought to link agencies’ stated objectives to their budget requests. Initiated by President Nixon in 1973, MBO put in place a process to hold agency managers responsible for achieving agreed-upon outputs and outcomes. Agency heads would be accountable for achieving presidential objectives of national importance; managers within an agency would be held accountable for objectives set jointly by supervisors and subordinates. Performance was primarily defined as agency outputs and processes, but efforts were also made to define performance as the results of federal spending—what would today be called “outcomes.” Zero-Base Budgeting (ZBB) was an executive branch budget formulation process introduced into the federal government in 1977 by President Carter. Its main focus was on optimizing accomplishments available at alternative budgetary levels. Under ZBB agencies were expected to set priorities based on the program results that could be achieved at alternative spending levels, one of which was to be below current funding. In developing budget proposals, these alternatives were to be ranked against each other sequentially from the lowest level organizations up through the department and without reference to a past budgetary base. In concept, ZBB sought a clear and precise link between budgetary resources and program results. Past initiatives, although generally perceived as having fallen far short of stated goals, contributed to the evolution of performance-based measurement and budgeting in the federal government. Many concepts first introduced by these initiatives became absorbed in the federal government and persisted long after their origins in PPBS, MBO, or ZBB had been forgotten. Hoover Commission reforms ultimately led to permanent changes in the President’s budget presentations and a greater inclusion of performance information in the narrative summaries associated with each budget account. The “obligations by activities” presentations established in response to the Commission’s performance budgeting recommendations continue today, although they are now referred to as “obligations by program activity” or, more informally, “program activities.” PPBS and MBO fostered exploration of difficult performance measurement issues, ultimately demonstrating the inherent limitations of analysis in a political environment and the often complex and uncertain relationship between federal activities, outputs, and outcomes. ZBB illustrated the usefulness of defining and presenting alternative funding levels and expanded participation of program managers in the budget process. When viewed collectively the past initiatives suggest two common themes. First, any effort to link plans and budgets—that is, to link the responsibility of the executive to define strategies and approaches with the legislative “power of the purse”—must explicitly involve both branches of our government. PPBS and ZBB faltered in large part because they intentionally attempted to develop performance plans and measures in isolation from congressional oversight and resource allocation processes. Since goals, objectives, and activities were not jointly discussed and agreed upon, there was no consensus on what performance should be, how to measure it, or how to integrate performance information with resource decisions. Second, the concept of performance budgeting has and will likely continue to evolve. Past initiatives illustrate a progression from the straight-forward, efficiency notion implicit in the Hoover Commission recommendations, through the increasingly complex and mechanistic processes of PPBS and ZBB. Budgeting is the process of making choices, and all of these initiatives sought to improve the rationality of budget choices by focusing on the results of activities—however those results might be defined. This history suggests that no single definition of performance budgeting encompasses the range of past and present needs and interests of federal decisionmakers. One commentator has summarized this reality as follows. “To a student of politics and of legislative bodies, it means . . . a presentation and review of budget requests in such a manner as to emphasize issues and make possible more effective choices. To a top administrator, it . . . also greater flexibility and discretion in his operations, plus better control and accountability with regard to his subordinates. Down the line of an agency, it may mean a single source for funds, an enlargement of authority, flexibility, and responsibility in the use of funds. . . . To the accountant, it means accrual accounting, cost accounting, segregation of capital from operating accounts, working capital funds, and many other techniques.” In other words, the multiplicity of definitions reflects the differences in the roles various participants play in the budget process. And, given the complexity and enormity of the federal budget process, performance budgeting at the federal level will need to encompass a variety of perspectives in its efforts to link resources with results. As the current federal initiative seeking to link resources to results, GPRA seeks to involve all participants, directly ties plans and measures to budget presentations, and centers attention on outcome performance measurement. GPRA requires all federal agencies to set strategic goals in consultation with the Congress and key stakeholders; develop plans for program activities; measure performance; and annually report to the President and the Congress on the degree to which goals were met. Appendix VI contains additional information on GPRA’s purposes and requirements. GPRA can be seen as melding the best features of its predecessors. Its required connection to budget presentations harkens back to BAPA; its interest in performance measurement and cross-agency comparisons reflects PPBS; and its concern with outcomes and outputs emulates MBO. In performance budgeting terms, GPRA avoids the mechanistic approaches of previous efforts, notably PPBS and ZBB. The Senate committee report on GPRA emphasized that although “this Act contains no provision authorizing or implementing a performance budget,” it was imperative that the “Congress develop a clear understanding of what it is getting in the way of results from each dollar spent.” Recognizing that “it is unclear how best to present information and what the results will be,” GPRA requires pilot projects to develop alternative forms of performance budgets. As one observer has noted, “there is no magic bullet that will replace budget judgement and budget policies with science.” Past initiatives demonstrate that any link between performance information and resource allocation decisions is unlikely to be straightforward. The implicit presumptions of PPBS and ZBB—that systematic analysis of options could substitute for political judgment—ultimately proved unsustainable. GPRA recognizes that decisionmakers, rather than budget systems, must provide judgments needed within a public sector context. That is, in a political process, performance information can be one, but not the only factor in budgetary choice; performance information can change the terms of debate, but not necessarily the ultimate decision. Finally, GPRA should be seen as part of a series of critical managerial and financial reform efforts currently underway in the federal government that share common goals of better management and accountability for results. For example, the Chief Financial Officers Act and efforts by the Federal Accounting Standards Advisory Board seek to increase public confidence in government through improved financial reporting. These efforts will, among other things, help achieve improved cost accounting and reliability of data, essential steps in accurately matching resources to program performance. In its structure, focus, and approach, GPRA incorporates important lessons from past federal performance budgeting initiatives. For example, by requiring consultation between the executive and legislative branches on overall agency goals and missions, GPRA addresses past failures to link planning and goal setting processes with the congressional budget process; by requiring use of program activities in agency budget requests as the basis for performance planning and measurement, GPRA enhances prospects for effective links with the budget; and by emphasizing a range of performance measures that strive toward but do not initially demand outcomes, GPRA provides a realistic framework for the expectations and capabilities of performance measurement in the federal environment. Nevertheless, many of the challenges which confronted earlier efforts remain unresolved and will likely affect early GPRA implementation efforts. Agency officials, legislative staff, and other experts we met with recognized these continuing concerns and emphasized the need to adjust expectations as new approaches and capabilities are developed and tried. Where most past initiatives did not link performance information developed within the executive branch with congressional processes, GPRA provides that agencies must consult with cognizant congressional committees, and other stakeholders, as strategic planning efforts progress. This requirement is GPRA’s most fundamental change and perhaps its most significant challenge, because any effort to link resources and results must encompass some fundamental understanding of the goals of a particular program. However, discussions between agencies and the Congress on strategic planning are likely to underscore the competing and conflicting goals of many federal programs as well as the sometimes different expectations among the various stakeholders in the legislative and executive branches. In addition, the federal government’s increasing reliance on third parties—principally, state and local governments and contractors—further complicates efforts to reach consensus on program goals. And, significantly, executive branch officials and legislative staff we spoke with seemed to approach strategic planning consultations with very different expectations. For the most part, past initiatives defined planning processes as internal agency activities, with limited external visibility and virtually no external involvement. Not surprisingly, where initiatives were in practice confined within the executive branch, legislative oversight and budget decision-making were ultimately unaffected; the Congress resorted to traditional information sources, which agencies quickly reemphasized. For example, in PPBS, executive agencies did not provide the Congress with information on alternative program choices or even on the basis for decisions to pursue a particular program course, often despite requests from the Congress. During MBO, presidential objectives approved by the administration were made public, but congressional involvement in determining these objectives was not sought. Although some ZBB decision packages were made available to the Congress, differences in format and the voluminous amount of paperwork limited congressional interest and discouraged use. GPRA’s premise of joint legislative and executive involvement in strategic planning is new. GPRA requires a formal document based in part on consultations with the Congress and other interested stakeholders. The Senate report on GPRA indicates that strategic plans are to be the basic foundation for a recurring process of goal-setting and performance measurement tied to the agency’s program activities and that goals must be clear and precise in order to maintain a consistent direction. The Senate report on GPRA recognizes that shifts in political philosophy may alter priorities and means of achieving objectives but assumes that legislatively determined missions and goals would remain largely unchanged from year to year. GPRA strategic planning was viewed as fundamentally different from previous efforts, requiring that agency missions and goals be connected to day-to-day operations. Past governmentwide initiatives suggest that achieving GPRA’s strategic planning consultation goals will be difficult, particularly given the changes in emphasis and approach established by GPRA. For example, reaching a reasonable level of consensus on clear and precise strategic goals will almost certainly encounter political hurdles. Competing and/or ambiguous goals in many federal programs are often a by-product of the process of consensus building; strategic planning which is seen as merely rekindling old conflicts may not be well-received within the political process. Furthermore, the federal government’s continued and, in recent years expanded, reliance on state and local governments and other third parties to deliver federally funded services—some of the stakeholders that would likely be part of the consultation process—adds extra complications to the prospect of reaching consensus. For example, applying PPBS to programs requiring participation by federal, state, and local governments was seen as a major implementation problem. Discussions with legislative and executive branch staff confirmed the above concerns and also suggested that these officials may be approaching strategic planning from fundamentally differing perspectives. Agency officials viewed strategic plans as a potentially useful means to a dialogue with congressional committees but were skeptical that consensus on strategic goals could be reached, especially given the often conflicting views among an agency’s multiple congressional stakeholders. Some noted that achieving consensus may result in rhetorical rather than substantive plans and doubted the capacity of such plans to inform congressional decision-making. Legislative staff characterized some of the early strategic plans as lacking in substance and requisite detail. One staff member expressed concern that agency strategic plans would be used to present political agendas and justifications for the status quo, rather than real assessments of need and value provided by specific program activities. Another legislative staff suggested that the broader focus of the strategic planning process could hinder traditional congressional oversight and control processes. Some experts we contacted suggested that the expectations for strategic planning must be lowered, particularly for the initial attempts at congressional consultation. Specifically, they urged agencies and the Congress to seek a “reasonable degree” of consensus on draft strategic plans and allow several iterations to refine plans and demarcate lines of conflict and agreement. In the opinion of these experts, establishing an ongoing dialogue between the branches will be more important than seeking immediate consensus. Where past initiatives tended to devise unique structures to capture performance information that ultimately proved difficult to link to congressional budget presentations, GPRA requires agencies to plan and measure performance using the same structures which form the basis for the agency’s budget request: program activities. This critical design element of GPRA aims at assuring a simple, straightforward link among plans, budgets, and performance information and the related congressional oversight and resource allocation processes. However, the suitability of agencies’ current program activity structures for GPRA purposes is likely to vary widely and require modification or the use of crosswalks. Discussions with agency officials and legislative staff suggest that both are well aware of potential challenges in implementing this GPRA requirement but, again, tend to view the need for and benefits of adjustments to program activity structures from very different perspectives. As discussed previously, the “program structures” (PPBS) and “decision units” (ZBB) of earlier performance budgeting initiatives were not intended, at least initially, to explicitly connect to either an agency’s organizational structure or congressional budget justifications. Attempts to crosswalk PPBS program structures to budget presentations proved unduly cumbersome, and subsequent efforts to align these structures with the federal budget were ultimately unsuccessful. Similarly, under ZBB, crosswalks were needed between decision units and budget structures, and decision unit consolidations obscured the analysis of alternative spending levels and performance that was ZBB’s presumed hallmark. Congressional interest in both initiatives quickly waned as plans and performance information could not be directly linked to familiar oversight and budget structures. In the end, structural incompatibilities meant that resources were not linked to the new results information. GPRA’s required use of program activities appearing in the President’s Budget as the basis for performance planning and measurement is intended to establish the direct budgetary link absent in earlier initiatives. But this goal is dependent on the capacity of the current program activity structures to meet GPRA’s needs. That is, where the success of earlier initiatives hinged on the extent that unique planning structures could link to congressional processes, current program activities structures useful to congressional resource allocation processes must prove their suitability for planning and measurement purposes. Subject to clearance by OMBand generally resulting from negotiations between agencies and appropriations subcommittees, program activity structures differ from agency to agency and, within an agency, from budget account to budget account. Program activities, like budget accounts, may represent programmatic, process, organizational, or other orientations and, similarly, their suitability for GPRA planning and measurement purposes will also vary. For example, during ZBB, some agencies used their program activities as the basis for consolidated decision units; one agency that did so found that the process orientation of its program activities (e.g., regulatory development) rendered ZBB rankings meaningless. Under GPRA, when program activity structures present challenges to performance planning and measurement objectives, agencies have options. GPRA allows agencies to consolidate, aggregate, or disaggregate program activity structures for performance planning purposes, where needed. This approach would of course require subsequent crosswalks, but presumably not as burdensome as those of prior initiatives. Agencies may also attempt to renegotiate program activities with their appropriations subcommittees and OMB. Program activities, however, serve specific functions and may prove resistant to frequent or substantial change. For example, program activities (1) provide a relatively consistent structure for OMB and the Congress, allowing comparison of current spending to estimates of future needs, and (2) often form the basic unit of congressional oversight for determining reprogramming thresholds. Agency officials we spoke with confirmed the varying suitability of their program activity structures for GPRA purposes. One agency successfully worked through the performance planning process using its existing program activities; another agency found it necessary to devise a separate planning structure and then link back to program activities using a crosswalk. This second agency had a program activity structure that reflected its organizational units—a structure useful for traditional accountability purposes but less useful for outcome planning. Still other agencies separated performance planning from program activity structures, believing it necessary to first establish appropriate program goals, objectives, and measures before considering the link to the budget. These agencies planned to rely on GPRA’s provision to aggregate, disaggregate, or consolidate program activities. Our discussions with agency officials and legislative staff highlighted a potential tension on the use of program activities as a basis for agencies’ performance planning and measurement. Some agency officials saw program activity structures as secondary to strategic planning; thus, where current program activity structures proved unsuitable for planning purposes, these officials viewed change in the program activity structure as inevitable and appropriate. Legislative staff generally viewed these structures as fundamental to congressional oversight of agency activities; thus, change was viewed with apprehension and concern. Legislative staff were generally comfortable with existing structures and questioned whether changes would frustrate congressional oversight. Agency officials generally saw a need to be flexible in using program activities as a planning mechanism, and considered it likely and desirable to change program activity structures to better align with GPRA goals and objectives; however, they noted that changes could prove difficult and time-consuming to negotiate with the Congress. In addition, agency officials were not convinced that changes to program activities would necessarily achieve GPRA’s purposes, particularly when competing or unclear goals existed or when agency goals and objectives were likely to change over time. The experts we met with generally agreed that the program activity requirement of GPRA would likely constitute a significant implementation challenge. One expert expressed the tension between legislative and executive branch officials as a difference in the purpose and role of the program activity structure. Congressional interests emphasize oversight and control, thus necessitating detail and continuity in the structure. Agencies, however, use program activities for managerial purposes, thus seeking less detail in favor of more flexibility. Another expert noted that GPRA does not define how to aggregate, disaggregate, or consolidate program activity structures. GPRA performance reporting allows agencies to use a range of performance measures but contains a specific emphasis on outcomes—the actual results of a program activity compared to its intended purpose. Past initiatives struggled with a variety of approaches, ultimately finding it more practical to measure agency processes and outputs than outcomes. Agency officials implementing GPRA affirmed the value of outcome measurement and were also exploring alternative approaches due to the inherent challenge of outcome measurement in a federal environment marked by entitlement programs and other programs performed by nonfederal actors. Legislative staff questioned the validity and usefulness of outcome data in decision-making and perceived a potential for loss of needed detail. Taken together, the views of executive and legislative officials suggest GPRA will be challenged to identify performance measures that are both outcome-based and useful for traditional accountability purposes. Past initiatives struggled with performance reporting. Taken together, their experiences reflect a slow refinement of the objectives and awareness of the difficulties of performance measurement within the federal government. Efforts spurred by the Hoover Commission centered on identifying the activities to be performed and their costs, most commonly described as unit cost and workload analysis. Under PPBS, the purposes and uses of analysis were expanded to include a decision-making component; hence, not only were outputs and their costs analyzed, but PPBS expected that such analysis could define the most urgent national goals and determine the most effective and efficient means of reaching these goals. But agencies which attempted to gather this performance-oriented data found the process to be far more difficult than expected, and officials reported that several years would be required to develop the information and collection systems envisioned by PPBS. Agency officials reporting on their experiences under PPBS also noted situations where it was difficult to relate programs to a stated outcome or to separate out other influences that might affect ultimate outcomes. For example, the Upward Bound program was designed to increase skills and motivation for low-income high school children. However, PPBS officials had no way to isolate the program’s effect from other environmental influences which might also have contributed to the success or failure of different program participants. While subsequent initiatives reduced their expectations regarding the use of performance measurement and analysis, they continued to encounter similar difficulties. Under MBO, in contrast to PPBS experiences, presidential objectives and related agency programs were to be determined, and then followed by discussion of appropriate measures. This approach recognized that some presidential objectives, such as achieving cooperation with other countries or successfully negotiating international economic treaties, did not lend themselves to scientific analysis. ZBB decision packages were expected to include the outputs or accomplishments expected from a program. However, these performance measures were very quickly overwhelmed by the need to present decision packages within budget deadlines. ZBB allowed the use of proxy measures of performance and even indicated that decision packages were expected to be ranked with or without the benefit of performance information. In fact, a subsequent analysis of ZBB efforts found that fewer than half of the decision packages examined had quantifiable accomplishments, workload, or unit cost information. While acknowledging the inherent difficulties of performance measurement, GPRA requires that agencies establish performance indicators to be used in measuring the relevant outputs and outcomes of each program activity. The Senate report on GPRA indicates that sponsors understood the importance of measurement to any performance-based initiative and that outcomes are the most desirable performance indicator. However, GPRA also accepts that measurable outcomes may not always be possible—that causal links between federal efforts and desired outcomes may never be established—and encourages that a range of related indicators, such as quantity, quality, timeliness, and cost be developed and used to approximate outcomes. Executive officials we spoke with were strongly supportive of performance measurement, including outcome measurement, but raised concerns about the use of this information, particularly as a vehicle for congressional oversight. These officials saw value in defining outcomes for planning purposes and were also testing various approaches, including identifying intermediate performance measurements, using multiple measures to reflect different stakeholders’ interest, and applying nonquantitative measures, due to the difficulties inherent in outcome measurement. But executive officials were concerned that in today’s federal environment, full or ultimate program outcome was typically not under the control of a single federal agency, complicating responsibility determinations and resulting resource allocation decisions. In some cases, outcomes can only be achieved over many years; in other cases, federal activities are but one, and often a small, component of total public and private sector interventions in a given program area; and in still other cases, intended results cut across the activities of several agencies. In each of these cases, any individual agency outcome measurement is often incomplete and therefore of limited value to budgetary decisions. Moreover, the increasing role of state and local governments as well as of other third parties as the delivery agents for federally financed activities means that in achieving many federal outcomes, the efforts of nonfederal actors—and their objectives and concerns—were critical factors in performance measurement. Lastly, the predominance of entitlement spending, in which federal actions are typically a function of statutory eligibility determinations, further clouds the ability to hold agencies accountable for outcomes by shifting attention from broad goals (e.g., assuring a certain standard of living) to specific processes (e.g., ensuring correct and timely payments to individuals). Legislative staff also expressed concerns regarding the use of outcome measurement for oversight purposes, but principally in terms of the completeness, validity, and reliability of the data for decision-making. In particular, legislative staff were reluctant to have outcome information substitute for the more detailed information they customarily receive, indicating that such a substitution could lead to less, rather than better informed legislative decision-making. One official described an agency’s strategic plan as outcome-based, but with little discussion of the activities planned to meet the established agency goals; others expressed frustration that an agency’s goals defined in its GPRA plans can be very different from those negotiated in congressional oversight and resource allocation processes. Finally, legislative staff also expressed strong interest in congressional involvement in measurement questions. Although concerned about the added burden for congressional staff, legislative staff felt that the Congress should take an active interest in what is measured and how it is measured. GPRA performance information, augmented by audited financial data, was seen as most useful for the Congress, but the staff emphasized that the quality of this information would need to be greatly improved. Experts we spoke with encouraged agencies to identify a range of measures and indicated that this approach is particularly useful for programs with multiple or conflicting goals. Nonquantitative measures were also cited as important for activities such as research and development, and one expert urged the use of multiyear measures where goals could not be realistically achieved in a single year. One expert cautioned against agencies identifying outcomes too quickly, indicating that such a practice risked rhetoric over measurement and would not be useful in holding agencies to a level of performance. Similarly social indicators—poverty rates or mortality statistics—should only be used where it is evident that federal actions have the capacity to affect the indicator. Unlike past initiatives, GPRA’s implementation design enhances prospects for a fuller integration of performance information with budgeting. As noted above past initiatives were generally attempted within a single annual budget cycle and tended to lack processes for addressing implementation problems. In contrast GPRA posits a multiyear, iterative implementation process, built around periodic publicly available products, that will allow agencies and the Congress the opportunity to refine performance planning, measurement, and reporting, and to modify, as needed, current budget processes and presentations. Past initiatives tended to take an “instant implementation” approach that limited their capacity to address challenges as they arose. At their outset, these initiatives generally gave agencies little time for complex implementation tasks. For example, PPBS gave agencies 10 weeks to develop requisite program structures—a task which the Department of Defense, the originator of PPBS, took 10 years to accomplish. ZBB similarly imposed numerous changes to executive branch budget formulation processes within a single budget cycle, with guidance agencies believed was inadequate on key requirements. Given this abbreviated implementation process and the fact that cost estimates and decision packages developed under these initiatives were not routinely made available to the Congress, it is not surprising that congressional budget decision-making was unaffected. In contrast, GPRA defines a 7-year implementation time frame, from initial pilots to first governmentwide performance reports, and incorporates feedback mechanisms such as required evaluations of key concepts before governmentwide implementation. Once key requirements have been phased in, successive iterations of agencies’ strategic plans, performance plans, and performance reports will allow opportunities for needed refinements. In addition, GPRA’s products, which will be part of the public record, are to be made available routinely to the Congress in time to allow for the information to be integrated with congressional budget and oversight processes. For example, the Senate report on GPRA states that its plans and reports can give the Congress the ability to identify where planned resources do not appear adequate to achieve intended results and then to make realignments as appropriate. GPRA’s implementation approach also provides for 2-year pilot projects of alternative performance budget approaches in at least five agencies. During the second year of these pilots (fiscal year 1999), performance-based budget presentations for each of the designated agencies are to be included in the President’s Budget submission to the Congress. The pilots’ aim is to test possible approaches and develop capabilities toward realizing the potential of performance budgeting, and to present varying levels of performance, including outcome-related performance, resulting from different budgeted amounts. GPRA also requires OMB to evaluate the results of the pilots by March 31, 2001, and assess whether legislation requiring performance budgets should be proposed. The Senate report on GPRA said that the performance budgeting pilots are to begin “only after agencies had sufficient experience in preparing strategic and performance plans, and several years of collecting performance data.” In this context, and recognizing the importance of concentrating on governmentwide GPRA implementation in 1998, OMB indicates that these pilots will be delayed for at least a year. As envisioned under GPRA, performance budgeting will require the ability to calculate the effects on performance of marginal changes in cost and funding. According to OMB, very few agencies currently have this capability, and the delay will give time for its development. In one critical dimension, GPRA will face an environment unknown to previous performance budgeting initiatives: sustained, real declines in discretionary spending. Past efforts faced budget-related tensions, but nothing comparable to that which will likely form the initial operating environment for GPRA. Both implementation challenges and opportunities will likely arise from different expectations regarding the appropriate role for GPRA within this period of declining resources. To executive officials we spoke with, performance information was seen as essential to justify and improve current program performance; to legislative staff, performance information was expected to prove valuable as a government downsizing tool. As GPRA is implemented governmentwide, total discretionary spending is projected to decline in real terms, continuing the pattern of the last 6 years. This constitutes a unique implementation environment when compared to past initiatives. Hoover Commission recommendations were implemented as the federal government shifted from a wartime bureaucracy; PPBS faced the competing spending tensions of the Vietnam war and an ambitious social agenda; ZBB was instituted as federal deficits reached then post-war highs and the economy experienced unusually high inflation. While all of these concerns affected consideration and passage of the budget, federal spending during each of these initiatives generally continued to experience real increases, particularly for discretionary spending. Budgetary constraints will likely raise implementation issues for both agencies and the Congress. Experts we spoke with noted that in implementing GPRA all participants will need to build capacity to develop and use performance information. For agencies, this will mean acquiring necessary resources and skilled personnel, and developing the management leadership needed to sustain a performance-based organization. Similarly, the Congress will need to expand its capacity to actively participate in strategic planning, effectively communicate results-based expectations, and manage its use of performance information provided by agencies. Generally, executive officials did not see resource availability as a significant concern; they tended to view GPRA as the “right thing to do” and believed that needed resources would be found. However, they were concerned about the potential burden of expanded performance measurement requirements, noting that GPRA’s requirements could be especially onerous if, as some expected, they were layered on top of existing information requirements. In our discussions with executive officials and legislative staff, both agreed that declining budgets provided new incentives to use performance information as a key input to decision-making, but each had differing expectations as to how this should be done. In effect, each had differing views on what constituted appropriate and effective “use.” Executive officials believed that GPRA can be used to more effectively present budgetary requirements in performance-based terms, for example to the Congress. In addition, they noted that GPRA can be useful within the executive branch to identify ways to streamline operations and to make necessary budget reductions; its principal value was internal and management oriented, stemming from its ability to clarify missions and performance expectations. However, they also noted that current budgetary pressures and apprehension about use of GPRA information could increase levels of defensiveness among agency staff. Legislative officials agreed that GPRA should aid in presenting budgetary requirements in performance-based terms. They saw GPRA as encouraging both agencies and the Congress to revisit current functions and activities in relation to their articulated mission and to identify poorly performing or overlapping program activities. Legislative staff added that, given the difficult budget choices facing the nation, terminating programs based on GPRA performance information was a far more defensible practice than instituting across-the-board reductions in all spending—all too often the only other alternative. These staff expressed concern that as agencies and the Congress search for ways to reduce federal spending, conflicts over agency missions and program goals are more likely to surface, leading to agency “repackaging” of information to obscure poor performance. And they questioned whether agencies could provide valid and accurate performance data. Other experts saw potential for use of GPRA in the budget process but expressed caution. These experts noted that the GPRA process can allow agencies and the Congress to renegotiate program goals, thus forcing rigor into federal budgeting and management processes. One expert emphasized that agencies would need to see GPRA information used in decision-making if they were to continue to invest in the initiative. However, if GPRA’s exclusive result is to terminate programs, the initiative could suffer a loss of support within the executive branch. Experts also stated that GPRA information would also need to be used outside of the budget process. While GPRA has incorporated critical lessons from the past, the Congress and the executive branch will face certain challenges in their efforts to connect resources to results in the federal government. These challenges cannot be addressed by either the executive or legislative branch alone; all those involved in the resource allocation process must play a part. In particular, efforts to implement GPRA must address the following issues: The Congress and the executive branch will need to explore what can be expected of a performance budgeting system. GPRA can inform the budget process and change the nature of its dialogue by more routinely introducing performance information into decision-making. But, GPRA cannot be expected to eliminate conflict inherent in the political process of resource allocation, and final decisions will appropriately take into account many factors, including performance. The Congress and the executive branch must acknowledge that it takes time to develop goals, outcomes, and measures that are valid and acceptable to a range of stakeholders. All participants must take full advantage of the iterative planning and reporting processes defined by GPRA. Immediate expectations regarding budgetary impact and the ease of performance measurement must be tempered with long-term involvement and commitment to achieving GPRA’s purposes. The Congress and the executive branch must recognize the difficulties associated with devising a system that integrates performance and budget information. GPRA provides for such integration through the program activity structure of the federal budget. Both the budget and GPRA processes must be better aligned, requiring adjustments and accommodations. In some cases, agencies may need to develop effective crosswalks between strategic plans and the budget; in other cases, agencies and the Congress may decide to change the program activity structure in the budget. Improved financial reporting and auditing as required by the Chief Financial Officers Act will further strengthen the cost basis and reliability of data underlying the link between performance information and the budget. Over the longer term, GPRA can become a powerful tool for the hard budgetary choices that the Congress and the administration will face in the coming years. In addition to improving attention on the performance of individual program activities, GPRA can be used to address one of the more intractable problems of the federal government—that of duplicative programs that cut across federal missions and agencies. The Congress and the administration could use GPRA as the vehicle to devise a framework that compares and integrates decisions that affect related programs. In this manner, GPRA’s focus on governmentwide performance can offer an important alternative to across-the-board reductions and better inform choices among competing budgetary claims. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate Committee on the Budget; House Committee on the Budget; Senate Committee on Appropriations; House Committee on Appropriations; Subcommittee on Government Management, Information and Technology, House Committee on Government Reform and Oversight; the Director of the Office of Management and Budget; and other interested parties. We will also make copies available to others on request. The major contributors to this letter were Michael J. Curro, Carolyn L. Yocom, and Linda F. Baker. If you have any questions, I can be reached at (202) 512-9573. The specific objective of our work was to compare and contrast the key design elements and approaches of GPRA with those of similar past initiatives in order to identify potential challenges for GPRA implementation. To identify past federal performance budgeting initiatives, we used the following criteria: (1) the initiative occurred after World War II, (2) the initiative was implemented governmentwide, and (3) the initiative asserted (either initially or ultimately) a relationship between performance information and the federal budget process. Based upon these criteria, we identified four prior federal initiatives: federal performance budgeting initiatives derived from the first Hoover Commission; the Planning-Programming-Budgeting-System (PPBS); Management by Objectives (MBO); and Zero-Base Budgeting (ZBB). Our work did not address performance budgeting initiatives that were limited to a few programs or agencies, nor did we address initiatives that were planned but never fully implemented. For example, this approach excluded the end-results budgeting efforts in the Forest Service during the 1980s and President Ford’s Presidential Management Initiatives. To collect information on GPRA and on the four prior federal initiatives, we used a qualitative research design. In making our review of each prior initiative, we conducted extensive literature searches, including pertinent legislative histories, hearings, and committee prints. For GPRA, we collected information on its legislative history as well as other relevant information including OMB guidances, selected pilot performance plans and reports, and available reviews of GPRA implementation efforts to date. We compiled information on the context, implementation approach, and results of each of the prior initiatives. To compare and contrast these analysis results with GPRA, we summarized our findings for each initiative, then compiled a set of observations relevant to GPRA design and implementation. From this work we identified a set of potential challenges for GPRA implementation as well as relevant observations based on past initiatives. To compare the results of our analysis with GPRA implementation experiences to date, we contacted selected individuals in the executive and legislative branches and other experts from outside government. We selected these individuals based on their knowledge, experience, and interest in GPRA. We asked them to review the identified challenges and observations and participate in one of three panels: (1) an executive panel of individuals with direct responsibility for implementing GPRA and representing agencies covering a range of functions and program types (e.g., regulatory, direct service provision, grant administration, research and development); (2) a legislative panel composed of staff from authorizing, budget, and appropriations committees in the House of Representatives; and (3) a panel of individuals from the National Academy of Public Administration (NAPA), academia, and former government officials with expertise in GPRA or prior performance budgeting initiatives. We asked the panelists to review our observations and indicate the extent to which the challenges we identified held true for the programs and/or budgets under their purview or within their experience. We also asked panelists to discuss what approaches had been used or might be considered to mitigate these concerns. To assure maximum candor, individuals were informed that there would be no attribution of their comments to them or their organizations. We conducted our work in Washington, D.C., between October 1996 and March 1997. We requested comments on a draft of this product from the Director of OMB. On March 3, 1997, we met with designated OMB officials and discussed and incorporated changes based upon their comments. After World War II, America was left with a wartime organizational bureaucracy and a huge national debt that exceeded the gross domestic product (GDP). Reorganization planning evolved as a systematic means of reducing federal spending while allaying concerns that such reductions would cause a return to the depression of the 1930’s. The President and the Congress explored various reorganization efforts, the most effective and well known being the Commission on the Organization of the Executive Branch, more commonly referred to as the first Hoover Commission, established by law in 1947. The Declaration of Policy in the act creating the first Hoover Commission (61 Stat. 246, July 7, 1947) focused on promoting economy, efficiency and improved services in the executive branch of government. The Commission was charged with the structural reorganization of departments and agencies and the President’s managerial authorities; it published 19 reports with over 270 recommendations in the Spring of 1949. With estimates of the number of implemented recommendations being as high as 196, the first Hoover Commission is considered to have been highly successful. “Under performance budgeting, attention is centered on the function or activity—on the accomplishment of the purpose—instead of on lists of employees or authorizations of purchases . . . . this method of budgeting concentrates congressional action and executive direction on the scope and magnitude of the different Federal activities. It places both accomplishment and cost in a clear light before the Congress and the public.” Performance budgets as prescribed by the Hoover Commission were to provide more comprehensive and intelligible information to the President, the Congress, and the public. And, the Commission recommended that attention should shift away from government inputs—items of expense, lists of federal employees—to government outputs—its accomplishments, activities, and their related costs. “While the 1951 budget may be described as the first performance budget, it will be far from perfect, and we hope that we can improve it immeasurably in later years.” The 1951 budget submission was a distinct change from prior Presidential budgets. One of the more significant changes made was in the “obligations by activities” section of the budget. This section provided (1) listings of the programs or activities imbedded within a budget account, (2) separated operating and capital expenses, and (3) established breakouts for grants, and other fixed charges as well. Prior to the 1951 budget, less than 45 percent of all budget accounts contained obligation by activity subdivisions; after the 1951 budget, all accounts did. The 1951 budget also included narrative statements on program and performance for each account. Narrative statements varied in their approach, some presenting workload and unit cost information and others simply describing activities within the budget account. Finally, the 1951 budget replaced detailed lists of civilian positions and salaries that accompanied each account with summary information on employment levels. Most executive agencies charged with implementation had high expectations for performance budgets as a means of better defining, presenting, and executing the budget. Performance budgets were expected to align programs and activities in a uniform manner and assist managers in making trade-offs between—and within—particular programs. Agencies also viewed performance budgets as correcting budgeting and accounting weaknesses and improving the administration and oversight of programs. And, some agencies saw the submission of budgets on a program and functional basis as a simplification of the federal budget. However, some agencies did provide more cautionary statements regarding the implementation of performance budgeting. In particular, agencies expressed concern regarding whether—or how—to define different functions and activities consistently. Agencies also noted that the requirements for performance budgeting were adding to rather than substituting for their current budget and reporting requirements. Agency comments regarding the requirements for performance budgeting were mixed, with some expressing concern that requirements were too rigid and others stating that requirements were very generally and broadly defined. “The budget estimates of the Department of Defense shall be prepared, presented, and justified, where practicable . . . so as to account for, and report, the cost of performance of readily identifiable functional programs and activities, with segregation of operating and capital programs. . . .” And, as far as practicable, the Defense budget estimates and authorized programs were to be presented in a comparable form and follow a uniform pattern. The use of a performance budget was expected to correct weaknesses in budget formulation and presentation as well as improving the administration and management of authorized programs. And, BOB expected that a uniform pattern of accounts would allow comparisons across the services that were currently difficult to obtain. “The Budget shall set forth in such form and detail as the President may determine—(a) functions and activities of the Government;” The Congress considered that the Hoover Commission recommendation for performance budgeting was instituted on a governmentwide basis with the passage of BAPA. The second Hoover Commission, established on July 10, 1953 (67 Stat. 184), noted that performance budgeting was first used generally in the budget for fiscal year 1951. Reflecting on the implementation of performance budgeting, the second Commission observed that many programs did not have adequate cost information and suggested that budget activities and organization patterns be made consistent and accounts established to reflect this pattern; and, that budget classifications, organization, and accounting structures should be synchronized. DOD performance budgeting efforts in the 1950’s did work towards a consistent presentation of budget accounts that led to the current budget structure of DOD. Comptrollers were established in DOD and the Services with the aim of enhancing the development of adequate budget preparation and review. Each Service was required to develop similar systems which allowed for some general comparisons between the services and standard classifications of cost categories were developed. Although it did not specifically mention performance budgeting, BAPA is generally credited with advancing several important changes to federal budget practices. The statute institutionalized efforts to report sub-account level information to the Congress through the obligations by activity sections, now termed program activities. A greater amount of performance information was placed into the President’s budget, primarily output based work-load and unit cost information. BAPA also required additional coordination between agencies, created management devices such as working capital funds, delineated responsibilities for budgeting and accounting between the executive and legislative branches, and emphasized the need for a close relationship between accounting, management, and programming activities. “The installation of performance budgeting in the Federal agencies has met with varying degrees of success. . . . performance budgeting has encountered practical difficulties greater than originally contemplated and in some cases created congressional dissatisfaction with respect to program classification and accounting support.” In 1954, Arthur Smithies, noted chronicler and analyst of the budget, clarified this issue by distinguishing between a performance budget and a program budget. “Congressmen themselves are dissatisfied with the present form of the budget. They feel they have lost something by the performance budget and have not gained much . . . . Unless the performance budget can evolve into a true program budget, the Congress may decide to revert to the old system and console itself with the fiction that it has no programmatic responsibilities . . . . While the preparation of a meaningful program budget is a task of immense difficulty, and may never be wholly successful, there can be little doubt that further progress without direction is both feasible and desirable.” In January of 1965, President Johnson described the nation’s economic performance as “a creditable record of achievement.” From 1961 to 1964 the economy had been growing in real terms at an average annual rate of over 5 percent. Average annual inflation was just over 1 percent during this period, while unemployment was roughly constant at 5 percent. There was some concern about annual federal deficits, which in 1962 reached $7 billion, or 1.3 percent of GDP. A Planning-Programming-Budgeting-System (PPBS) was seen as a means of building upon the Nation’s economic strength by modernizing the management tools used in the federal government. Proponents of PPBS believed that efficiencies and improvements in government operations could be achieved through a common approach for (a) establishing long range planning objectives, (b) analyzing the costs and benefits of alternative programs which would meet these objectives, and (c) translating programs into budget and legislative proposals and long-term projections. President Johnson considered PPBS a technique for controlling federal programs and budgets, rather than “having them control us.” Furthermore, an earlier introduction of a PPBS-type system in DOD in 1961 was deemed a significant improvement over previous budget practices. Prior to PPBS, the DOD system was highly decentralized and resource formulation and allocation processes across the services were duplicative, inequitable, and limited to consideration of a single budget year. Initially termed a “program package-program element” system, DOD’s PPBS activities provided a means of evaluating and deciding among major alternative methods of accomplishing military missions. Planning horizons were also extended with the development of a 5-year defense plan. “(1) It will help us find new ways to do jobs faster, to do jobs better, and to do jobs less expensively. (2) It will insure a much sounder judgment through more accurate information, pinpointing those things that we ought to do more, spotlighting those things that we ought to do less. (3) It will make our decision-making process as up-to-date, I think, as our space-exploring program.” There were distinct differences between DOD approaches and the subsequent governmentwide implementation of PPBS. DOD implementation involved several hundred analysts and over 10 years of contractor-assisted development efforts. DOD introduced three key phases of activity for implementing PPBS: (1) reviewing requirements, (2) formulating and reviewing programs, extended several years into the future, and (3) developing annual budget estimates. The first two phases were continual, year-round efforts that resulted in a 5-year program plan for the entire defense establishment. In phase three, the budget year requirements established in the 5-year program plan are separated out into an annual budget request. In contrast to this phased approach used at DOD, governmentwide implementation of PPBS was expected to be accomplished in less than 6 months. On October 12, 1965, less than 2 months after the formal announcement of PPBS, the Bureau of the Budget (BOB) issued Bulletin 66-3 which provided agency guidance and instructions for implementing PPBS. Overall, 22 executive departments and establishments were mandated and 17 smaller agencies were encouraged to implement PPBS. Bulletin 66-3 gave agencies 10 days to designate an official responsible for their PPBS system and to report their choice to BOB. Within the next 20 days, agencies were to make tentative decisions on their broad program categories. Agency instructions, procedures, or regulations regarding PPBS implementation were to be forwarded to BOB within the next 2 months. A final Program Structure, approved by the director of the agency, was expected by February 1, 1966. Program Structures were the basic foundation of the PPBS system, designed to provide a coherent statement of a national need, an agency’s authority to fill that need, and the activities planned to meet that need. BOB expected agencies to categorize all operations and activities in output oriented terms reflecting each agency’s objectives. Three subdivisions of activities were available within the Program Structure: (1) program categories, defined as activities with similar broad missions, (2) program subcategories, defined as subdivisions of narrower objectives, and (3) program elements, defined as the specific products (e.g., goods and services) contributing to agency objectives. For example, if education is a sample Program Structure, a program category might be secondary education; subcategories might include college preparatory and vocational activities; and program elements might include facilities, books, and teachers. Three documents were expected to provide data on Program Structures: Program and Financial Plans (PFP), Program Memoranda (PM) and Special Studies. The PFP were similar to the DOD 5-year plan, containing multiyear descriptions of program objectives and accomplishments in quantitative nonfinancial terms related to the universe of need. PM were expected to describe agency program categories, summarize PFP data, and delineate recommended programs. Agencies were to illustrate how they would achieve national needs, showing costs and effectiveness of alternative objectives, program types, and levels of operation. Furthermore, PM should include any assumptions and uncertainties on the cost and criteria used to support agency recommendations and estimates. Special Studies were expected to vary greatly in scope and were carried out in response to agency top management or BOB inquiries, or at the initiative of analytic staff. Contrary to expected time frames, PPBS implementation proceeded slowly—even after several years of effort. In November of 1966, President Johnson issued a memorandum to Cabinet members and agency heads stating that too many agencies had been slow in establishing PPBS and that PPBS had not been used to make top management decisions. The President urged personal participation of agency heads and instructed the Director of BOB to review and report on agency progress in implementing PPBS. Nevertheless, fully 2 years into implementation, agency directors and former BOB officials testified that implementation was proceeding more slowly than hoped. Some agencies characterized their efforts as in the beginning stages or as requiring several more years before achieving notable results. Others reported that new information systems had to be developed or devised in order to track data on a program or mission basis. “The introduction of the Planning, Programming, and Budgeting system will not, by itself, require any changes in the form in which budget appropriation requests are sent to Congress. Further, this Bulletin is not to be interpreted to set forth changes in the format of annual budget submissions to the Budget Bureau.” However, to affect resource allocation decisions made within the executive branch, PPBS reports were timed to occur with the BOB budget preparation schedule. PM and Special Studies were expected to be used during the BOB spring review of the budget, when agencies and BOB would develop initial estimates of budgetary need and PFP was expected to be used during the fall as agencies developed annual budget requests for BOB. The result was two tracks of budget information: one which addressed the new PPBS requirements and one which addressed the existing BOB requirements for submitting the President’s budget to the Congress. This separation between Program Structures and the President’s budget created an implementation burden that later BOB bulletins tried to address, primarily by devising a more concrete link between PPBS and the budget. In July 1967, a second BOB bulletin (No. 68-2) directed agencies to provide a crosswalk—or a reconciliation—between their PPBS and appropriations structures. The crosswalk was to be sufficient to ensure that the budget submission was consistent with the intent of the program decisions. In 1968, the Congress requested and received an accompanying commentary to BOB’s third bulletin (No. 68-9); the commentary noted that the then-current “two-track system” of program and appropriation structures was confusing and causing an undue burden. Agencies were asked to consider changing their PPBS program structures so as to avoid crosswalks and integrate PPBS and appropriations structures. Subsequent BOB guidances made procedural changes to the PPBS system, primarily limiting the scope and magnitude of reporting requirements for agencies and increasing staff hiring and training. Although originally allowed to include unlimited program proposals without regard to agency budget levels, the PFP requirements became limited to budgeted activities. Noting that many PM lacked analysis of major alternatives, policy decisions, or strategies directed towards specific outputs, BOB dramatically reduced its requests for major policy issues presented in PM documents. Further, BOB provided agencies extra preparation time for PM, and pledged assistance with the analysis and review of major policy issues. Lastly, during the first two years of implementation, almost 900 PPBS-specific positions were created, of which almost 400 were filled through new hires. Four years into implementation, over 4,500 staff had attended PPBS training sessions. While DOD continues to use PPBS procedures today, the governmentwide initiative begun with such great promise in 1966 was formally discontinued in 1971 with remarkably little comment. Some observers and participants faulted the implementation process, contrasting DOD’s 10 years of preparation with a significantly shorter governmentwide implementation period. A former agency official charged that PPBS was implemented indiscriminately, with agencies lacking the capability to perform PPBS activities, and BOB lacking the competence to guide them. Others said PPBS failed to garner the necessary support it needed because it affected the balance of power between the executive and legislative branches. PPBS participants and observers cited many problems developing measures and analysis techniques, as well as incorporating results into decision-making practices. Congressional hearings reviewed executive approaches to estimating, measuring, and valuing benefits, ultimately recommending the use of standard interest rates and discount policies. A GAO report cited several obstacles to relating output measures to program benefits; for example the report noted that the increased use of grants meant that program outputs could not be obtained due to a “rather loose and intermittent” federal control over grantees’ program performance.Some members of Congress questioned the broader purposes and accomplishments of PPBS as a decision-making tool, particularly in light of the impact of assumptions on analysis results; they further noted that their lack of access to PPBS documents placed them at a disadvantage in considering resource allocation questions. Some agencies cautioned that PPBS analysis could not substitute for inherently political decisions such as the allocation of resources among different priorities (e.g., health v. education); others asserted that decisions for certain federal functions—such as foreign affairs—could not be relegated to systems analysis. Other observers found PPBS unrealistic because it attempted to improve decision-making without recognizing the differing goals and interests of the decisionmakers. Over 3 years into PPBS implementation, the Joint Economic Committee of the Congress published a compendium of papers on the analysis and evaluation of public expenditures in PPBS. In this compendium, an Assistant Director for Program Evaluation at BOB noted that expectations for PPBS needed to be constrained by certain realities of the federal environment, namely Governments operate with limited resources, and the demand for these resources always exceeds the available supply. Past resource commitments place heavy constraints on current budgets, providing limited control over resource allocation. Workable program measurement techniques are difficult to achieve, particularly given the complexity and size of the federal government. Implementation of new ideas can be slowed by the size of government, the inherent uncertainties of its tasks, and the high degree of coordination needed. Often there are political and moral claims made on the federal government which do not necessarily reflect an interest in cost effectiveness or efficiency. The resource allocation process in government is not well linked to planning, as these activities serve different needs and respond to different time frames. Once a budget is established, there is minimal accountability for performance. Although it failed as a governmentwide performance budgeting initiative, PPBS is credited with instituting improvements in federal program management. PPBS allowed agencies to reappraise their mission and functions; accumulate better information on inputs, outputs, and their relationship to objectives; and increase top official interest over planning, budgeting, and performance. Furthermore, decisionmakers increased the use of systems analysis, recognizing its value as a means of better understanding outputs, benefits, and costs. Finally, PPBS left a long-standing legacy of increases in the amount and quality of program evaluation in the federal government. Despite the immense implementation difficulties—a truncated start-up, significant increases in paperwork, problems measuring program benefits and costs, and complex crosswalks to link program and budget structures—few individuals argued against the goals of PPBS. Some argued for its continuation, asserting that the goals and purposes of PPBS were critical to improving government operations. At a congressional hearing in 1970, one former HEW official summarized this view in the following manner. “. . . Rekindle the spluttering flame of PPB . . . . In my judgment PPB is absolutely right in concept. It requires more sustained support from the Congress, the White House, and the BOB. It requires patience. Its message and value is care in considering what the Government has done and might do. New initials will be needed but the job must be done.” During the 1960’s a bipartisan consensus developed that federal management needed improvement. A study requested by President Johnson in 1966 and carried out by the Heineman Task Force criticized the federal government’s management of the new Great Society programs. The Task Force recommended strengthening the management responsibilities of the then-Bureau of the Budget (BOB). In 1970 President Nixon proposed changing BOB into a new Office of Management and Budget (OMB), with the new agency expected to give greater attention to federal management issues. To gain greater administrative control over major executive branch departments and agencies, President Nixon proposed a new governmentwide initiative: Management by Objectives (MBO). MBO was a popular management technique used in the private sector and had also been implemented at the Department of Health, Education, and Welfare during the President’s first term. MBO was intended to centralize goal-setting decisions while at the same time allowing managers to choose how to achieve the goals. It focused on tracking progress toward goals previously agreed upon between a supervisor and subordinate. President Nixon formally initiated MBO in an April 18, 1973, memorandum to 21 agencies, which included the 11 cabinet departments and constituted about 95 percent of the budget and federal employees. President Nixon stated: “I am now asking each department and agency head to seek a sharper focus on the results which the various activities under his or her direction are aimed at achieving. . . . This conscious emphasis on setting goals and then achieving results will substantially enhance federal program performance.” A follow-up memo to the MBO department heads from the Director of OMB further explained that the new initiative aimed at better communication, faster identification of problems, and greater accountability of managers to supervisors. Ultimately, the OMB Director stated, MBO would lay the groundwork for the President to decentralize more responsibility to the agencies. In his April 1973 letter, the President asked each agency to propose the 10 or 15 most important objectives—referred to as “presidential objectives”—to be accomplished in the coming year; the goal was to identify 100 presidential objectives. Different agencies were given different deadlines, varying between 2 and 8 weeks, to submit proposals. Subsequently, agencies were told that their search for objectives need not be limited to their proposals to the President. Agencies were encouraged to identify additional objectives, to track progress towards achieving them, and to use MBO in all aspects of their operations. OMB was to play a key role in implementing MBO. As part of MBO implementation, a new position within OMB was created: the “management associate.” Thirty management associates with varying backgrounds, some with government experience and some without, were hired. Their responsibilities would include providing day-to-day assistance to the departments in preparing objectives, tracking progress, working closely with OMB budget examiners, and providing technical assistance to agency staff and OMB top management to help implement the initiative. In addition, staff were specially selected to implement MBO at the agencies and were generally located between the Office of the Secretary and program managers. OMB statements emphasized that the initiative was to be conducted with a minimum of paperwork. Face-to-face meetings were to be held roughly every 2 months between top OMB and agency staff. The meetings were to focus on agency progress in achieving objectives, problems requiring top management attention, and any changes to objectives. Some existing OMB requirements were eliminated as a way of encouraging agency acceptance of the new initiative. OMB gave agencies some guidelines on their proposals for presidential objectives. In proposing presidential objectives, agencies were to consider the importance to the President’s agenda, measurability, and the ability to achieve the objective without additional resources and within 1 year. Agencies were to identify objectives on their own—that is, without intervention by OMB—and were asked to develop action plans with specific milestones for accomplishing objectives. All objectives were to be linked to the organizational units that would be held accountable for achieving them. If circumstances warranted, objectives could be changed during the year. OMB would review agencies’ proposed presidential objectives as well as track progress toward achieving them. In its first year, no explicit connection of MBO to the budget process was attempted. MBO fell far short of expectations during its first year. Although 20 of the 21 MBO agencies had identified presidential objectives and 18 had progress tracking systems in place by the end of the first year, many other important implementation steps were not achieved. For example, management conferences were held, although not as often as originally planned with 4 to 6 months passing between conferences for some agencies. Despite OMB’s intention to address this problem, scheduled meetings continued to be canceled frequently. And, as MBO reviews were increasingly done at the staff level, rather than at the OMB and agency head level, MBO paperwork increased. At OMB, tensions initially developed between the new management associates and OMB’s budget examiners; this eased to some extent as the management associates found that monitoring agency objectives was not a full-time task, especially given the associates’ lack of control over agency actions. Increasingly the management associates became involved in non-MBO tasks such as doing special studies. Most importantly, presidential involvement in MBO also faltered during 1974, affecting agency implementation and acceptance of MBO. In the second year of MBO, an attempt was made to re-emphasize MBO by linking objectives with agency budget submissions. In a February 1974 meeting, OMB informed agency heads that their 1976 budget requests were to be based on their presidential and agency (secretarial) objectives. OMB hoped that this would increase the permanence of MBO and encourage more explicit statements of the purposes for which money was to be spent. In June 1974, OMB asked the 21 MBO agencies to identify selected objectives in the letters transmitting their budget requests to OMB; these objectives were to be discussed in depth in the budget justifications. Agencies were told to “be prepared to provide” outlay estimates and “preliminary” schedules of milestones upon request, but were not required to include action plans. In August 1974, President Nixon resigned and, shortly after taking office, President Ford endorsed agencies’ proposed 1975 Presidential objectives. These were the last presidential objectives requested under MBO. Although certainly affected by President Nixon’s resignation, the MBO initiative suffered from its initial separation from existing budget formulation processes and from problems in identifying and measuring objectives. Efforts in the second year to tie the MBO initiative to the budget’s priority setting processes were quickly overwhelmed by its early demise. The President’s request that agencies focus on results and express those results in measurable terms did not make the practice of performance measurement any easier. For various reasons agencies found this difficult to do. Not surprisingly, as initially submitted to OMB, agencies’ objectives were often vaguely worded (e.g., “the abolition of crime in society” or “to make the U. S. Merchant Marine the most competitive in the world”) and not easily measurable. In addition, agency objectives often dealt with matters not achievable within a single year (such as finding a cure for cancer) or were beyond the control of agency managers (such as improving water quality), making accountability problematic. Despite these issues and its brief life as a formal initiative, proponents believe that MBO had positive results in both the short and long term. For the administration that proposed it, the MBO initiative enhanced its ability to explain the President’s agenda to the public—for example, the emphasis on transferring more federal power to cities and states. Some OMB staff and agency officials found MBO valuable as an internal agency management process, helping to clarify goals and associated activities. To some extent, the basic concepts of MBO—negotiating goals and holding subordinates accountable for achieving them—have survived in federal management practices. In addition, the potential of MBO as a tool for articulating presidential agendas and linking them with the budget was later confirmed by a similar initiative under President Bush; this initiative included publishing presidentially approved objectives, the resources needed to achieve them, and relevant accomplishments in the President’s Budget. And issues raised during MBO concerning the difficulties inherent in identifying and measuring federal outcomes would remain for later initiatives to address. In the mid 1970s, the annual deficit was a matter of public debate. By 1977 the annual deficit had been above $50 billion for 2 years, reaching a post-World War II high of $73.8 billion for fiscal 1976. A general sense existed that federal spending was out of control, with much of it no longer subject to annual appropriations but driven by permanent entitlement programs and multiyear budgetary authority. During 1976, the Congress and Candidate Jimmy Carter had responded to the new budget situation. Beginning in the spring the Congress held hearings on proposals for so-called “sunset” legislation that would have required periodic zero-base reviews of all federal programs by their congressional authorizing committees. Sunset proposals, however, did not become law. While campaigning for the presidency, Jimmy Carter promised to balance the budget within his first term and to reform the federal budgeting system, which he characterized as “inefficient, chaotic, and virtually uncontrollable by either the President or the Congress.” To these ends he had promised to introduce zero-base budgeting (ZBB), which he had used as Governor of Georgia and which also had been discussed in sunset hearings. In fall 1976, congressional appropriations committees asked selected independent agencies to pilot test the applicability of ZBB concepts to legislative decision-making. Used in private industry as well as in some state and local governments, ZBB in theory required expenditure proposals to compete for funding on an equal—starting from “zero”—basis. ZBB prepares a detailed identification and evaluation of all activities together with alternatives, and spending necessary to achieve desired plans and goals. Where federal budgeting in recent years had made incremental changes to an accepted base of past spending, ZBB in contrast sought to look below the base, evaluating the efficiency and effectiveness of current operations and comparing the needs of one program against the needs of other programs that might be of higher priority. ZBB also looked to a greater involvement of program managers in budgeting as a way to identify new efficiencies and to incorporate better analysis into budget decision-making. On February 14, 1977, shortly after his inauguration, President Carter issued a memorandum to the heads of executive departments and agencies mandating use of zero-base budgeting for all fiscal year 1979 agency budget requests. The memorandum mandated that a new ZBB budget process would replace—not simply accompany or link to—the existing executive branch budget formulation process for all budget proposals in the immediately upcoming budget cycle. Consistent with an emphasis in ZBB theory on a close link between planning with budgeting, federal planning and budgeting under ZBB were to be done at the same time, in a single process. In contrast to its implementation of PPBS and MBO, OMB did not add or create a special staff for ZBB. Federal managers and budgeteers were expected to implement the new initiative. ZBB would not affect budget materials provided to congressional appropriations or authorizing committees, nor would it change the form of the President’s Budget. Formal implementation steps were taken within 2 months of the memorandum. On March 21, 1977, OMB sent agencies draft ZBB guidelines for comment, issuing final guidance on April 19 as Bulletin 77-9. In effect, agencies were given a lead time of about 6 months before final budget submissions were due to OMB. Agencies were to set up their own ZBB systems using the steps outlined in the Bulletin as a framework. Among other new requirements, agencies were asked to identify the “decision units” for which budget requests would be made. A decision unit was to be “at an organizational or program level at which the manager makes major decisions on the amount of spending and the scope, direction, or quality of work to be performed.” “not so low in the structure as to result in excessive paperwork and review . . . so high as to mask important considerations and prevent meaningful review of the work being performed.” “normally . . . included within a single account, be classified in only one budget subfunction, and to the extent possible, reflect existing program and organizational structures that have accounting support.” In all cases, the guidance stated, the identification of the decision units was to be determined by the information needs of top management. Budget requests for each decision unit were to be prepared by their managers, who would (1) identify alternative approaches to achieving the unit’s objectives, (2) identify several alternative funding levels, including a “minimum” level normally below current funding, (3) prepare “decision packages” according to a prescribed format for each unit, including budget and performance information, and (4) rank the decision packages against each other in a series of steps, beginning with program managers and proceeding up the hierarchy. The results of the ZBB process would be agency budget justifications and rankings, with the latter required to be submitted to OMB but not to the Congress. With OMB’s approval, agencies could consolidate decision units as a means to minimize paperwork and the review burden on top management. The guidance also required agencies to set objectives and performance indicators at the beginning of their ZBB process. Top and program managers were to set objectives as “explicit statements of intended output, clearly related to the basic need for which the program or organization exists.” Concurrently they were to identify the key indicators to be used in measuring performance and results. These should be “measures of effectiveness, efficiency, and workload for each decision unit. These measures can often be obtained from existing evaluation and workload measurement systems.” Indirect or proxy indicators could be used if these systems did not exist or were under development. A “lack of precise identification and quantification of such objectives,” however, would “not preclude the development and implementation of zero-base budgeting procedures.” Despite considerable variation in how agencies implemented ZBB, some patterns can be discerned. Some agencies tended to associate their decision units with their account structure or, within their account structure, with their program activities. Some agencies did not identify minimums below current funding, and many identified minimums as an arbitrary percentage of current funding, generally between 75 and 90 percent. Agencies also made use of the option to consolidate decision units and often set initial decision units at high organizational levels (e.g., the division level or higher). Lastly, one study of several agencies found that fewer than half the decision packages examined had quantifiable accomplishments, workload, or unit cost information. The next year, in May 5, 1978, OMB issued Circular A-115, which revised some aspects of the ZBB process. Addressing problems with objectives and performance information, OMB now urged agencies to use the results of their performance evaluations in analyzing alternative methods of accomplishing objectives and in analyzing anticipated accomplishments identified with each level of performance. The circular also strengthened language dealing with the objective-setting requirement. The guidance on selecting decision units, preparing rankings, and consolidation was clarified. A requirement to train staff before they participated in the ZBB process was also added. In other respects, however, ZBB requirements were unchanged. For example, no provision was made for a separate planning phase, and the requirement to prepare decision packages for all budget requests, including those for mandatory programs, remained. The budget that resulted from agencies’ and OMB’s first year of ZBB efforts disappointed some observers. Few significant budgetary actions were identified as resulting from ZBB, and some questioned the utility of the many hours spent by program managers, budgeteers, and top managers on ZBB. In the following year, agency budget justifications to OMB continued to be prepared using ZBB, but agency budget justifications to the Congress continued to be prepared as in the past, largely without reference to agencies’ ZBB information. As the Carter presidency proceeded, less and less attention was devoted in the Budget Message to the role and claimed achievements of ZBB. On August 7, 1981, in the first year of the succeeding administration, OMB rescinded circular A-115 requiring agencies to have ZBB systems. Some ZBB requirements, however, survived beyond the formal life of the initiative. Requirements for agencies to identify “decision units” and prepare consolidated rankings remained until May 1986. A requirement to identify three funding levels lasted even longer, remaining until 1994, as did an OMB option to request that the agency present a “consolidated” ranking of “program elements and related funding levels.” In one sense, ZBB was successfully implemented: all agencies submitted the required paperwork on time. By the end of ZBB’s first budget year, agencies had prepared about 25,000 internal decision packages and submitted about 10,000 of these to OMB. But in essential ways federal ZBB had not been an exercise in zero-basing a budget. The widespread use of arbitrarily chosen percentages to identify alternative funding levels, rather than analysis based on program knowledge and performance information, precluded genuine zero-basing, as did consolidation and selection of initial decision units at high levels in the organization. From the beginning, paperwork burden for federal managers constituted a significant implementation problem. One study estimated that paperwork increased, on average, 229 percent in ZBB’s first year. In addition to the ZBB packages, agencies had to prepare separate budget materials, often using different categories, for OMB, appropriations, and authorizing committees. Preparing crosswalks between these added to agency burden. Agencies believed that inadequate time had been allowed to implement the new initiative. The requirement to compress planning and budgeting functions within the timeframes of the budget cycle had proven especially difficult, affecting program managers’ ability to identify alternative approaches to accomplishing agency objectives. Some agency officials also believed that the performance information needed for ZBB analysis was lacking. Available information concerned processes and activities, not how well these processes and activities performed. Agencies also questioned the need to prepare and rank decision packages for programs whose spending levels were outside their control. For example, the Department of Health, Education, and Welfare did not identify minimum levels for social security and other programs where it believed spending was uncontrollable; Treasury stated it saw little use in ranking decision packages for interest on the debt since the interest would have to be paid in any case. Paperwork and other burden and technical difficulties were compounded by agency perceptions that OMB had not used the results of agencies’ ZBB efforts in its budget decision-making. In Congress, the results of the congressionally requested ZBB pilots, made public in June 1977 cast doubts on ZBB’s suitability as a potential tool for congressional decision-making. One major thrust of the pilots had been to see whether ZBB rankings—comparing priorities of “decision packages” against one another—could be used by appropriators to identify the impact of budget cuts. The results of the pilots were not encouraging. In one pilot, the agency had failed to set minimums below current funding for over one-third of its decision units and refused to rank its decision packages because the process-oriented program activity structure of the agency’s budget was too interdependent to permit meaningful ranking. The lack of cost accounting information needed to identify alternative funding levels was also cited as a technical problem. Finally, the level of burden and paperwork was a problem for both for agencies and appropriators. In one typical case, 362 pages were needed for an agency’s ZBB-based budget justification versus 72 pages for its non-ZBB justification. The results of the congressional pilots were largely consistent with later agency experiences. No mechanism existed, however, to incorporate lessons learned from the congressional pilots into executive branch ZBB implementation. By the time OMB sent agencies a survey in October 11, 1977, seeking their views on implementation problems and proposed solutions, the gaps between ZBB’s initial promise and its first year results were becoming apparent. Despite implementation problems and the relatively short time span in which all its elements were required, federal ZBB has been credited with some positive results. Some participants in the budget process as well as other observers attributed certain program efficiencies, arising from the consideration of alternatives, to ZBB. Interestingly, ZBB established within federal budgeting a requirement to present alternative levels of funding linked to alternative results—a requirement that lasted until 1994. “(1) improve the confidence of the American people in the capability of the Federal Government, by systematically holding Federal agencies accountable for achieving program results; (2) initiate program performance reform with a series of pilot projects in setting program goals, measuring program performance against those goals, and reporting publicly on their progress; (3) improve Federal program effectiveness and public accountability by promoting a new focus on results, service quality, and customer satisfaction; (4) help Federal managers improve service delivery, by requiring that they plan for meeting program objectives and by providing them with information about program results and service quality; (5) improve congressional decisionmaking by providing more objective information on achieving statutory objectives, and on the relative effectiveness and efficiency of Federal programs and spending; and (6) improve internal management of the Federal Government.” From these broad purposes, a system of interrelated plans and reports provides the basis for linking federal resources and results, with requirements and new concepts piloted before governmentwide application. GPRA requires each agency to develop strategic plans covering a period of at least 5 years. Agencies’ strategic plans must include the agency’s mission statement; identify long-term general goals, including outcome-related goals and objectives; and describe how the agency intends to achieve these goals through its activities and through its human, capital, information, and other resources. Under GPRA, agency strategic plans are the starting point for agencies to set annual program goals and to measure program performance in achieving those goals. To this end, strategic plans are to include a description of how long-term general goals will be related to annual performance goals as well as a description of the program evaluations used in establishing goals. As part of the strategic planning process, agencies are required to consult with the Congress as well as solicit the views of other stakeholders. Agencies’ first strategic plans are to be submitted to the Director of OMB and the Congress by the end of fiscal year 1997. Strategic plans must be updated at least every 3 years. GPRA also requires each agency to prepare an annual performance plan that includes the performance indicators that will be used to measure “the relevant outputs, service levels, and outcomes of each program activity” in an agency’s budget. The annual performance plan is to provide the direct link between strategic goals outlined in the agency’s strategic plan and what managers and employees do day-to-day. When an agency believes it is not possible to express a measurable goal for a program activity, the agency may ask OMB’s authorization to use a nonquantifiable goal. In addition, GPRA allows agencies to aggregate, disaggregate, or consolidate program activities for purposes of performance planning. These plans are also to be used by OMB to develop an overall federal performance plan for the federal budget, which is to be submitted each year to the Congress with the President’s budget. The first annual performance plans are to be submitted to OMB in the fall of 1997, with the first overall federal performance plan due for fiscal year 1999. Ultimately, GPRA will require that each agency prepare an annual report on program performance for the previous fiscal year. In each report, agencies are to review and discuss performance compared with the performance goals established in annual performance plans. When a goal is not met, agencies are to explain the reasons the goal was not met; plans and schedules for meeting the goal; and, if the goal was impractical or not feasible, the reasons for that and the actions recommended. Actions needed to accomplish a goal could include legislative, regulatory, or other actions or, when the agency found a goal to be impractical or infeasible, a discussion of whether the goal ought to be modified. The report is also to include the summary findings of program evaluations completed during the fiscal year covered by the report. Agencies’ first performance reports for fiscal year 1999 are due to the President and the Congress no later than March 31, 2000. In crafting GPRA, the Congress also recognized that managerial accountability for results is linked to managers having sufficient flexibility, discretion, and authority to accomplish desired results. GPRA authorizes agencies to apply for managerial flexibility waivers in their annual performance plans beginning with fiscal year 1999. The authority of agencies to request waivers of administrative procedural requirements and controls is intended to provide federal managers with more flexibility to structure agency systems to better support program goals. The nonstatutory requirements that OMB can waive under GPRA generally involve the allocation and use of resources, such as restrictions on shifting funds among items within a budget account. Agencies must report in their annual performance reports on the use and effectiveness of any GPRA managerial flexibility waivers that they receive. GPRA calls for phased implementation, as described above, beginning with selected pilot projects in performance goals and managerial flexibility in fiscal years 1994 through 1996. These pilots are expected to develop experience with GPRA processes and concepts before implementation begins governmentwide in 1997. As of March 1997, 68 pilot projects for performance planning and performance reporting were under way in 28 agencies. OMB also is required to select at least five agencies from among the initial pilot agencies to pilot managerial accountability and flexibility for fiscal years 1995 and 1996; however, OMB did not do so. GAO is required to report on governmentwide readiness for implementation by June 1, 1997; OMB is required to report on the costs, benefits, and usefulness of the performance planning and measurement pilots by May 1, 1997, identifying any recommended changes in GPRA requirements. GPRA also requires OMB to select at least five agencies, at least three of which have had experience developing performance plans during the initial GPRA pilot phase, to test performance budgeting for fiscal years 1998 and 1999. Performance budgets to be prepared by the pilot agencies are intended to provide the Congress with information on the direct relationship between proposed program spending and expected program results and the anticipated effects of varying spending levels on results. OMB is required to report on these pilots by March 31, 2001. OMB’s report is to assess the feasibility of performance budgeting, recommend whether legislation requiring performance budgets should be proposed, and identify any other recommended changes to GPRA requirements. 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. 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 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. | Pursuant to a legislative requirement, GAO reviewed the implementation of the Government Performance and Results Act of 1993 (GPRA), focusing on key design elements and approaches of GPRA as compared with those of past initiatives which also sought to link resources with results, a concept generally termed performance budgeting. GAO noted that: (1) in its overall structure, focus, and approach, GPRA incorporates critical lessons learned from previous efforts, but many of the same issues encountered in previous initiatives remain and will likely pose significant challenges if GPRA is to achieve its aim of better linking resource decisions to performance levels; (2) where past efforts failed to link executive branch performance planning and measurement with congressional resource allocation processes, GPRA requires explicit consultation between the executive and legislative branches on agency strategic plans; (3) past initiatives' experiences suggest that efforts to link resources with results must begin in the planning phase with some fundamental understanding about program goals; (4) where past initiatives devised unique performance information formats often unconnected to the structures used in congressional budget presentations, GPRA requires agencies to plan and measure performance using the "program activities" listed in their budget submissions; (5) where past initiatives were generally unprepared for the difficulties associated with measuring the outcomes of federal programs and often retreated to simple output or workload measures, GPRA states a preference for outcome measurement while recognizing the need to develop a range of measures; (6) GAO's discussions with selected legislative staff and agency officials revealed fundamental differences in perspectives and expectations that are often a necessary consequence of the system of separated powers; (7) past initiatives often foundered because no mechanism existed to reconcile or even to address these legitimate, but at times competing, views; (8) GPRA, through required consultations and formal, public documents, is intended to encourage an explicit and periodic exchange of views between the branches; (9) GPRA differs from prior initiatives in two important respects; (10) past performance budgeting initiatives were typically implemented governmentwide within a single annual budget cycle; (11) GPRA, in contrast, defines a multiyear and iterative governmentwide implementation process that incorporates pilot tests and formal evaluations of key concepts; (12) GPRA will face an operating environment unknown to its predecessors: persistent efforts to constrain spending; (13) past initiatives demonstrate that performance budgeting is an evolving concept that cannot be viewed in simple mechanistic terms; and (14) ultimately this goal of linking resources with results implies both risks and rewards. |
The US-VISIT program is a governmentwide endeavor intended to enhance national security, facilitate legitimate trade and travel, contribute to the integrity of the U.S. immigration system, and adhere to U.S. privacy laws and policies by collecting, maintaining, and sharing information on certain foreign nationals who enter and exit the United States; identifying foreign nationals who (1) have overstayed or violated the terms of their visit; (2) can receive, extend, or adjust their immigration status; or (3) should be apprehended or detained by law enforcement officials; detecting fraudulent travel documents, verifying traveler identity, and determining traveler admissibility through the use of biometrics; and facilitating information sharing and coordination within the border management community. The program involves interdependencies among people, processes, technology, and facilities, as shown in figure 1. Within DHS, organizational responsibility for the US-VISIT program lies with the Border and Transportation Security Directorate. In July 2003, DHS established a US-VISIT program office with responsibility for managing the acquisition, deployment, operation, and sustainment of the US-VISIT system and supporting people (e.g., inspectors), processes (e.g., entry exit policies and procedures), and facilities (e.g., inspection booths). DHS plans to deliver US-VISIT capability incrementally. Currently, it has defined four increments, with Increments 1 through 3 being interim or temporary solutions, and Increment 4 being the yet-to-be-defined end vision for US-VISIT. Increments 1 through 3 include the interfacing and enhancement of existing system capabilities and the deployment of these capabilities to air, sea, and land ports of entry (POE). 1. The first increment includes the electronic collection and matching of biographic and biometric information at all major air and some sea POEs for selected foreign travelers with non-immigrant visas. Increment 1 entry capability was deployed to 115 airports and 14 seaports on January 5, 2004. Increment 1 exit capability was deployed as a pilot to two POEs on January 5, 2004—one airport and one seaport. 2. The second increment is divided into two parts—2A and 2B. Increment 2A is to include the capability to process machine-readable visas and other travel and entry documents that use biometric identifiers at all POEs. This increment is to be implemented by October 26, 2004. Increment 2B is to expand the Increment 1 solution for entry to secondary inspection at the 50 highest volume land POEs by December 31, 2004. According to the US-VISIT Request for Proposal (RFP), 2B is also to include radio frequency (RF) capability at the 50 busiest land POEs for both entry and exit processes. 3. Increment 3 is to expand the 2B capability to the remaining 115 land POEs. It is to be implemented by December 31, 2005. 4. Increment 4 is the yet-to-be-defined end vision of US-VISIT, which will likely consist of a series of capability releases. DHS plans to award a single, indefinite-delivery/indefinite-quantity contract to a prime contractor for integrating existing and new business processes and technologies. DHS plans to award the contract by May 2004. According to the RFP, the prime contractor’s scope of work is to include, but is not limited to, Increments 2B, 3, and 4. By definition, US-VISIT is a risky undertaking because it is to perform a critical mission, its scope is large and complex, it must meet a demanding implementation schedule, and its potential cost is enormous. In announcing the US-VISIT system, the DHS Under Secretary for Border and Transportation Security stated that the system’s goal is to “give America a 21st Century ‘smart border’—one that speeds through legitimate trade and travel, but stops terrorists in their tracks.” Achieving these goals is daunting: the United States shares over 7,500 miles of land border with Canada and Mexico, and it has approximately 95,000 miles of shoreline and navigable waterways to protect. In fiscal year 2002, there were about 279 million inspections of foreign nationals at U.S. POEs. In these circumstances, preventing the entry of persons who pose a threat to the United States cannot be guaranteed, and the missed entry of just one can have severe consequences. Relatedly, US-VISIT is to achieve the important law enforcement goal of identifying those among these millions of visitors each year who overstay or otherwise violate the terms of their visas. Complicating achievement of these security and law enforcement goals are other key US-VISIT goals: facilitating the movement of legitimate trade and travel through the POEs and providing for enforcement of U.S. privacy laws and regulations. US-VISIT is to provide for the interfacing of a number of existing systems. It is also to support and refine a large and complex governmentwide process involving multiple departments and agencies. This process involves the pre-entry, entry, status, and exit of hundreds of millions of foreign national travelers to and from the United States at over 300 air, sea, and land POEs. The interfaced systems included in Increment 1 are Arrival Departure Information System (ADIS), a database that stores traveler arrival and departure data received from air and sea carrier manifests and that provides query and reporting functions; Advance Passenger Information System (APIS), a system that captures arrival and departure manifest information provided by air and sea carriers; Interagency Border Inspection System (IBIS), a system that maintains lookout data, interfaces with other agencies’ databases, and is currently used by inspectors at POEs to verify traveler information and modify data; Automated Biometric Identification System (IDENT), a system that collects and stores biometric data about foreign visitors; Student Exchange Visitor Information System (SEVIS), a system that contains information on foreign students; Computer Linked Application Information Management System (CLAIMS 3), a system that contains information on foreign nationals who request benefits, such as change of status or extension of stay; and Consular Consolidated Database (CCD), a system that includes information on whether a visa applicant has previously applied for a visa or currently has a valid U.S. visa. Figure 2 shows these systems and their relationships. In addition to integrating numerous systems, US-VISIT also involves complex processes governing the stages of a traveler’s visit to the United States: pre-entry, entry, status management, and exit. These processes for Increment 1 are as follows: Pre-entry process. Pre-entry processing begins with initial petitions for visas. When the Department of State issues the travel documentation, biographic (and in some cases biometric) data are collected and made available to border management agencies. The biometric data are transmitted from State to DHS, where the prints are run against the US- VISIT IDENT biometric database to verify identity and to check the biometric watchlist. The results of the biometric check are transmitted back to State. Commercial air and sea carriers are required by law to transmit crew and passenger manifests to appropriate immigration officers before arriving in the United States. These manifests are transmitted through APIS. The APIS lists are run against the biographic lookout system and identify those arrivals who have biometric data available. In addition, POEs review the APIS list in order to identify foreign nationals who need to be scrutinized more closely. Entry process. When a foreign national arrives at a POE’s primary inspection booth, biographic information, such as name and date of birth, is displayed on the bottom half of a computer workstation screen, along with a photograph obtained from State’s CCD. The inspector at the booth scans the foreign national’s fingerprints (left and right index fingers) and takes a digital photograph. This information is forwarded to the IDENT database, where it is checked against stored fingerprints in the IDENT lookout database. If the foreign national’s fingerprints are already in IDENT, the system performs a match (a comparison of the fingerprint taken during the primary inspection to the one on file) to confirm that the person submitting the fingerprints is the person on file. During this process, the inspector also questions the foreign national about the purpose of his or her travel and length of stay. Status management process. The status management process manages the foreign national’s temporary presence in the United States, including the adjudication of benefits applications and investigations into possible violations of immigration regulations. ADIS matches entry and exit manifest data to ensure that each record showing a foreign national entering the United States is matched with a record showing the foreign national exiting the United States. ADIS receives status information from CLAIMS 3 and SEVIS on foreign nationals. Exit process. The exit process includes the carriers’ submission of electronic manifest data to IBIS/APIS. This biographic information is passed to ADIS, where it is matched against entry information. At the two POEs where the exit pilot is being conducted, foreign nationals use a self- serve kiosk where they are prompted to scan their travel documentation and provide their fingerprints (right and left index fingers). This departure record is then stored in ADIS (along with the person’s arrival record) and used to verify if a foreign national has complied with the admission terms of his or her visa. Key US-VISIT milestones are legislatively mandated. For example, the Immigration and Naturalization Service Data Management Improvement Act of 2000 requires that US-VISIT be implemented at all air and sea POEs by December 31, 2003; at the 50 highest volume land POEs by December 31, 2004; and at all remaining POEs by December 31, 2005. Because of limited progress during the 7 years following the legislation that originated the entry exit system requirement, DHS acknowledged that it could not complete permanent solutions in these time frames, and thus it planned to implement interim (temporary) solutions. For example, Increments 1 through 3 include the interfacing of existing systems and the design and construction of interim facilities at land POEs. Further, DHS officials have stated that it will be difficult to develop and implement even the interim solutions at some of the highest volume land POEs (such as San Ysidro, California; Otay Mesa, California; and Laredo, Texas) by December 31, 2004, because even minor changes in the inspection time can greatly affect the average wait time at these high-volume POEs. Moreover, achievement of interim solutions is based on assumptions that, if changed, could significantly affect facility and staffing plans. Despite DHS’s estimate in February 2003, that the total overall cost of the US-VISIT program would be about $7.2 billion through fiscal year 2014, the potential governmentwide cost of US-VISIT over just a 10-year period could be about twice as much. Although the DHS estimate included a wide range of costs, it omitted some costs and may have understated others. The estimate included system investment costs, such as information technology hardware and communications infrastructure, software enhancements, and interfaces; the cost of facilities and additional inspectors; system and facilities operation and maintenance costs; the cost of planning, designing, and constructing permanent facilities, which according to DHS was about $2.9 billion (this estimate was based on the assumptions that (1) no additional traffic lanes would be required to support the entry processes and (2) exit facilities would mirror entry facilities—i.e., that a land POE with 10 entry traffic lanes would require 10 exit traffic lanes); costs to design and construct building space to house additional computer equipment and inspectors; and costs for highway reconfiguration at land POEs. However, the estimate did not include the costs to design and construct interim facilities at land POEs. DHS officials estimated that the cost of constructing the interim facilities at the 50 highest volume POEs was about $218 million. Moreover, the estimate is based on assumptions that, if changed, could significantly affect, for example, land POE facility and staffing needs. Finally, although the estimate did include the cost of implementing biometrics, these costs are understated, because they did not include, for example, State Department costs. Specifically, in November 2002, we reported that a rough order of magnitude estimate of the cost to implement visas with biometrics would be between $1.3 billion and $2.9 billion initially and between $0.7 and $1.5 billion annually thereafter. This estimate is based on certain assumptions, including that all current visa- issuing embassies and consulates will be equipped to collect biometrics from visa applicants. Assuming that biometrics are implemented by December 2004, this means that the recurring cost of having biometric visas through DHS’s fiscal year 2014 life cycle period would be between $7 and $15 billion. In contrast, DHS’s estimate for the entire program through fiscal year 2014 was about $7.2 billion. Compounding the risk factors inherent in the scale and significance of the US-VISIT program are a number of others that can be attributed to its state of management and its acquisition approach. As described in our September 2003 report on US-VISIT, these include relying on existing systems to provide the foundation for the first three program increments (and thus having to accept the performance limitations of these existing systems), not having mature program management capabilities, not having fully defined near-term facilities solutions, and not knowing the mission value that is to be derived from US-VISIT increments. Our recently completed audit work for the appropriations committees addressed each of these factors, which our next report will discuss, including why each is still an area of risk. The system performance of the interim releases of US-VISIT (Increments 1, 2, and 3) will depend largely on the performance of the existing systems that are to be interfaced to create the overall system. Thus, US-VISIT system availability and associated downtime, for example, will be constrained by the availability of the interfaced systems. In this regard, some of the existing systems have had availability and reliability problems that could limit US-VISIT performance. Two examples are SEVIS and CLAIMS 3. Problems have been identified with the availability and reliability of SEVIS, the system designed to manage and monitor foreign students in the United States. For example, in April 2003, the Justice Inspector General reported that many users had difficulty logging on to the system, and that as the volume of users grew, the system became increasingly sluggish. According to other reports, university representatives complained that it was taking hours to log on to the system and to enter a single record, or worse, that the system accepted the record and later deleted it. We are required to report to the House and Senate Appropriations Committees by April 1, 2004, on SEVIS performance, among other things. We also reported in May 2001 that CLAIMS 3 was unreliable. This system contains information on foreign nationals who request benefits and is used to process benefit applications other than naturalization. Specifically, we reported that INS officials stated that the system was frequently unavailable and did not always update and store important case data when field offices transferred data from the local system to the mainframe computer. Our experience with major modernization programs, like US-VISIT, shows that they should be managed formally, which includes establishing a program office that (1) is adequately staffed (both in numbers and skill levels), (2) has clearly defined its staff’s roles and responsibilities, and (3) is supported by rigorous and disciplined acquisition management processes. DHS established a US-VISIT program office in June 2003 and determined that this office’s staffing needs were, in all, 115 government and 117 contractor personnel to perform key acquisition management functions. These functions fall into categories described by the Software Engineering Institute’s Software Acquisition Capability Maturity Model (SA-CMM®), which defines a suite of key acquisition process areas that are necessary for rigorous and disciplined management of a system acquisition program. These process areas include acquisition planning, requirements development and management, project management, solicitation, contract tracking and oversight, evaluation, and transition to support. Our latest report stated that the US-VISIT program’s staffing levels were far below its stated needs. Moreover, specific roles and responsibilities had not been defined beyond general statements. Further, the program had not yet defined plans and associated time frames for achieving needed staffing levels and defining roles, responsibilities, and relationships. According to the Program Director, positions were being filled with detailees from various DHS component organizations. Additionally, although the approved program office structure provided for positions to perform the SA-CMM key process areas (including acquisition planning, requirements development and management, project management, and contract tracking and oversight), none of the process areas were defined and implemented. Until they are, the program office must rely on the knowledge and skills of its existing staff to execute these important acquisition functions. According to the Program Director, needed program staffing and key process areas were not in place because the program was just getting off the ground, and it would take considerable time to establish a fully functioning and mature program management capability. Until the program office is adequately staffed, positional roles and responsibilities are clearly defined and understood, and rigorous and disciplined acquisition process controls are defined, understood, and followed, DHS’s efforts to acquire, deploy, operate, and maintain system capabilities will be at risk of not producing promised performance levels, functionality, and associated benefits on time and within budget. Work by the Data Management Improvement Act Task Force has shown that existing facilities do not adequately support the current entry exit process at land POEs. In particular, more than 100 land POEs have less than 50 percent of the required capacity to support current inspection processes and traffic levels. As a result, as part of US-VISIT (Increment 2), DHS plans to construct interim facilities at about 40 of the 50 highest volume land POEs by December 31, 2004, and construct interim facilities at the remaining portion of these 50 POEs by February 2005. According to DHS officials, the department plans to design and construct interim facilities to (1) support the US-VISIT inspection process, technology, and staff requirements and (2) meet current traffic wait time requirements at each land POE. To plan for the design and construction of interim facilities that meet these requirements, DHS modeled various inspection process and facilities scenarios to define what inspection process to follow and what interim facilities to construct. The modeling was based on two key assumptions: (1) the current staffing level and (2) the current number of inspection booths staffed for each POE. According to preliminary DHS modeling exercises, small incremental increases in average inspection times at some high-volume land POEs could significantly increase average wait times. Moreover, any changes to decisions about which foreign travelers are subject to US-VISIT could significantly affect these assumptions and thus near-term facility requirements. OMB Circular Number A-11, part 7, requires that investments in major systems be implemented incrementally, with each increment delivering tangible and measurable benefits. Incremental investment involves justifying investment in each increment on the basis of benefits, costs, and risks. Although DHS is pursuing US-VISIT incrementally, it has not defined incremental costs and benefits to justify its proposed investments in each increment. In the case of Increment 1, DHS’ 2003 expenditure plan stated that this increment would provide “immediate benefits,” but it did not describe them. Instead, it described capabilities to be provided, such as the ability to determine whether a foreign national should be admitted and to perform checks against watch lists. It did not describe in meaningful terms the benefits that are to result from implementation of these capabilities (e.g., X percent reduction in inspection times or Y percent reduction in false positive matches against watch lists). Also, DHS did not identify the estimated cost of Increment 1. The Program Director told us that the $375 million requested in the 2003 plan included not only all the funding required for Increment 1, but also funding for later increments. However, the plan did not separate the funds by increment, and program officials did not provide this information. While DHS developed a benefits and cost analysis for the former entry exit program in February 2003, this analysis had limitations, such as an absence of meaningful benefit descriptions. Program officials acknowledged that this analysis is out of date and is not reflective of current US-VISIT plans. According to these officials, an updated analysis will be issued in the very near future. Without a reliable understanding of whether near-term increments will produce mission value justifying its costs and whether known risks can be effectively mitigated, DHS is investing in and implementing near-term solutions that have not been adequately justified. To the credit of the hard-working and dedicated staff working on the program, an initial US-VISIT operating capability was deployed to major air and selected sea POEs at the beginning of this year. However, the US- VISIT program still faces the risk factors described in this testimony, each of which will be discussed in our soon to be released report. To address these risk factors, our published reports presented several recommendations regarding the US-VISIT program, including ensure that future expenditure plans fully disclose US-VISIT system capabilities, schedule, cost, and benefits to be delivered; determine whether proposed US-VISIT increments will produce mission value commensurate with costs and risks; define performance standards for each increment that are measurable and reflect the limitations imposed by relying on existing systems; develop a risk management plan and regularly report all high risks; develop and implement a plan for satisfying key acquisition management controls and implement these in accordance with Software Engineering Institute guidance; ensure that human capital and financial resources are provided to establish a fully functional and effective US-VISIT program office; define program office positions, roles, and responsibilities; and develop and implement a human capital strategy for the program office that provides for staffing positions with individuals who have the appropriate knowledge, skills, and abilities. Unless DHS addresses the risk factors described in this testimony, successful deployment of US-VISIT increments is doubtful, because achieving success will depend too much on heroic efforts by the people involved, rather than being the predictable outcome of sound investment and acquisition management capabilities. Mr. Chairman, this concludes our statement. We would be happy to answer any questions that you or members of the committee may have at this time. If you should have any questions about this testimony, please contact Randolph C. Hite at (202) 512-3870 or [email protected]. Other major contributors to this testimony included Barbara Collier, Deborah Davis, Tamra Goldstein, David Hinchman, and Jessica Waselkow. 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. | US-VISIT (United States Visitor and Immigrant Status Indicator Technology) is a governmentwide program to enhance national security, facilitate legitimate trade and travel, contribute to the integrity of the U.S. immigration system, and adhere to U.S. privacy laws and policies by (1) collecting, maintaining, and sharing information on certain foreign nationals who enter and exit the United States; (2) identifying foreign nationals who (1) have overstayed or violated the terms of their visit; (2) can receive, extend, or adjust their immigration status; or (3) should be apprehended or detained by law enforcement officials; (3) detecting fraudulent travel documents, verifying traveler identity, and determining traveler admissibility through the use of biometrics; and (4) facilitating information sharing and coordination within the border management community. GAO was asked to testify on its completed work on the nature, status, and management of the USVISIT program. The US-VISIT program is inherently risky, both because of the type of program it is and because of the way it is being managed. First, US-VISIT is inherently risky because it is to perform a critical, multifaceted mission, its scope is large and complex, it must meet a demanding implementation schedule, and its potential cost is enormous. That is, one critical aspect of the program's mission is to prevent the entry of persons who pose a threat to the United States; failing in this mission could have serious consequences. To carry out this mission, the program aims to control the pre-entry, entry, status, and exit of millions of travelers--a large and complex process. In addition, through legislative mandate, it has challenging milestones (such as the system being implemented at all U.S. ports of entry by December 31, 2005). Finally, DHS estimated that the program would cost $7.2 billion through fiscal year 2014, but this estimate did not include all costs and underestimated some others. All these factors add risk. Second, several factors related to the program's management increase the risk of not delivering mission valued commensurate with costs or not delivering defined program capabilities on time and within budget. For example, the program is to rely initially on integrating existing systems with reported problems that could limit US-VISIT performance. In addition, the requirements for interim facilities at high-volume land ports of entry are not only demanding, they are based on assumptions that, if altered, could significantly affect facility plans. Further, DHS did not define the benefits versus costs of near-term program increments (that is, the interim versions of the program that are being pursued while the final version is being defined). Addressing these issues is the responsibility of the program office, which however was not adequately staffed, had not clearly defined roles and responsibilities for its staff, and had not established key processes for managing the acquisition and deployment of US-VISIT. Despite the program management challenges confronting US-VISIT, the first increment was deployed at the beginning of this year. However, the program still faces a number of risks, including the ones described above. To address these, GAO has made a series of recommendations regarding the planned scope of US-VISIT and its management. Addressing the identified risks increases the likelihood that the deployment of US-VISIT will be successful--the predictable outcome of sound management of a welljustified and designed program. |
Title I of HIPAA established standards for health coverage access, portability, and renewability that apply to employer-sponsored plans in the group market and, to a more limited extent, to the individual market.Group market provisions include limitations on preexisting condition exclusion periods; a requirement that previous coverage be credited to reduce or eliminate a new employee’s preexisting condition exclusion period; restrictions against excluding an employee from the health plan on the basis of his or her health status; and special enrollment opportunities for certain employees, such as those who did not enroll because they were previously covered under a spouse’s health plan. With limited exceptions, carriers must renew all group coverage at the employer’s request, regardless of the health status or historic health costs of the employee members. HIPAA also requires carriers in the small group market to guarantee coverage to all small employers (defined as those with 2 to 50 employees) that apply. In the individual market, HIPAA guarantees that eligible individuals losing group coverage have access to at least two individual market insurance products. This provision is referred to as group-to-individual portability. States may comply with this provision using either the federal rules—which require individual market carriers to guarantee access to certain insurance policies to eligible individuals—or an “alternative mechanism.” Under an alternative mechanism, states may, within broad federal parameters, design other approaches to provide eligible individuals with a choice of coverage. Twelve states are operating under the federal rules, and 38 are using an alternative mechanism. Of the latter, 22 are using a high-risk pool to provide coverage to these eligible individuals. A high-risk pool is a state entity that offers comprehensive health insurance to individuals with preexisting health conditions who are otherwise unable to obtain coverage in the individual market or who may be able to obtain coverage only at a cost-prohibitive rate. (App. II contains a summary of HIPAA access, portability, and renewability standards by market segment.) HIPAA was signed into law on August 21, 1996, and by the end of June 1998, all substantive provisions were effective for almost all plans. HIPAA regulations were issued on an interim final basis, and federal agencies issued most of the implementing regulations on April 8, 1997. Enhancements and clarifications to the regulations followed and will continue in 1999. Officials expect to finalize HIPAA regulations in 2000. Finally, after HIPAA was enacted, three additional federal laws—the Mental Health Parity Act (MHPA), the Newborns’ and Mothers’ Health Protection Act, and the Women’s Health and Cancer Rights Act (WHCRA)—imposed federal standards on private insurance coverage of mental health, maternity and newborn, and reconstruction after mastectomy benefits. Carrier and employer officials we interviewed expressed concerns about the lead time given them to comply with HIPAA and subsequent federal insurance reforms. The adoption of the new standards requires issuers to perform various tasks, including educating staff, issuing notices to enrollees, revising premium prices and marketing materials, and retooling information systems. Carrier officials consistently said that such changes require at least 6 months’ lead time or, preferably, 1 full year. Regulations implementing HIPAA were issued less than 2 months before certain provisions became effective, although carriers and employers have generally overcome the early start-up hurdles. Neither the MHPA nor the WHCRA had statutory provisions that provided for lead times of 6 months or more. Although the MHPA was signed into law in September 1996, its implementing regulations were not issued until December 22, 1997—only 9 days before some group plans became subject to the law. Similarly, while the WHCRA was signed into law on October 21, 1998, issuers were required to begin issuing notices to enrollees less than 3 months later, by January 1, 1999. Federal agencies, recognizing the short lead time, provided for a period during which no MHPA enforcement action would be taken against issuers making a good-faith effort to comply. Responsibility for enforcing HIPAA standards is divided among three federal agencies and the states. The Department of Labor is responsible for ensuring that employer-sponsored group health plans comply with HIPAA—an extension of Labor’s current regulatory role under the Employee Retirement Income Security Act of 1974 (ERISA). In states that do not adopt and enforce statutes or regulations that meet or exceed the HIPAA standards, the Department of Health and Human Services—through HCFA—is responsible for directly enforcing HIPAA standards for carriers in the group and individual markets. The Department of the Treasury enforces HIPAA requirements for group health plans by imposing an excise tax under the Internal Revenue Code as a penalty for noncompliance with the HIPAA standards. In states that have standards that conform to HIPAA, state insurance regulators have primary enforcement authority over insurance carriers. Notwithstanding early start-up challenges, the adoption of HIPAA’s group market access and portability provisions has proceeded relatively well—particularly for larger group plans. Noncompliance with these standards may be more common among smaller group plans. With respect to guaranteed coverage for small employers, quantitative evidence about the effects of the provision does not yet exist, but early evidence suggests that experiences vary considerably among states, in large part on the basis of the extent of pre-HIPAA state reforms. Larger employer plans appear to have adopted HIPAA access and portability provisions relatively easily. The Director of the Department of Labor’s health care task force said the Department has uncovered no systemic problems in the group market related specifically to HIPAA. A senior Labor field official told us that large employers and insurance companies are generally informed about HIPAA and make good-faith efforts to comply, although questions of interpretation still arise. The field office had no formal investigations related to HIPAA pending at the time of our visit in December 1998. Similarly, large employers and health benefit consultants we interviewed reported few ongoing problems in adopting HIPAA portability standards. Many carriers and large employers we interviewed said that their health plans tended to require few changes to comply with HIPAA. This was probably the case because many large employer plans had already incorporated portability protections similar to those of HIPAA. For example, many large employers had not excluded preexisting conditions from coverage before HIPAA became law. Many more have since dropped preexisting condition exclusion periods, partly because of the increased complexity of administering them under HIPAA. Table 1 shows that less than half of all group plans offered by employers with more than 200 employees continue to include preexisting condition exclusion periods.Further, a large midwestern telecommunications company official told us that before HIPAA, the company’s health plans (1) did not exclude preexisting conditions from coverage, (2) did not exclude individuals from the plan because of health status, and (3) provided later enrollment opportunities for those initially declining coverage. Thus, few changes were necessary. The degree of compliance with HIPAA portability provisions among small employer group plans has not been measured, but health insurance agents and regulators suspect noncompliance to be more common among these plans than among medium and large group plans. Whereas medium and large employers rely on carriers, third-party administrators, or a health benefits professional staff to implement HIPAA requirements, small employers may have fewer resources and may rely largely on carriers and agents to learn about changes in health benefits required by law. Further, observations made by health insurance agents and others suggest that some small employers either misunderstand the HIPAA requirements or are entirely unaware of them. In addition, several of the agents we surveyed volunteered that many of their colleagues do not understand HIPAA. An official of a small employer whom we interviewed in California told us an anecdote that illustrates this point. The individual responsible for human resource issues at this company with about 80 employees relied exclusively on the company’s insurance agent to learn about HIPAA’s certificate issuance requirement. The agent told the human resources staff person that certificates need be issued only upon the request of the employee; this is contrary to the law, which requires that certificates be issued automatically to anyone losing coverage. The discrepancy became apparent only as a result of our visit. Moreover, an agent in Florida indicated that perhaps 25 percent of her clients, most commonly the smaller employers, are not in compliance with one or more HIPAA provisions and are not making an effort to comply. Department of Labor officials also expressed concern about compliance among smaller employers. One field office official said that smaller employers know far less than larger employers about HIPAA and are more likely to be in violation of it. This field official is particularly concerned about small employers that self-fund their health plans and do not use the services of a third-party administrator. While this arrangement is not common, such employers have virtually no contact with health benefits professionals and, according to Labor officials, are very likely to be uninformed. Officials from another Labor field office noted that the Department’s experience in overseeing employer pension plans suggests that smaller employers are more likely to be in violation of requirements than larger employers. The extent to which HIPAA’s guaranteed issue provision affects market access for small employers in a given state is largely dependent on the extent of state reforms preceding HIPAA. Most states had already passed laws requiring carriers in the small group market to guarantee access to at least one health insurance plan for any small employer that applied. While most of these state laws were more limited than HIPAA, a substantial minority were equally or more stringent. In 13 states, reforms that preceded HIPAA required all products in the small group market to be guaranteed to be accessible to all small employers, just as HIPAA now does. Moreover, these states defined a small employer at least as inclusively as HIPAA. Therefore, HIPAA imposed virtually no changes in the way small group coverage is sold in these states. In 26 states, existing reforms included small group market guaranteed issue provisions that were more limited than the HIPAA provisions. Often, state reforms defined small employers as having 3 to 25 employees, as opposed to HIPAA’s 2 to 50 employees. These states also imposed the guaranteed issue provision on fewer health plans. Thus, in these states, HIPAA’s impact was to modify, to varying degrees, the existing regulations. In 11 states and the District of Columbia, a guaranteed issue provision applicable to all carriers did not exist in the small group market. Here HIPAA imposed significant changes on the regulation of the small group market. Figure 1 shows the requirements of the 50 states and the District of Columbia for small group guaranteed issue coverage before HIPAA. The effects of HIPAA’s small group market guaranteed issue provision on cost and access to coverage have not been evaluated, and, among the health insurance agents we surveyed, observations on its effects varied widely. Asked a general question about the effects of the provision, 46 percent of the agents we surveyed in states where existing guaranteed issue reforms were more limited than HIPAA’s said that access had improved: for example, the choices of products available to small employers had increased. Agents also noted that, because every small employer has access to every small group product on the market, employers are better able to compare carriers’ products and rates. Conversely, 44 percent of the agents said that HIPAA had not improved access for small groups. Many agents observed that while access is now guaranteed to groups that were previously excluded from coverage—high-risk groups—these groups may be unable to afford the available coverage. Carrier representatives we interviewed generally corroborated agent observations concerning increased comparison shopping by agents among all carrier products and high premiums for high-risk groups. Several carrier representatives said that small group market premiums have risen overall, but these representatives could not determine what proportion of the increase might be attributable to HIPAA’s guaranteed issue provision. Several carrier officials also pointed out that the guaranteed issue requirement limits carriers’ flexibility in designing benefit plans. Because every plan offered must be available to every small employer group, these carriers have reduced the number of plans they offer and are less able to customize plans to specific groups. Further, one carrier was concerned that very small employer groups might change health plans to obtain certain benefits, such as maternity coverage, when one or more individuals in the group needed that coverage. Another carrier cited concerns that very small groups tend to obtain coverage only when it becomes apparent that it will be needed. HIPAA’s group-to-individual portability provision ensures that people who are losing group coverage are guaranteed access to at least two individual market products, although these individuals, if in poor health, will probably pay more than the standard rate. The amount of the premium increase varies considerably. Our survey showed that in states using the federal rules, an individual in poor health would usually pay a premium greater than 200 percent of the standard rate, while in states using a high-risk pool, the increase was never greater than 200 percent of the standard rate. The exact number of individuals relying on this portability right to obtain coverage is difficult to quantify but appears small. HIPAA does not limit the premium price carriers may charge eligible individuals for coverage. Thus, premiums charged to individuals eligible for coverage under HIPAA, especially those in poor health, are often substantially higher than carriers’ standard rates—the rates healthy individuals pay. The extent of the increase in the premium rate is largely dependent upon whether a state restricts the amount carriers can vary premium rates and on the state’s approach to complying with HIPAA’s group-to-individual portability provision. Our premium survey of selected carriers in states using federal rules to guarantee group-to-individual portability under HIPAA showed that a particular individual eligible for HIPAA, with a preexisting condition, would be charged between 100 and 464 percent of the standard rate for a commonly sold product. In terms of monthly premiums, the rates quoted ranged from as low as $149 for a health maintenance organization (HMO) product in California to $951 for a preferred provider organization (PPO) product with a $500 deductible in the District of Columbia. As table 2 shows, the premium quotes provided by almost half of the carriers for this individual were 300 percent or more of their standard rates. As the table demonstrates, carriers in these states almost always charge an individual in poor health who is eligible for coverage under HIPAA a higher-than-standard monthly premium, which is similar to what unhealthy people without HIPAA portability rights experience if accepted for individual coverage in states without premium rate restrictions. Before HIPAA, however, many unhealthy people in these states could have been rejected outright for any type of individual private health insurance or could have faced an exclusion for their preexisting condition. In the 22 states using a high-risk pool as an alternative mechanism,individuals in poor health who are HIPAA-eligible also pay a higher premium, although the amount of the increase is generally less than in the states using federal rules, because the risk-pool coverage is subsidized. All 22 states using their high-risk pool as an alternative mechanism impose a premium cap for coverage in the pool of 200 percent of the standard rate or less, and about half cap premiums at 150 percent of the standard rate or less. The actual cost of covering these individuals is subsidized, most commonly by assessments on carriers. In several of these states, this assessment is offset against state premium or income taxes. As table 3 indicates, monthly premiums for the same individual discussed above for the most commonly sold product in each state ranged from $107 for a $1,000 deductible, fee-for-service plan in Minnesota to $336 for a $1,000 deductible, PPO plan in Louisiana. These premiums in about half of the 22 states were below $200 and between $200 and $336 in the other half. The number of people that rely on HIPAA’s group-to-individual portability provision to obtain coverage is difficult to quantify, particularly in states using the federal rules and states using an alternative mechanism other than a high-risk pool. In these states, carriers and state entities have not undertaken a systematic effort to count these individuals. However, in states using the federal rules, each of three national carriers estimated it had HIPAA enrollment of fewer than 200 individuals. In contrast, most states that use a high-risk pool as an alternative mechanism are able to separately track the enrollment of people eligible for coverage under HIPAA. Enrollment data suggest that the number of individuals relying on their HIPAA portability rights in these states is also relatively low. In 20 states that track HIPAA enrollment, approximately 6,500 HIPAA-eligibles are enrolled in the risk pools—or about 10 percent of the total risk-pool enrollment of over 63,000. Further, high-risk-pool enrollment reaches 1,000 HIPAA-eligibles in only two states. Consumer awareness and understanding of HIPAA remain limited, and those who have heard of the law often believe it provides broader access and protections than it does. Consumers who are unfamiliar with HIPAA may not receive the law’s protections or may make poor choices. Consequently, federal agencies and other entities have undertaken educational efforts that target specific populations—such as those changing jobs or losing group coverage—in an attempt to reach those who are most likely to benefit from HIPAA’s protections. In February 1998, we reported that many consumers misunderstood HIPAA and believed that the federal law provided broader access and protections than it actually does. Over 1 year later, most consumers are still largely unfamiliar with the law, according to agents, carriers, and state regulators. Sixty-five percent of the agents we surveyed indicated that their clients do not understand HIPAA and often approach the agents with questions. Similarly, several carriers and a third-party administrator we interviewed agreed that consumers know little about the law. For example, insurance regulators from two states told us that although consumers may have a vague understanding that HIPAA provides certain health care rights, most consumers are still unaware of specific HIPAA provisions. Consumers often misunderstand (1) the restrictions HIPAA imposes on former group enrollees’ guarantee of access to individual market coverage and (2) HIPAA’s definition of portability. First, for a former group enrollee to be eligible for individual market coverage under HIPAA, the individual must have had at least 18 months of creditable insurance coverage (the most recent coverage must have been through a group) with no break of more than 63 consecutive days; have exhausted any Consolidated Omnibus Budget Reconciliation Act (COBRA) or other continuation coverage available; not be eligible for any other group coverage, or for Medicare or Medicaid; not have lost group coverage because of nonpayment of premiums or fraud. Consumers continue to misunderstand these restrictions, according to agents and carrier officials. For example, one of the agents we surveyed said that out of 10 applications he received for individual coverage from former group enrollees, only 3 qualified for a HIPAA-guaranteed access product. The remaining seven were ineligible for such reasons as failing to select or exhaust COBRA or having a lapse in coverage of more than 63 days. Similarly, data provided by a large carrier suggest that over a quarter of all applicants for HIPAA portability coverage in 1998—61 of 231—were denied because they did not meet one or more of these eligibility criteria. Second, consumers commonly misunderstand the scope of HIPAA’s protections and its definition of portability. According to agents we surveyed, a number of consumers mistakenly believe that HIPAA guarantees access to individual insurance coverage for everyone, including those previously uninsured. Others believe HIPAA eliminates the use of preexisting condition exclusion periods altogether. Still others believe that portability allows them to carry their current health benefits with them when they change or lose jobs, according to regulators. In reality, portability under HIPAA is much more limited and simply means that once an individual has health coverage, time spent under that coverage may be used to reduce or eliminate any preexisting condition exclusion imposed by a subsequent employer’s health plan. Consumers and small employers may not receive HIPAA protections if they do not know they exist and may make poor choices based on ignorance. Although HIPAA may affect relatively few people at any given point, a clear understanding of their rights is imperative for eligible individuals. The following scenarios describe hypothetical cases in which consumers who qualified for HIPAA protections were not aware of their rights and were unable to take advantage of the law’s protections. Employee A has chronic asthma and decided to quit her job to become self-employed. Although she received a certificate of creditable coverage and a notice from her prior employer’s health plan administrator explaining her COBRA continuation-of-coverage rights, she declined COBRA because she perceived it to be expensive and she had heard that HIPAA provided a guarantee of access to coverage in the individual market. Several months later, she approached an agent to obtain coverage. She learned that because she had not elected COBRA and more than 63 days had elapsed since her group coverage expired, she was ineligible for a HIPAA group-to-individual portability product. The agent told her that consequently, most carriers would reject her application for coverage because of her health condition. Moreover, if she obtained coverage, carriers would exclude coverage for her preexisting condition for 1 year. Employee B has chronic back problems and had been continuously insured through his company’s health plan for the past 5 years. During his first 12 months of coverage, all expenses associated with treating his costly back condition were excluded. Employee B changed jobs but never received a certificate of creditable coverage and was not otherwise aware of HIPAA’s portability rights. Without this certificate, which would have documented Employee B’s previous coverage, the new employer applied a preexisting condition exclusion to Employee B, not covering any costs associated with treating his back condition for another full year. Therefore, Employee B incurred an additional year of medical costs for a health condition for which he had previously fulfilled the maximum allowable waiting period. Recognizing that many consumers do not understand their rights under HIPAA, employers, federal agencies, and others have undertaken, to varying degrees, efforts to inform consumers about their rights under HIPAA. Although several employers question the value of extensive education efforts, most have external and internal resources available to respond to consumer inquiries. In addition, federal, state, and other entities are attempting to better target consumer education efforts to individuals who are experiencing a transition in employment so these individuals have access to relevant information when they need it. The extent of employer educational efforts varies, depending largely on the size of the employer and the resources available. Officials of several multistate employers said that their health plans already included many of HIPAA’s protections, and an official from one of these employers said that efforts to provide employees with information specific to HIPAA would only generate confusion. Consequently, in some cases, employers have simply amended their summary plan descriptions to include HIPAA protections and refer employees to this document when they have questions about their coverage. An official from one employer believes more extensive educational efforts are not an efficient use of resources, since HIPAA only affects employees in transition. Some employers noted that their human resources personnel can answer employee questions or conduct interviews with exiting employees, at which time they can explain HIPAA and other federal laws. Some officials emphasized that just as it took several years for consumers to become familiar with COBRA protections, it will take some time for employees to understand their rights under HIPAA. Smaller employers tend to rely on their carriers or their agents to resolve questions and to educate them about changes in federal law. Carriers we interviewed have amended their contracts to comply with the law and have customer service representatives available to answer questions. Further, many carriers have issued notices and educational materials to clarify areas of confusion and to explain HIPAA’s requirements to plan enrollees. Officials at both the Department of Labor and HCFA said that they are attempting to better target consumer education efforts to individuals who are experiencing a transition in employment so that these individuals will have access to relevant information when they need it. For example, the Worker Adjustment and Retraining Notification Act, among other things, requires any employer who intends to order a plant closing or mass layoff to notify state dislocated worker units. Labor has encouraged its regional offices to participate in state dislocated worker programs, allowing Department officials to provide educational materials directly to those individuals in transition. Labor’s regional offices are also encouraged to meet with state insurance departments to discuss HIPAA and other federal laws. Through its education outreach program, Labor has conducted presentations about the law to employers and health associations. Although HCFA does not yet have a coordinated outreach program, the two regional offices we visited plan to coordinate with state programs by distributing HIPAA informational materials at selected sites, such as unemployment, Social Security, and Railroad Retirement Board offices, where people in employment transition often go. Finally, both agencies have Internet sites that contain HIPAA information, have customer service representatives to answer questions, and make educational publications available. States have also undertaken a variety of efforts to better educate consumers about HIPAA, although the extent of these efforts varies among states. At least 20 states have developed consumer information materials that address HIPAA provisions. For example, insurance department officials in Montana have conducted training seminars for agents, large employers, and provider groups, and Oklahoma has incorporated HIPAA information in its continuing education requirement for agents. In addition, a number of states that use their high-risk pool as an alternative mechanism, such as Illinois, have undertaken educational efforts to inform the public about the availability of coverage through the pool. Also, two of the states we visited require carriers to notify consumers whom they decline to cover about the availability of coverage through the pool. In contrast, regulators in California do not believe they have an obligation to inform consumers about changes in federal law, and they emphasized that their primary mission is to regulate insurers. Finally, all of the states we visited have customer service personnel who are available to answer consumer inquiries related to HIPAA or to refer these questions to the appropriate federal authorities. Other entities are also conducting an assortment of educational efforts. Employee benefits consulting firms have assembled educational materials on HIPAA and have sponsored training seminars for employers. Also, Georgetown University’s Institute for Health Care Research and Policy has prepared a consumer guide for each state that explains the protections available to individual consumers and small businesses under HIPAA and state insurance laws. As noted above, HIPAA requires carriers and employers to issue a certificate of creditable coverage that documents the length of prior coverage to all individuals losing health coverage. To help issuers comply with this requirement, federal agencies developed a model certificate that was published in the Federal Register and is available electronically on HCFA and Labor’s Internet sites. Several issuers we interviewed have essentially adopted the model certificate, which, in part, requires information about (1) the date coverage began, or a statement that an individual has at least 18 months of creditable coverage, and (2) the date coverage ended, or whether coverage is continuing, such as through COBRA. (The model certificate is included as app. V.) As an educational tool, however, the model certificate has limitations. First, it does not explicitly inform consumers that they may have a group-to-individual portability right, nor does it highlight any of the restrictions placed on this right. Second, the certificate does not explicitly inform consumers changing jobs that they may not have to fulfill another preexisting condition period under their subsequent employer’s health plan. Consequently, consumers who receive certificates may not understand their purpose and may discard them, never realizing their connection to HIPAA’s access and portability rights. The experiences of employers and carriers seem to indicate that this is indeed the case: according to employer and carrier estimates, few enrollees have a certificate at the time they apply for coverage either because they discarded the certificate provided by a prior employer or carrier or never received one. Carriers and employers continue to question the value of certificates for proving creditable coverage. They point out that since most enrollees do not have a certificate, the law requires carriers and employers to otherwise verify prior coverage, as was generally the practice in states with portability laws predating HIPAA. Moreover, carriers and employers assert that since most employer plans no longer include preexisting condition exclusion clauses, most of the certificates issued are not needed. Finally, employers and carriers indicated that the cost and administrative resources needed to issue a certificate to every departing enrollee pose a significant burden. Carriers and employers would prefer to issue certificates on demand—that is, to only those who request them. Nevertheless, HIPAA currently requires that certificates be issued to all individuals losing health coverage. Individuals who clearly understand their rights under the law are better able to make use of its protections. Regulatory authorities we interviewed agreed that certificates that clearly delineate a consumer’s rights, and the restrictions placed on these rights, could serve as an important educational tool and increase the likelihood that consumers in transition have the information they need to take advantage of their HIPAA rights. HIPAA established a complex regulatory framework in which oversight and enforcement of the law are shared among multiple federal agencies and state regulators. While the law essentially expanded Labor’s existing oversight responsibilities under ERISA, it created a new regulatory role for HCFA. Thus far, HCFA’s enforcement efforts have been limited. Under ERISA, Labor is responsible for ensuring that employer-sponsored group health plans meet certain fiduciary, reporting, and disclosure requirements related to the provision of health benefits. Labor’s approach to identifying noncompliance among ERISA plans has been largely complaint-driven, and investigative and enforcement efforts tend to focus on firms from which patterns of employee complaints are received. HIPAA significantly expanded the complexity of Labor’s health plan oversight role: Labor is now also charged with ensuring that employer plans comply with access and portability standards. While its role in overseeing ERISA plans has expanded, Labor continues to rely on consumer complaints to identify noncompliance. However, recognizing the increased complexity of its role brought about by HIPAA and other federal insurance laws, Labor has attempted to enhance its customer service function and undertake other oversight improvements, as discussed below. Before 1996, Labor’s customer service function was centralized in Washington, D.C. The Department has decentralized customer service staff to its field offices in an effort to be more responsive to employers and employees. In addition, Labor has increased the number of staff dedicated to this purpose. In 1998, Labor added about 9 customer service staff-years to its 1997 levels and will add up to 23 additional staff-years during 1999. (App. III describes the resources Labor estimates it has used in the implementation of HIPAA.) The customer service staff position has evolved from an administrative/clerical position to that of a paraprofessional or professional. Labor’s eventual goal is to have all customer service positions filled by college-educated professionals. The national question/complaint tracking system has been enhanced to better capture information related specifically to HIPAA. Whereas all HIPAA-related questions and complaints were captured under a single category before October 1998, they are now differentiated into separate categories relating to their specific nature. Labor is developing a series of HIPAA compliance review steps to be added to guidelines it uses in investigating employers. These review steps will be followed regardless of the reason for the investigation. Whereas Labor was able to build upon an existing regulatory role, HIPAA created broad new regulatory responsibilities for HCFA. In states that do not adopt and enforce statutes or regulations that meet or exceed HIPAA standards, HCFA is responsible for directly enforcing them. To do this, HCFA has had to assume responsibilities typically undertaken by state insurance regulators, such as providing guidance to carriers, reviewing carrier policy forms, and monitoring carrier marketing practices. To date, HCFA’s regulatory and enforcement activities have been limited primarily to the five states known not to have passed statutes or regulations that fully conform to HIPAA: California, Massachusetts, Michigan, Missouri, and Rhode Island. Further, the extent of HCFA’s efforts within four of the five states remains limited, still consisting largely of responding to consumer queries and complaints. Also, HCFA has yet to comprehensively evaluate the extent to which the other 45 states conform to HIPAA. We reported in July 1998 that the extent of HCFA’s efforts in the direct enforcement states varied. For example, in California, Missouri, and Rhode Island, HCFA developed guidance that delineated state and federal regulatory responsibilities; HCFA also held informational meetings with carriers in Missouri and Rhode Island. Further, while HCFA had begun to review carriers’ policies sold in Missouri to ensure compliance, it had not initiated any regulatory activities beyond responding to consumer inquiries and complaints in Massachusetts and Michigan. Since that report, the extent of HCFA’s enforcement efforts has not dramatically changed; however, HCFA has awarded three external contracts to assist in enforcement tasks, and regional officials have held informational meetings in California. Enforcement efforts in the direct enforcement states remain largely complaint driven except for policy reviews in Missouri where carriers voluntarily submit policies for review. Further, HCFA has not determined the extent to which the remaining states have passed conforming legislation, and regional officials said they are just beginning to determine how they can identify any gaps in state laws and what their role should ultimately be in states in which gaps are identified. Although evidence suggests that most of these states have standards in place that meet or exceed HIPAA requirements, isolated gaps are likely to remain. For example, several officials noted that many states have not adopted the certificate of creditable coverage issuance requirement or a definition of a small group that is consistent with HIPAA’s. HCFA officials acknowledge that the agency has thus far pursued a minimalist approach to regulating under HIPAA and largely attribute their limited efforts to a lack of enforcement regulations and insufficient staff capacity. While HIPAA provides for a civil monetary penalty for noncomplying carriers, the statute is largely silent about the standards and processes by which HCFA will carry out its regulatory role in states. According to agency officials, the enforcement regulations will clearly delineate these standards and processes to the regulated community, thereby enhancing HCFA’s ability to carry out necessary enforcement actions. Although officials had anticipated publishing the regulations by late 1998, they remain unpublished. HCFA officials also attribute their limited efforts to insufficient staff capacity. When HIPAA was originally passed, the Congress did not provide any additional resources for HCFA to implement the provisions of the law. Thus, the agency initially reassigned staff from other functions to assist in HIPAA’s implementation. HCFA did receive a supplemental appropriation of $2.2 million in May 1998. Although these funds allowed the agency to hire and train 22 additional regional staff, including some who have specialized expertise in health insurance, they were not sufficient to allow the agency to move forward with the “full range of HIPAA enforcement activities,” according to the HCFA Administrator. Given the current level of resources, HCFA intends to focus on (1) completing the enforcement regulations and (2) conducting direct enforcement responsibilities in the states that have not passed conforming legislation. According to agency officials, HCFA has not begun to review the insurance laws of the remaining states to determine compliance with HIPAA. (App. IV describes the resources HCFA estimates it has used in the implementation of HIPAA.) Since our February 1998 report, progress has continued in implementing HIPAA. The law’s provisions, which were intended to improve consumers’ access to private health insurance, are now applicable to nearly all group and individual private health plans. Consequently, minimum standards of protection now apply to group (both fully insured and self-funded) and individual insurance coverage sold in all states. As a result of these new federal standards many consumers face fewer preexisting condition exclusions, enrollees should be able to more easily renew their health plans, employees may not be excluded from group health plans on the basis of small employers must have guaranteed access to all coverage sold in the small group market, and high-risk individuals losing group coverage may have better access to either individual health insurance or a subsidized high-risk pool. Nonetheless, some concerns persist. High-risk individuals and some small groups may continue to face high premiums for guaranteed coverage because HIPAA does not constrain carriers’ rating practices beyond existing state laws. Partly because of this, relatively few eligible high-risk individuals who lost group coverage appear to have purchased HIPAA-guaranteed individual insurance. Consumers’ lack of awareness or understanding of HIPAA can in some cases impede their ability to exercise the rights afforded by the law. Federal agencies and others are attempting to target education efforts at consumers in employment transition, but such efforts could take years, as was the case with educating consumers about COBRA. One potentially effective education tool is the certificates of creditable coverage that the law requires be issued to every enrollee who loses insurance coverage. The certificates’ value as an educational tool, however, is diminished because model guidance on these certificates does not explicitly and comprehensively outline the protections provided by HIPAA. Finally, both HCFA and Labor have become better equipped over the last year to oversee compliance with HIPAA. Nonetheless, both agencies recognize that further efforts are needed, including targeting consumer education efforts; proactively ensuring employers’ compliance; and, for HCFA, ensuring that all states’ insurance regulations fully conform with the federal standards. Moreover, HCFA recognizes that its ability to fully perform its new regulatory role will be enhanced when enforcement regulations are issued. Until HCFA issues these regulations, its efforts to guarantee consumers in all states the protections to which they are entitled under HIPAA may be hindered. We recommend that HCFA and the Department of Labor revise the model certificate of creditable health plan coverage to more explicitly inform consumers of their new rights under HIPAA. At a minimum, the model certificate should inform consumers about appropriate contacts for additional information about HIPAA and highlight key provisions and restrictions, including the limits on preexisting condition exclusion periods and the guaranteed renewability of all health coverage, the reduction or elimination of preexisting condition exclusion periods for employees changing jobs, the prohibition against excluding an individual from an employer health plan on the basis of his or her health status, and the guarantee of access to insurance products for certain individuals losing group coverage and the restrictions placed on that guarantee. Also, to ensure that HCFA is able to fully perform its new oversight role under HIPAA, we recommend that the agency promptly promulgate enforcement regulations. HCFA and the Department of Labor commented on a draft of this report and generally agreed with our findings and recommendations. Both HCFA and Labor highlighted recent initiatives to increase outreach and oversight related to HIPAA. For example, the Director of Labor’s Health Care Task Force, Pension and Welfare Benefits Administration, noted that additional outreach efforts have been initiated through partnerships with consumer, labor, and business organizations and that additional materials have been developed to support the agency’s consumer service staff and investigators. For its part, HCFA noted that it has recently hired a new director with expertise in insurance regulation to oversee HIPAA enforcement, submitted the agency’s enforcement regulation for review by the Office of Management and Budget, and expanded the agency’s review of insurers’ policy forms. HCFA also noted that it has begun to review states’ conformance with HIPAA’s provisions and intends to initiate market conduct exams. In addition, HCFA commented that our report should have emphasized some of the agency’s efforts since February 1998, such as obtaining additional funding and staff resources. We addressed HCFA’s fiscal year 1998 supplemental appropriation and the agency’s hiring of additional regional staff in our July 1998 report, as well as on pages 23 and 24 of this report. Both agencies also provided technical comments, which we have incorporated as appropriate. Appendix VI contains the comment letter from HCFA. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies to the Honorable Nancy-Ann Min DeParle, Administrator of the Health Care Financing Administration; the Honorable Alexis M. Herman, Secretary of Labor; and other interested congressional committees and members and agency officials. We will also make copies available to others upon request. The information presented in this report was developed by Susan Anthony, Randy DiRosa, Mary Freeman, and Betty Kirksey under the direction of John Dicken. Please call me at (202) 512-7114 if you have any questions about the information provided in this report. To address our objectives, we visited five states—California, Florida, Illinois, Montana, and Oklahoma—and interviewed regulators, carriers, agents, and employers. We selected these states on the basis of their geographic dispersion and approach to implementing the group-to-individual portability provision of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). With officials in these states, we discussed a multitude of issues, including each state’s implementation of HIPAA provisions, monitoring and enforcement efforts, educational efforts, and challenges faced in implementing the various provisions of the law. We collaborated with the National Association of Health Underwriters to survey agents in 13 states and the District of Columbia that are using the federal rules (or a similar approach) to guarantee eligible individuals group-to-individual portability under HIPAA. In these states, agents obtained premium rate quotes from selected carriers for a commonly sold product for a specified high-risk individual losing group coverage and for a demographically similar, but healthy, individual. In addition, the survey queried agents about consumers’ knowledge of the law and their experiences. We also selected eight states not using the federal rules and surveyed an additional 40 agents to obtain comparable information about consumers’ and agents’ experiences. For states using a high-risk pool to guarantee access for those losing group coverage, we reviewed published enrollment and premium data and interviewed representatives of each state’s risk pool. In addition, we interviewed officials at the Health Care Financing Administration (HCFA) and the Department of Labor to discuss monitoring and enforcement issues and educational efforts undertaken to inform consumers about the law. We also interviewed individuals at national organizations, including the National Association of Insurance Commissioners, the Health Insurance Association of America, the BlueCross BlueShield Association, and the Council for Affordable Health Insurance. In addition, we hosted forums, at which over 25 national insurance carriers discussed their experiences with HIPAA and challenges they faced in its implementation. Finally, we interviewed representatives of research organizations, such as Georgetown University’s Institute for Health Care Research and Policy, and reviewed available literature. To achieve its goals of improving access to and portability and renewability of private health insurance, HIPAA set forth standards that variously apply to the individual small group (2 to 50 employees) and large group (more than 50 employees) markets of all states. Most HIPAA standards became effective on July 1, 1997. However, group plans do not become subject to the applicable standards until their first plan year beginning on or after July 1, 1997. HIPAA’s health coverage access, portability, nondiscrimination, and renewability standards are summarized in table I.1. Small group employer (2 to 50 employees) Large group employer (over 50 employees) HIPAA requires issuers of health coverage to provide certificates of creditable coverage to enrollees whose coverage terminates. The certificates must document the period during which the enrollee was covered so that a subsequent health issuer can credit this time against its preexisting condition exclusion period. The certificates must also document any period during which the enrollee had applied for coverage but was waiting for coverage to take effect—the waiting period—and must include information on an enrollee’s dependents covered under the plan. In the small group market, carriers must make all plans available and issue coverage to any small employer that applies, regardless of the group’s claims history or health status. Under individual market guaranteed access—often referred to as group-to-individual portability—eligible individuals must have guaranteed access to at least two different coverage options. Generally, eligible individuals are defined as those with at least 18 months of prior group coverage who meet several additional requirements. Depending on the option states choose to implement this requirement, coverage may be provided by carriers, through state high-risk insurance pool programs, or in other ways. HIPAA requires that all health plan policies be renewed regardless of the health status or claims experience of plan participants, with limited exceptions. Exceptions include cases of fraud, enrollee failure to pay premiums, enrollee movement out of a plan service area, and the withdrawal of an issuer from the market. Group plan issuers generally may deny, exclude, or limit an enrollee’s benefits arising from a preexisting condition for no more than 12 months following the effective date of coverage. A preexisting condition is defined as a condition for which medical advice, diagnosis, care, or treatment was received or recommended during the 6 months preceding the date of coverage or the first day of the waiting period for coverage. Pregnancy may not be considered a preexisting condition, nor can preexisting conditions be imposed on newborn or adopted children in most cases. Group plan issuers may not exclude a member within the group from coverage on the basis of the individual’s health status or medical history. Similarly, the benefits provided, premiums charged, and contributions to the plan may not vary for similarly situated group plan enrollees on the basis of health status or medical history. Issuers of group coverage must credit an enrollee’s period of prior coverage against the group issuer’s preexisting condition exclusion period. Prior coverage must have been consecutive with no breaks of more than 63 days to be creditable. For example, an individual who has been covered for 6 months and changes employers may be eligible to have the subsequent employer’s plan’s 12-month waiting period for preexisting conditions reduced by 6 months. Time spent in a prior health plan’s waiting period may not count as part of a break in coverage. Individuals who do not enroll for coverage in a group plan during their initial enrollment opportunity may be eligible for a special enrollment period later if they originally declined to enroll because they had other coverage, such as under the Consolidated Omnibus Budget Reconciliation Act (COBRA), or if they were covered as a dependent under a spouse’s coverage and later lost that coverage. In addition, if an enrollee has a new dependent because of marriage or the birth or adoption of a child, the enrollee and dependents may become eligible for coverage during a special enrollment period. HIPAA also includes certain other standards that relate to private health coverage, including limited expansions of COBRA coverage rights, new disclosure requirements for Employee Retirement Income Security Act plans, and new requirements for uniform enrollee and claims information, to be phased in through 1999. Tax law changes authorize federally tax-advantaged medical savings accounts for small employer and self-employed plans. For employers with 50 or more employees that provide mental health benefits, the Mental Health Parity Act requires that the annual and lifetime dollar maximums for mental health be the same as dollar maximums for medical/surgical benefits. The law does not establish a separate lifetime dollar maximum for mental health services. If medical/surgical benefits do not have annual or lifetime dollar maximums, mental health benefits cannot have lifetime maximums. Plans may continue to otherwise set the terms and conditions of mental health coverage, such as by imposing an annual limit on the number of inpatient days, the number of visits, or the percentage of cost-sharing for services. Group plans that can demonstrate that compliance will result in a cost increase of 1 percent or more may be exempt from the law. Under the Newborns’ and Mothers’ Health Protection Act, group health plans may not restrict benefits for any hospital stay in connection with childbirth for the mother or newborn child following a normal vaginal delivery to less than 48 hours, restrict benefits for any hospital stay for a cesarean section to less than 96 hours, or require that a provider obtain authorization from the plan for prescribing any length of stay required. The minimum stays do not apply if the decision to discharge the mother or newborn is made by the mother and her doctor. The Women’s Health and Cancer Rights Act contains protections for breast cancer patients who elect breast reconstruction in connection with a mastectomy. Under the act, reconstructive benefits must include coverage for reconstruction of the breast on which the mastectomy was performed, surgery and reconstruction of the other breast to produce a symmetrical appearance, and prostheses and physical complications at all stages of treatment related to a mastectomy. Benefits under the act may be subject to annual deductibles and coinsurance consistent with those established for other benefits under the plan or coverage. Private Health Insurance: HCFA Cautious in Enforcing Federal HIPAA Standards in States Lacking Conforming Laws (GAO/HEHS-98-217R, July 22, 1998). Implementation of HIPAA: State-Designed Mechanisms for Group-to-Individual Portability (GAO/HEHS-98-161R, May 20, 1998). Health Insurance Standards: Implications of New Federal Law for Consumers, Insurers, Regulators (GAO/T-HEHS-98-114, Mar. 19, 1998). Health Insurance Standards: New Federal Law Creates Challenges for Consumers, Insurers, Regulators (GAO/HEHS-98-67, Feb. 25, 1998). The Health Insurance Portability and Accountability Act of 1996: Early Implementation Concerns (GAO/HEHS-97-200R, Sept. 2, 1997). Private Health Insurance: Millions Relying on Individual Market Face Cost and Coverage Tradeoffs (GAO/HEHS-97-8, Nov. 25, 1996). Health Insurance Portability: Reform Could Ensure Continued Coverage for Up to 25 Million Americans (GAO/HEHS-95-257, Sept. 19, 1995). Health Insurance Regulation: National Portability Standards Would Facilitate Changing Health Plans (GAO/HEHS-95-205, July 18, 1995). Health Insurance Regulation: Variation in Recent State Small Employer Health Insurance Reforms (GAO/HEHS-95-161FS, June 12, 1995). 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. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO provided information on: (1) the implementation status of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) provisions in the group insurance market; (2) the price of coverage for certain individuals losing group insurance; (3) the extent of consumer understanding of HIPAA as well as federal, state, and private efforts undertaken to educate consumers about the law's protections; and (4) federal efforts undertaken to ensure HIPAA compliance. GAO noted that: (1) implementation of HIPAA's insurance standards in the group market has proceeded relatively smoothly--particularly among larger group plans--although carriers and employers continue to express some concerns about certain administrative and interpretive aspects of HIPAA; (2) this ease of transition has occurred partly because many of these group plans had already provided key HIPAA protections before the law was enacted; (3) concerns exist about the extent to which some smaller employers are performing certain required tasks; (4) with respect to HIPAA's requirement that carriers guarantee access to coverage for certain smaller employers, early evidence suggests experiences vary considerably among states, largely depending on the extent of state-level reforms that preceded HIPAA; (5) HIPAA's group-to-individual portability provision ensures that certain consumers who lose group coverage are guaranteed access to at least two individual market insurance products; (6) the so-called HIPAA-eligible individuals who have certain health conditions often pay a higher-than-standard premium for individual coverage, although the amount of the premium increase varies considerably; (7) all but 3 of the 41 carriers GAO surveyed in states using HIPAA standards would charge a HIPAA-eligible with a specified health condition a higher-than-standard rate, and nearly half of these would charge 300 to 464 percent of the standard rate; (8) the average premium for individual coverage for HIPAA-eligibles with a specified health condition that would be charged by the 41 carriers was $381 per month; (9) the 22 states that use a high-risk pool as an alternative to the federal portability standards limit premiums to 200 percent or less of the standard rate, or an average subsidized rate of $221 per month; (10) the exact number of individuals who rely on HIPAA's group-to-individual portability provision to obtain coverage is difficult to determine but appears small according to carrier estimates and risk-pool enrollment figures; (11) consumers' understanding of HIPAA remains limited, and many are largely unfamiliar with the law; (12) federal agencies and others have targeted educational efforts to specific populations in an attempt to reach those most likely to benefit from HIPAA; and (13) HIPAA established a complex regulatory framework in which oversight and enforcement of the law are shared among multiple federal agencies and state regulators. |
FQHCs and RHCs operate under separate programs, both of which were established to increase access to care for low-income people in medically underserved areas. FQHCs are required to provide a comprehensive set of primary care services to any individual, regardless of ability to pay. In addition, a distinguishing feature of FQHCs is that they provide enabling services that help patients gain access to health care, such as outreach, translation, and transportation. FQHCs include community health centers, migrant health centers, public housing programs, health care for the homeless, and other centers and clinics. FQHCs vary considerably based on their location, size of their uninsured and Medicaid populations, revenue mix, market competition, and managed care penetration in the surrounding area. For instance, an FQHC may be located in an urban area with a large uninsured or Medicaid population and high capitated Medicaid managed care penetration, or in a rural area, where it serves as the only source of primary health care for several communities. Currently, there are over 1,200 FQHCs operating over 3,000 delivery sites that provide services to about 11 million people each year. Unlike FQHCs, RHCs are not required to provide services to all individuals; however, they are required to operate in areas that are designated as underserved. RHCs can operate either independently or as parts of larger organizations, such as hospitals, skilled nursing facilities, or home health agencies. RHCs can serve as specialty clinics, focusing their services on particular populations or specialties such as pediatrics or obstetrics and gynecology. There are now approximately 3,500 RHCs. FQHCs and RHCs receive, on average, one-quarter to one-third of their revenues from Medicaid, a joint federal-state program that annually finances health care for more than 40 million low-income Americans. (See fig. 1.) FQHCs primarily rely on Medicaid reimbursement and HRSA grant funds as sources of revenue. From 1996 through 1999, Medicaid dollars per Medicaid patient increased from $348 to $383, while HRSA grant dollars per uninsured FQHC patient declined from $228 to $219. FQHCs also receive revenue from state, local, and private grants; Medicare and other public insurance; and self-pay and commercial insurance. In contrast, RHCs receive a smaller proportion of revenue from Medicaid and a much higher proportion of Medicare, commercial insurance, and self-pay revenue. Prior to BBA, federal law required state Medicaid programs to pay FQHCs and RHCs on a cost-related basis. In determining payments, states required FQHCs and RHCs to submit cost reports. States reviewed these cost reports to determine which reported costs were allowable (related to providing services to Medicaid beneficiaries) and reasonable (not an excessive amount for a type of cost or service). For purposes of reimbursing FQHCs and RHCs for services, the Medicaid statute directs states to follow the Medicare statute and regulations. The Medicare regulations provide guidance on the types of allowable costs, citing activities such as compensation for physicians and other staff, supplies, administrative overhead, and other items. With regard to reasonableness of cost, states may set limits, or in the case of RHCs, may rely on Medicare limits on the cost of providing a service. These limits can include a ceiling on recognized costs per service, such as a medical visit, or a limit on a type of cost, such as administrative costs. Since regulations require payments to be based on actual costs—which could only be reported after the close of an FQHC’s or RHC’s fiscal year— states generally made interim payments to FQHCs and RHCs throughout the year and subsequently adjusted these payments after actual cost reports were filed. The regulations state that these interim payments to FQHCs and RHCs are subject to reconciliation, which generally occurred after the submission of a cost report. During reconciliation, the total amount of reasonable costs was determined and compared to the interim payments that the FQHCs or RHCs received, and the state Medicaid program either paid any shortfall or recouped any overage. BBA gave states the option of phasing out cost-based reimbursement by percentage reductions in reasonable costs reimbursed—to 95 percent of an FQHC’s or RHC’s reasonable costs in 2000, 90 percent in 2001, 85 percent in 2002, and 70 percent in 2003—and discontinuing the cost-based reimbursement requirement after 2003. States were simultaneously required to make supplemental payments to FQHCs and RHCs that served capitated Medicaid managed care plan enrollees. Under BBA, states were required to compare the aggregate managed care plans’ payments to the amount that an FQHC or RHC would receive under the cost-based reimbursement methodology. In the event that total managed care payments were less, states were expected to provide supplemental payments to FQHCs and RHCs to make up the difference. BBRA slowed the phase out of cost-based reimbursement, freezing allowed reductions at 95 percent for 2001 and 2002. It allowed states to resume reductions to 90 percent of costs in 2003, 85 percent of costs for 2004, and a complete phase out of the cost-based reimbursement requirement in 2005. BBRA also extended requirements for supplemental payments through 2004 for FQHCs and RHCs participating in capitated Medicaid managed care. BIPA specified a new nationwide PPS to reimburse FQHCs and RHCs for Medicaid visits. An FQHC’s or RHC’s PPS rate is the average of its own 1999 and 2000 reasonable costs per visit, effective for services provided beginning January 1, 2001. For future years’ payments, this amount will be adjusted annually for inflation. In addition to this annual adjustment, BIPA requires that payments to FQHCs and RHCs be adjusted in the event of any increase or decrease in the scope of services furnished. States also may receive approval from HCFA to use an alternative system if they can demonstrate that the alternative payment methodology used results in rates no lower than the prospective system’s minimum payment and if the FQHC or RHC agrees to its use. In fulfilling prior federal requirements to use cost-based reimbursement for FQHCs and RHCs, many states controlled payment rates by imposing limits on costs considered reasonable. States generally reported using three types of spending limits—setting overall caps, limiting administrative costs, or setting performance standards—in defining reasonable costs. As a result, not all costs incurred by FQHCs, RHCs, or both were reimbursed. A few states did not reconcile costs—that is, compare the total Medicaid reimbursement with the total amount of Medicaid payments for a reporting period and settle any over- or under-payments—as required by HCFA regulation. BBA contained two major provisions regarding Medicaid reimbursement for FQHCs and RHCs: allowing states to reduce the percentage of reasonable cost reimbursed and mandating that states make supplemental payments. With regard to the first provision, most states did not choose to modify their payment practices and reduce the percentage of reasonable costs reimbursed. With regard to the second provision, 38 states and the District of Columbia were subject to the BBA requirement to provide supplemental payments to FQHCs and RHCs that were contracting with capitated Medicaid managed care plans in the event that plan payments were less than what these FQHCs and RHCs would have received under cost-based reimbursement. Many states’ Medicaid programs reported imposing one or more limits in defining FQHCs’ and RHCs’ reasonable costs. These limits can significantly affect what FQHCs and RHCs are paid. While most states employed a retrospective system that reconciled reimbursement with actual reasonable costs, at least seven states based payments for FQHCs, RHCs, or both on a prior period’s reasonable costs, and most adjusted them for inflation without a reconciliation process—a practice that is inconsistent with HCFA reconciliation regulations. For FQHCs, states reported using three types of limits in defining reasonable costs: setting overall caps, setting performance standards, or limiting administrative costs. Twenty-four states reported limits on how much they reimbursed for a patient’s visit, sometimes by comparing FQHCs’ costs across the state to establish a cap. Alabama and Florida, for example, limited reasonable costs to the 80th percentile of FQHCs’ costs per visit, while Maryland limited reasonable costs by establishing an overall cap at 115 percent of the median cost per visit across FQHCs. Twelve states limited reasonable costs by setting performance or productivity standards. For instance, some states stipulated the number of visits per year that a full-time-equivalent physician should provide; similar guidelines were used for nurse practitioners and physician assistants. Similarly, New Jersey required a certain number of visits per hour for physicians and other medical personnel. Ten states reported limits on administrative costs, disallowing administrative costs exceeding 30 to 45 percent of total costs. For example, Maryland limited the amount of administrative costs reimbursed to one-third of total costs, while Wisconsin did not reimburse administrative costs in excess of 30 percent of the center’s total costs. With regard to RHCs, 32 of the 45 states with RHCs reported relying on Medicare’s payment methodology for determining reasonable costs. Medicare payment policies include both an overall cap and a performance or productivity standard. In 2000, the Medicare payment cap for RHCs was $61.85 per visit. As noted above, HCFA regulations provide that Medicaid interim payments to FQHCs and RHCs are subject to reconciliation based on actual reasonable costs. Most states reimbursed FQHCs and RHCs under a retrospective system that includes interim payments based on estimated costs and a year-end reconciliation process to account for differences in reimbursement and actual reasonable costs. However, seven states (Colorado, Connecticut, Delaware, Florida, Maryland, New York, and Rhode Island) and the District of Columbia reported setting payment rates for FQHCs based on a prior year’s costs with most adjusting for inflation— essentially establishing prospectively determined rates. The difference between these states’ processes and states with end-of-year reconciliation is illustrated in figure 2. Four of the seven states—Delaware, Maryland, New York, and Rhode Island—were granted a waiver of the reconciliation requirement under Section 1115 of the Social Security Act. However, the remaining three states—Colorado, Connecticut, and Florida—and the District of Columbia were not in compliance with the reconciliation regulation since they did not reconcile with their FQHCs and RHCs and did not obtain a waiver of this requirement. Most states chose not to reduce their reimbursements to FQHCs and RHCs as allowed by BBA. According to our survey, five states and the District of Columbia chose to implement the BBA reduction to 95 percent of reasonable costs for their FQHCs, RHCs, or both. Alabama, Minnesota, and Nevada reduced payments to both FQHCs and RHCs. Connecticut and the District of Columbia reduced payments to FQHCs, while Maine did so for RHCs. As required by BBA, states with capitated managed care plans did make supplemental payments to FQHCs or RHCs or received a waiver from HCFA from this requirement. These supplemental payments were to make up the difference between the reimbursement FQHCs and RHCs received from managed care organizations and what they would have received under cost-based reimbursement. Not all states were required to make supplemental payments. Thirty-eight states and the District of Columbia were subject to this BBA requirement, while the remaining 12 states received approval from HCFA to waive supplemental payments. (See fig. 3.) Of the 38 states and the District of Columbia that were subject to the BBA requirement for supplemental payments, 12 states did not have capitated Medicaid managed care, so the BBA policy did not affect them. Twenty- five of the remaining 26 states and the District of Columbia made supplemental payments to FQHCs participating in Medicaid managed care, while 16 states made payments to RHCs. Fewer RHCs qualified for supplemental payments because many operated in areas that did not have managed care. (App. II shows states’ practices with regard to supplemental payments.) The 12 states that have received approval to waive supplemental payments are operating under Section 1115 waivers, under which HCFA can allow states to waive most federal Medicaid requirements for a demonstration project that is likely to assist in promoting program objectives. Of the 12 states with waivers, 4 states—Arizona, Hawaii, New York, and Rhode Island—made supplemental payments, but not the full amount that would be required under BBA. New York, for example, provided varying percentages of the difference between reasonable costs and managed care payments, depending on when mandatory managed care enrollment began in the county where the FQHC is located. New York reimbursed FQHCs 90 percent of the difference during the first year of mandatory managed care and 50 percent in subsequent years. RHCs in New York received supplemental payments only if (1) at least 50 percent of the RHC’s visits were provided to Medicaid beneficiaries or (2) 60 percent of the visits were provided to Medicaid beneficiaries and indigent persons; as of April 2001, no RHCs had qualified under this provision. In Rhode Island, supplemental payments were unrelated to the costs of an FQHC or RHC; instead, the state legislature allocated funds that were distributed to FQHCs and RHCs based on a set per-member-per-month amount. BIPA established a new nationwide PPS for Medicaid that is likely to constrain future payments. In particular, some FQHCs and RHCs may receive Medicaid payment increases that are lower than what they have received in the past. Ultimately, an FQHC’s or RHC’s ability to manage under the new PPS will depend on its initial payment rate, and changes it can make to keep its cost growth at or below the inflation index. All states—including those with 1115 waivers—will have to comply with the new payment system requirement established by BIPA. Under this new system, an FQHC’s or RHC’s prospective payment rate is the average of its own 1999 and 2000 reasonable costs per visit, which will be updated for inflation in future years. These initial rates became effective for services provided beginning January 1, 2001. States may receive approval from HCFA to use an alternative system to reimburse some or all of their FQHCs and RHCs, if they can demonstrate that the alternative payment methodology would result in rates no lower than the prospective system’s minimum payment and if the FQHC or RHC agrees to the alternative methodology. In addition, BIPA requires that we assess the need for adjusting the initial rate for FQHCs and RHCs. States can continue to use their prior methods of determining reasonable costs in establishing the 2001 payment rate under the PPS. Under these circumstances, the initial PPS rates would reflect average 1999 and 2000 per-visit reasonable costs rather than the actual costs incurred by the FQHC or RHC. For the FQHCs and RHCs in the states that have applied limits in determining reasonable costs, this could result in 2001 PPS rates well below their actual costs. In contrast, the 2001 PPS rate for FQHCs and RHCs in states that did not incorporate reasonable cost limits—or that have costs below their states’ overall caps—will be closer to their actual costs. Further, the 2001 PPS rate will not be updated for inflation from 1999 through 2001. This could mean that most FQHCs and RHCs would receive lower per-visit payments in 2001 than in the prior year. BIPA does require the rates for 2002 be adjusted for inflation using the Medicare Economic Index for primary care services (MEI-PC). This adjustment will be the only automatic annual modification of Medicaid rates to reflect increasing costs. If changes in patients’ needs or other factors result in costs increasing more than the index, those additional costs will not result automatically in higher Medicaid rates as they did under the prior state systems. The MEI-PC has increased less than other measures of inflation, making the Medicaid payment increases under the PPS less than what some states have used in the past. For example, four states that previously set prospective rates using a prior year’s cost updated for inflation used inflation indexes that have grown faster than the MEI-PC. (See table 1.) The PPS created by BIPA provides stronger control over state payments to FQHCs and RHCs than the previously required cost-based systems by limiting per-visit payment increases to what appears to be a historically low measure of inflation. It also creates incentives and pressures for FQHCs and RHCs to operate efficiently. However, the pressure on individual FQHCs and RHCs to control or reduce costs, created by the PPS, could vary considerably. If payment increases lag behind necessary cost increases, FQHCs and RHCs with low average costs may have less ability to keep future costs at or below their payment rates than higher cost centers. FQHCs’ and RHCs’ ability to manage under the new PPS will depend on their initial rate and their ability to keep cost growth at or below the inflation index. For example, FQHCs and RHCs that had a low volume of visits and high per-visit costs when the rates were established may be better able to manage by increasing service volume to lower their per-visit costs. FQHCs and RHCs with low initial per-visit costs, however, may have more difficulties. To the extent that lower initial per-visit costs already reflect greater efficiency, there may be fewer options for an efficient FQHC or RHC to adapt to necessary cost increases not reflected in the inflation index. FQHCs and RHCs that face an increasingly complex mix of patients may be also disadvantaged as the PPS incorporates payment increases only related to inflation or changes in scope of service. Because of their heightened reliance on Medicaid, FQHCs are likely to be more affected than RHCs by the new payment system. As noted earlier, grant dollars per uninsured FQHC patient have been declining, making Medicaid reimbursement even more critical to FQHC operations. In part because of their mandate to preserve and expand necessary primary care health services, FQHCs and RHCs have received reimbursement based on their costs in an effort to ensure adequate payment. However, this approach does little to encourage efficiency. The new payment system mandated by BIPA attempts to ensure adequacy by basing payments on historical rates while promoting efficiency by limiting increases. However, the combination of reimbursement limits imposed historically by many states and the inflation adjustments in the new PPS may constrain future Medicaid payment to some FQHCs and RHCs. Finding a mechanism to strike the proper balance between payment adequacy and incentives for efficiency has been, and will likely be, a challenge. We provided HHS an opportunity to comment on a draft of this report. In its comments, HHS generally concurred that the new BIPA PPS has the potential to limit payments to FQHCs and RHCs. Although HHS stated that the BIPA payment system may result in higher payments than the staged phase out of cost-based reimbursement, as we note in the report, we found that few states had taken action aimed at making reductions in cost-based reimbursement. HHS also agreed that the effects of the new system would vary among FQHCs and RHCs, and that FQHCs and RHCs that are already operating efficiently could be penalized. HHS suggested that we place greater emphasis on three aspects of the BIPA PPS. In particular, HHS suggested that we include more discussion about potential adjustments to the base rate in addition to those for inflation. We have done so by including additional reference to BIPA’s provision that rates should be adjusted to account for a change in the scope of service. Second, HHS suggested that we place greater emphasis on states’ ability to implement an alternative payment methodology under BIPA, which may result in higher payments to FQHCs and RHCs. Our draft report already recognized that payments under the alternative methodology can be no lower than payments under the PPS, and we have not changed the report. Third, HHS requested that we emphasize that states cannot impose a stricter definition of reasonable costs in establishing 2001 payment rates than they had under the prior reimbursement system. We have no basis to question HHS’ position, but because BIPA does not include explicit language to that effect, we have not modified the report. HHS also provided technical comments, which we incorporated where appropriate. HHS’ comments are provided in appendix III. We are sending copies of this report to the Secretary of Health and Human Services and other interested parties. We will also make copies available to others on request. If you or your staffs have questions about this report, please contact me or Janet Heinrich at (202) 512-7114. An additional GAO contact and the names of other staff who made key contributions to this report are listed in appendix IV. To describe how states implemented cost-based reimbursement and the extent to which states’ practices changed as a result of BBA, we surveyed Medicaid officials in the 50 states and the District of Columbia regarding their FQHC and RHC reimbursement policies. We analyzed responses to our mail survey from all 50 states and the District of Columbia regarding whether states were phasing out or continuing cost-based reimbursement or had a waiver of the cost-based reimbursement requirement, states’ reimbursement practices, managed care participation and supplemental payments, and general information on other funding sources. Additionally, we interviewed representatives from 12 state Primary Care Associations, which are private, nonprofit membership organizations that receive grant funds from HRSA. We also analyzed national demographic, financial, and utilization information on FQHCs using HRSA’s Uniform Data System (UDS) for 1996 through 1999. We conducted site visits in five states: Michigan, New York, Ohio, Oklahoma, and Rhode Island. We selected these states because they had (1) unique reimbursement methodologies, (2) rural and/or urban populations, or (3) different levels of managed care penetration. These states also varied in their policies regarding supplemental payments, ranging from making the full payments required by BBA to having received approval to waive supplemental payments entirely. Within each state, we interviewed representatives from the Medicaid office and Medicaid managed care organizations. We also met with officials from eight FQHCs and nine RHCs. To assess the impact of the new PPS enacted under BIPA for 2001, we examined BIPA in light of previous statutes regarding Medicaid reimbursement for FQHCs and RHCs and HCFA regulations applicable to the new statute. We examined the indexes used by four states– Connecticut, Colorado, Delaware, and Florida—from 1996 through 1999 and compared them to the annual inflation adjustments specified in BIPA. Our work was conducted from May 2000 through May 2001 in accordance with generally accepted government auditing standards. Table 2 shows states’ practices regarding the provision of supplemental payments to FQHCs and RHCs participating in capitated Medicaid managed care. As shown below, 25 states and the District of Columbia have made supplemental payments to FQHCs as required by BBA. Additionally, four states have made payments to FQHCs that are not the full amount required under BBA since the states have 1115 waivers. RHCs have received supplemental payments as required by BBA in 16 states, while 2 states with 1115 waivers have made some level of payment to RHCs. The remaining states do not make supplemental payments to FQHCs or RHCs because there is no capitated Medicaid managed care in the state, no FQHCs or RHCs contract with Medicaid managed care organizations, or the state has an 1115 waiver and thus is not required to make supplemental payments. Catina Bradley, Barbara Chapman, Michelle Rosenberg, Behn Miller, Sharon Brigner, Anne Dievler, and Evan Stoll made key contributions to this report. Health Care Access: Programs for Underserved Populations Could Be Improved (GAO/T-HEHS-00-81, Mar. 23, 2000). Community Health Centers: Adapting to Changing Health Care Environment Key to Continued Success (GAO/HEHS-00-39, Mar. 10, 2000). Health Care Access: Opportunities to Target Programs and Improve Accountability (GAO/T-HEHS-97-204, Sept. 11, 1997). Rural Health Clinics: Rising Program Expenditures Not Focused on Improving Care in Isolated Areas (GAO/HEHS-97-24, Nov. 22, 1996). | To increase the accessibility of primary and preventive health services for low-income people living in medically underserved areas, Congress made federally qualified health centers and rural health clinics eligible for Medicaid payments. Since 1989, federal law has required Medicaid to reimburse both the centers and the clinics on the basis of reasonable costs they incurred in providing services to beneficiaries. Cost-based reimbursement can ensure that service providers are reimbursed for necessary costs; it is also regarded as inflationary because providers can increase their payments by raising their costs. In part because of their mandate to preserve and expand necessary primary health care services, the centers and the clinics have traditionally been reimbursed on the basis of their costs in an effort to ensure adequate payment. However, this approach does little to encourage efficiency. The new payment system mandated by the Benefits Improvement and Protection Act attempts to ensure adequacy by basing payments on historical rates while promoting efficiency by limiting increases. However, the combination of reimbursement limits imposed historically by most states and the inflation adjustments in the new prospective payment system may contain future Medicaid payment to some centers and clinics. Finding a way to strike the proper balance between payment adequacy and incentives for efficiency has been, and will likely be, a challenge. |
ORA, under the direction of the Associate Commissioner for Regulatory Affairs, is responsible for carrying out FDA’s mission to ensure that foods, cosmetics, and medical products are safe, effective, and properly promoted and labeled. ORA provides a central point to which headquarters officials can turn for field support services. It also exercises direct line authority over field operations, which are generally divided into four branches: investigations, laboratory, compliance, and administrative management. Product sampling and analyses are conducted primarily in the field by ORA’s 21 district offices. Each office is headed by a district director responsible for operations. ORA’s laboratories play a major role in protecting consumers from unsafe, ineffective, and mislabeled products. They provide a scientific base to support ORA enforcement and regulatory activity. The laboratories test thousands of product samples annually for possible violations of federal laws. ORA operates 18 field laboratories nationwide, including 1 in Puerto Rico, which FDA either owns or leases from the commercial sector or from the General Services Administration (GSA). (See fig. 1.) The laboratories, which are collocated with district offices, provide two program functions: (1) surveillance and compliance and (2) research. Surveillance and compliance functions are conducted by investigators and laboratory analysts who inspect and investigate domestic establishments and imports; sample, collect, and analyze products; monitor compliance with existing regulations; initiate legal actions when health hazards are detected; and respond to crises, such as consumer tampering. Enforcement decisions are supported by research activities, such as identifying potential health hazards and developing efficient and effective laboratory testing methods. ORA spends about $17 million per year, excluding salaries, to operate its laboratories. The field locations employ about 650 operating personnel—which include chemists, microbiologists, entomologists, research analysts, engineers, and physicists—and about 275 support personnel. ORA refers to the plan for the proposed laboratory structure as ORA 21. According to ORA management, the plan is designed to be a flexible blueprint for the future, allowing for changes to be made as necessary, with a 20-year implementation period extending to the year 2014. The laboratory structure under the plan includes the following: five mega-labs located in New York City, New York; Atlanta, Georgia; Los Angeles, California; Seattle, Washington; and Jefferson, Arkansas, which will be expected to perform all laboratory functions; and four special-purpose laboratories located in Winchester, Massachusetts (radionuclide analysis and engineering center); Cincinnati, Ohio (forensic chemistry center); Philadelphia, Pennsylvania (drug analysis center); and San Juan, Puerto Rico (drug analysis center). Table 2 shows the expected laboratory closures and their scheduled closing dates. ORA was led to consider laboratory alternatives when it decided that many of its once state-of-the-art field laboratories built in the 1960s had become obsolete. Over the years, FDA management has considered several options for replacing these facilities, from one-for-one replacement to consolidation. In a 1986 consolidation plan, FDA proposed closing five laboratories to reduce the total capacity of its field laboratory system by about one-third.In the early 1990s, ORA considered one-for-one replacement of these labs. For example, in 1991 and 1992, ORA had planned to construct new labs in New York and Baltimore, respectively. However, changes to the government’s policy in 1992 precluded FDA from using GSA’s federal building fund to acquire new construction projects. This caused ORA to reconsider its overall restructuring strategy. Accordingly, when ORA senior staff met in January 1993, they decided to examine how to most effectively and efficiently meet ORA’s laboratory needs for the 21st century. To accomplish this, ORA established the Working Analysts’ Advisory Group (WAAG) in the summer of 1993 and the Laboratory Directors’ Steering Committee in the fall of 1993. The members of these groups included laboratory analysts and directors, a field science adviser, and a representative of FDA’s Division of Field Science. Also, during a strategic planning meeting in October 1993, the Associate Commissioner for Regulatory Affairs requested that the Regional Food and Drug Director for the Pacific Region develop an options paper to change ORA’s field organizational alignment, including the laboratory structure, by the year 2004. To evaluate the current field laboratory structure and to suggest modifications to it, the two committees assessed many issues, including positive and negative aspects of the current laboratories and other factors relevant to the selection of laboratory locations. The two groups presented their recommendations to ORA senior staff. WAAG recommended that the 18 laboratories remain open and receive adequate funding support, while the Laboratory Directors’ Steering Committee recommended that the 18 laboratories be reduced to 13. The committee noted, however, that it had recommended closing some laboratories because the field structure was overwhelmed with work due to overall staff attrition. According to one committee member, if FDA had adequately staffed each laboratory, the committee would not have recommended certain ones for closure. In December 1993, the Director for the Pacific Region issued the options paper, “Reorganizations of ORA for the 21st Century.” The paper presented five options for restructuring the field laboratories. The options ranged from maintaining the status quo to restructuring using various consolidation options. The recommendations made by WAAG and the Steering Committee were incorporated into the paper’s options and presented to ORA senior management before an ORA senior staff meeting in January 1994. Participants in the ORA senior staff meeting discussed and reviewed each option and reached a consensus to consolidate the laboratories by creating five multipurpose mega-labs and four special-purpose labs. (See fig. 2.) ORA’s analysis showed that its consolidation option saved money compared with continuing with the present structure by replacing labs when current leases expire. However, we found that ORA made assumptions that may have inflated the projected costs of replacing several laboratories. ORA compared the costs of two options—consolidating laboratories as proposed (ORA 21) and replacing all laboratories as their leases expire. The replacement option assumes using leased property; the consolidation plan envisions that three of the mega-lab facilities (in Los Angeles, Seattle, and Jefferson, Arkansas) would be government owned. The costs estimated for consolidating versus replacing all the laboratories were about $950 million and $1.041 billion, respectively. Using these figures, ORA projected that the savings from its consolidation plan would be about $91 millon over a 20-year period. ORA’s assumption that it would have to lease space to replace existing laboratories was based on the federal budgetary process. Under budget score-keeping rules, outlays are generally scored on a cash basis when they occur. Therefore, the full construction cost must be appropriated in 1 year, and FDA believed that it could not compete for such funds given HHS’ budget constraints. As we have pointed out previously, the federal government has often entered into leases to satisfy long-term space needs even though GSA analyses have showed leases to be more costly in the long run than ownership. Under its most recently revised replacement analysis (July 1995), ORA appears to have overstated the space requirement for some laboratories and the staff requirements for two proposed laboratories. Such overstatements would increase the cost estimate for replacing laboratories and, thus, increase the comparative estimated savings from consolidation. For the new facilities, ORA estimated laboratory space per analyst at 650 square feet and office space per nonanalyst at 230 square feet. (According to a GSA official, GSA considers occupied office space of about 153 square feet to be standard, but no standard exists for laboratory space.) ORA’s consolidated space estimates, however, exceed all of ORA’s existing laboratories’ space amounts. For example, ORA’s three newest laboratories—in Kansas City, San Francisco, and Seattle—currently operate with much less laboratory space per analyst. According to regional officials and laboratory analysts, the San Francisco facility, with 369 square feet per analyst, is state-of-the-art, and the Kansas City and Seattle laboratories, with 411 and 344 square feet per analyst, respectively, were similarly characterized in a 1994 FDA Division of Field Science report. Also, the Atlanta laboratory, a multipurpose lab, currently has 33,654 square feet of laboratory, light industrial, and general storage space and 92 analysts on board with a capacity for 100. ORA had originally planned to expand this laboratory by 20,000 additional square feet for 60 additional analysts or about 333 square feet per analyst. However, after we questioned this estimate, ORA revised it, increasing it to 39,000 square feet (650 square feet per 60 additional analysts). Even using ORA’s revised estimate of 39,000 square feet, the Atlanta laboratory would have only about 450 square feet per analyst for its expected total capacity after expansion. If the cost estimates for to-be-leased space were based more on the amount of space in ORA’s newer laboratories, the estimated costs of replacing laboratories would be significantly less than ORA has projected. Even if the estimates were based on the projected space for the Atlanta mega-lab after expansion, they would be about $2.2 million less per year than ORA has calculated. ORA feels justified in basing space requirements on 650 square feet per analyst and supplied us with a September 12, 1995, outside consultant’s analysis performed after completion of our audit work. Although the consultant supported ORA’s space requirement, this amount of space is nevertheless significantly greater than that being proposed for mega-labs in Atlanta and Seattle. Furthermore, ORA could not explain how and why existing space requirements in its newest laboratories (in San Francisco and Kansas) and in its proposed Atlanta and Seattle mega-labs are inadequate. ORA also overestimated the staffing requirements for new laboratories in New York and Los Angeles under its replacement option. Instead of basing its estimates on the current staff size of these two laboratories—115 and 48, respectively—FDA used the mega-lab staff size of 189 analysts for New York and 75 analysts for Los Angeles. Thus, ORA came up with the same costs for the New York and Los Angeles facilities under both its replacement and consolidation options. Because the facilities’ costs under the replacement option were not estimated on the basis of a smaller staff size, the resulting cost estimate for replacing the laboratories is overstated by about $2.5 million annually. ORA believes that its consolidation plan would achieve certain benefits and efficiencies. Although we recognize that almost any restructuring could have some positive impact on operations, existing ORA evidence appears to contradict its claims that mega-labs will improve operations, supervisory/ analyst ratios, and utilization of laboratory equipment. ORA’s claims that its equipment and labs are obsolete are also questionable. The operational efficiencies that ORA expects to gain through its consolidation plan include achieving a critical mass (50 or more analysts) in each lab, decreasing the number of mid-level managers, redeploying some supervisory staff to operations, decreasing support work required of operational staff, increasing efficient use of equipment, and being able to do shift work. FDA believes that efficiency involves many factors in addition to timeliness, such as overall costs per operations, staff, equipment, expertise available and utilized, accomplishments/outcomes from each sample tested, and customer service/responsiveness. However, FDA provided us evaluations of its laboratories based only on the factor of timeliness. Current FDA timeliness statistics do not show that large laboratories are more efficient. In fact, FDA’s fiscal year 1994 Sample Timeframe Report (which depicts each laboratory’s timeliness in conducting analyses) showed that six out of seven medium-sized laboratories (33 to 50 analysts) were more timely than the two largest labs (New York and Atlanta). ORA officials in headquarters and in the field could not provide any explanation to contradict the data showing that its medium-sized laboratories were more timely or otherwise more efficient. In fact, WAAG and most ORA staff in the field that we spoke with stated that on the basis of their work experience an ideal laboratory size for efficiency is about 50 analysts. The Lab Directors’ Steering Committee report also stated that a lab size of 50 to 75 analysts is ideal. ORA’s claim that larger labs would improve the supervisory/analyst ratio is also unsubstantiated. Data show that the supervisory/analyst ratio in ORA’s two largest labs (in New York and Atlanta) with 115 and 92 analysts, respectively, is not better than in most of the other labs. For example, for at least the last 2 years, the labs in Atlanta and New York have generally had supervisory ratios of 1 to 7 and 1 to 8, respectively. Only the lab in Chicago (with a ratio of 1 to 6) has had a worse supervisory ratio than the labs in New York and Atlanta. In August 1994, the FDA Commissioner stated that many labs had obsolete physical plants and analytical tools. Our work, however, raises questions about FDA’s assessment. For example, the older labs (about 30 years old), referred to as “Rayfield buildings,” are all similarly designed, brick facilities that appear to be structurally sound. The Atlanta laboratory site, in fact, includes a 1960 Rayfield building and an addition that was built in 1985. ORA wants to expand this site into a mega-lab. WAAG also performed an evaluation of the existing labs. It concluded that the Rayfield buildings (in Atlanta, Baltimore, Buffalo, Cincinnati, Dallas, Detroit, and Minneapolis) generally are in good shape; however, some need renovation and/or additional space. With the expenditure of some funds for these purposes, these laboratories could be expected to continue to serve for approximately another 10 years. Most of the older facilities and some of the more modern facilities have three main problems: (1) insufficient or inoperative heating, ventilation, and air conditioning systems; (2) inoperable or insufficient exhaust hood capacity; and (3) insufficient space for employees or instrumentation. WAAG provided the following possible solutions for the three problems. It suggested that (1) insufficient or inoperative heating, ventilation, and air conditioning systems be corrected by installing booster fans and remotely controlled baffles in existing air systems; (2) inoperable or insufficient hood capacity may be solved by using smaller tabletop exhaust systems, good housekeeping practices, and modified hoods to accept moveable lab benches so that heavy or complicated equipment set-ups in the hoods may be removed when not in use; and (3) additional space for analysts and instrumentation may be found if labs implemented good housekeeping practices. In commenting on a draft of this report, HHS argued against using what it considers a stop-gap measure to continue occupation in current facilities for a few more years. Beyond the condition of the labs, the consensus of the analysts we spoke with is that present equipment is generally state-of-the-art. Analysts at several sites we visited told us that they do not know of more current equipment that is needed in their laboratories. FDA, on the other hand, commented that a large percentage of field laboratory equipment is scheduled for replacement on the basis of purchase dates in accordance with the widely recognized Department of Veterans Affairs schedule of scientific equipment life expectancy. However, FDA has not demonstrated that its laboratories lack state-of-the-art equipment given its current facility capability. Furthermore, ORA provided us no support for how equipment needs would differ in the future. One benefit of consolidation asserted by ORA was more intensive use of laboratory equipment. However, ORA did not provide evidence to refute assertions by analysts that cross-utilization of equipment is not always a viable option because instruments must be specially calibrated for particular samples. In addition to possibly overestimating the cost savings and efficiencies to be realized by consolidation, ORA may have underestimated this option’s adverse impact on laboratory efficiency. For example, some analysts in the field believe that consolidation would result in a significant loss of experienced analysts. Although ORA estimated that 75 percent of the analytical staff in labs scheduled for closure would relocate to other FDA facilities, it did not perform any analysis to support this estimate. We questioned this figure in a 1987 report when ORA previously used it in a proposed laboratory consolidation effort. ORA said that it used the relocation rate of 75 percent because it did not want to appear to understate the relocation costs. If a large percentage of analysts would not relocate, ORA’s operations could be adversely affected until new analysts are trained. To guide ORA in its site selection process, WAAG—at management’s request—developed and prioritized a set of criteria for consideration, recognizing that meeting each criterion might be impossible. In addition, ORA management developed its own criteria. However, ORA appears to have based site selection mainly on the availability of construction funds or congressional indications that such funds would be available for specific sites. WAAG’s criteria included quality-of-life issues, such as transportation, housing, population density, crime, and the merit of area schools; and construction feasibility issues, such as costs and available land for building new or expanding existing facilities. WAAG’s criteria also included projected workload distribution and the existing infrastructure to support the laboratories, such as commercial labs, workforce demographics, local universities, FDA investigation branches, and other government agencies. ORA management considered these criteria but developed a somewhat narrower set of criteria, which included geographic dispersion (two laboratories on each coast and one centrally located), quantity of commercial establishments in the area, major shipping ports of entry, and availability of FDA-owned land. We found, however, that the proposed mega-lab sites in New York, Los Angeles, and Jefferson do not meet many of the criteria established by WAAG and ORA. For example, the Jefferson site lacks such factors as proximity to ports of entry and quantity of nearby food and other relevant businesses. Instead, ORA appears to have placed more emphasis on the availability of funding in selecting the site locations. For the Los Angeles and Jefferson sites, the Congress has provided funds for architectural and engineering design work, with the expectation that subsequent construction funds would become available. Congressional action authorized construction funds to build a laboratory at the New York site, which committed FDA to this location. (See app. II.) ORA believes laboratory consolidation is necessary to meet its pressing need to streamline and improve operations. Although consolidation may achieve efficiencies, the evidence ORA provided to us appears to have overstated the magnitude of the future benefits. For example, ORA may have overestimated its costs for replacing several labs. Also, ORA overestimated the staffing requirements for new laboratories in New York and Los Angeles under its replacement option. Such inflated replacement cost figures raise questions about ORA’s estimated cost savings from ORA 21. Further, ORA’s existing evidence appears to contradict its claims that the mega-labs will improve operational efficiencies. These and other issues raised in this report suggest that FDA should revisit its plan to consolidate its regulatory laboratories. We recommend that the Commissioner of FDA review the restructuring plan to determine whether ORA adequately weighed the benefits of consolidation relative to other alternatives. HHS commented that it shared our interest in having accurate and appropriate information upon which to base critical decisions about current and future laboratory facility needs. However, HHS believes that any further analysis would not satisfy the basic and compelling need to reduce operations costs where possible. Thus, the Department disagreed with our report. Specifically, it believes that (1) ORA’s cost estimates (based on a space requirement of 650 square feet per analyst) are appropriate, (2) consolidation will result in efficient ORA operations, (3) the site selection for its mega-labs was based on reasonable criteria, and (4) its current equipment and facilities are obsolete. We found that ORA (1) has not demonstrated why existing space requirements in its newest facilities (which are significantly less than 650 square feet per analyst) are inadequate; (2) does not have adequate measurable data to support its claim that consolidation would achieve certain benefits and efficiencies; (3) appears to have based site selection mainly on the availability of construction funds or congressional indications that such funds would be available; and (4) has not demonstrated that its laboratories lack state-of-the-art equipment because of its current facility capability or that its schedule to replace equipment would differ if ORA consolidated its labs. We are not questioning whether consolidation should occur but are reporting that documentation of the bases for ORA’s decisions is lacking. We have incorporated the agency’s specific comments in this report where appropriate. A copy of the agency’s full response and our rebuttal appear in appendix II. We are sending copies of this report to interested congressional committees, the Secretary of Health and Human Services, the Commissioner of FDA, and other interested parties. This report was prepared by Barry Tice, Assistant Director; Robert Wychulis; and Cameo Zola. Please call Mr. Tice at (202) 512-4552 if you or your staff have any questions about this report. We performed our work at FDA headquarters in Rockville, Maryland, and visited FDA laboratories in Buffalo, Baltimore, and San Francisco. We also reviewed videotapes of the Los Angeles, Seattle, Dallas, and New Orleans laboratories. We reviewed agency procedures and data governing its plan to restructure field laboratory facilities. During our review, ORA provided us three different cost savings estimates. The initial cost estimate was dated December 22, 1994, followed by revised estimates on May 26 and July 5, 1995. The cost data were presented for two restructuring options: (1) consolidating from 18 to 9 laboratories and (2) replacing every lab when current leases expire. We discussed ORA’s plan with key ORA officials in headquarters and at the sites we visited. In addition, we discussed selected data with GSA headquarters and field representatives. During our visits to the three field laboratories, we held group meetings with analysts and inspection/ compliance personnel. Also, we met with import brokers in Baltimore and Tampa. We conducted our work between October 1994 and November 1995 in accordance with generally accepted government auditing standards. The following are GAO’s comments on the Department of Health and Human Services’ letter dated November 7, 1995. 1. Contrary to the agency’s comments, our report recognizes FDA’s past efforts to consolidate its field laboratories. In addition, we also note that in our 1987 report we criticized FDA’s 1986 consolidation plan because its criteria were limited and did not adequately address whether FDA could meet its current and future laboratory needs. More importantly, our current report does not dispute FDA’s decision to consolidate, but questions the magnitude of benefits FDA associates with its planned consolidation. 2. We disagree with the agency that we placed undue reliance on the WAAG or the Laboratory Directors’ Steering Committee reports. These were the only groups chartered by ORA to evaluate the current field laboratory structure and to suggest modifications. ORA’s management also provided the groups’ reports to us in support of its plan. On many occasions, we sought additional input from ORA regarding its needs assessment for its field laboratories. We asked for any long-range or strategic plan that described FDA’s workload expectations, including such data as future staffing needs, trends in compliance/inspection activities, shifts in port utilization, and possible changes in laboratory work resulting from new mandates. ORA provided no such data to us. Instead, ORA officials continuously told us that ORA’s future laboratory plans were based on the current analyst workforce and an estimated 25-percent increase for expansion. 3. Although the agency takes exception to our interpretation of its laboratory space projections, we still believe that they may be overstated. On June 5, 1995, ORA had reported to us that it had completed and submitted to GSA a proposal to modify the Atlanta laboratory for an additional 20,000 square feet. As we stated in this report, ORA provided revised cost estimates in July 1995 for several of its laboratories, including changing the requirements for expanding the Atlanta lab to 39,000 square feet. Even with the larger space estimate for Atlanta, the overall space in Atlanta at full capacity would only be about 450 square feet per analyst, significantly less than 650 square feet as stated above. 4. We have acknowledged in our report ORA’s September 12, 1995, consultant’s report. Our concern with the requirement of 650 square feet per analyst is, however, that it significantly exceeds the amount of space being proposed for mega-labs in Atlanta and Seattle and relatively new laboratory space occupied in San Francisco (1994) and Kansas City (1991). ORA has not provided us any explanation of why existing space in its newest facilities (San Francisco and Kansas City) and its proposed mega-labs in Atlanta and Seattle is inadequate. According to data that ORA provided to us, the Kansas City, Seattle, and San Francisco laboratories have an analyst capacity of 60, 65, and 70, respectively. Using the laboratory square footage figures in the table in HHS’ letter, the square footage per analyst is significantly less than that stated by FDA when considering the capacity for which these laboratories were built. For example, the San Francisco laboratory, FDA’s newest lab, has only 369 square feet per analyst. 5. We have noted in our report that ORA’s latest attempt (July 1995) at estimating lease costs for several of its laboratories was methodologically better than its previous two efforts. However, two issues we raised—(1) whether using a space requirement of 650 square feet per analyst is excessive and (2) ORA’s overestimating the size of the New York and Los Angeles laboratories under its replacement option—continue to raise questions about ORA’s projected 20-year savings. As we demonstrated in this report, if ORA used a square footage per analyst requirement based on its proposed Atlanta laboratory (including using ORA’s highest expansion figure), the cost for replacing six laboratories may be overstated by about $2.2 million per year. In addition, by overestimating the size of the Los Angeles and New York laboratories in its replacement costs, ORA may have overestimated the cost of these facilities by about $2.5 million annually. 6. We recognize FDA’s concern about successfully competing for funds within the Department and have expanded FDA’s concerns and views about this issue in the final report. We revised the report also to acknowledge the constraints of the budgetary process. 7. After considering the agency’s comments, we deleted our discussion in the final report on renovation and its implications for offsetting any savings FDA sees from its laboratory consolidation plan. 8. We believe that losing as many as 40 percent of ORA’s analysts is a significant factor that could adversely affect operations. This is especially true if many analysts leave at the same time, which is usually the case when sites close. ORA’s effectiveness could be weakened as a result until new analysts are trained. 9. We agree that efficiencies can be measured by many factors in addition to timeliness. However, as we point out in our report, FDA provided us evaluations of its laboratories based only on the factor of timeliness. 10. We were asked to look at the analysis FDA had to support its mega-lab site selections. FDA provided us with documentation for obtaining such planned operational efficiencies. We expected that such documentation would include analyses and projections of current and future workload/resource needs. Throughout our review, ORA never provided us any data suggesting that it lacked needed analysts of any type in any of its laboratories. Nor did ORA provide any analysis showing problems with its ability to analyze certain samples. In addition, during our review and discussions with headquarters and field officials, ORA never provided any explanation to contradict the data showing that medium-sized laboratories were more timely or otherwise more efficient. 11. Although consolidation may make implementation of the team concept more difficult, we recognize FDA’s commitment to making it work and have deleted the reference to the team concept in the final report. 12. On page 8 of its comments, the Department states that about 40 percent of FDA’s analysts are eligible for retirement and probably many of them will retire rather than move. As stated earlier, we believe that many analysts leaving at the same time could adversely affect operations at least in the short term. 13. Our report clearly points out that WAAG had developed comprehensive criteria to guide ORA in selecting possible sites for laboratory location and that ORA’s management developed a somewhat narrower set of criteria. WAAG’s criteria for site selection included, in addition to quality-of-life issues, all the issues included in ORA’s management’s criteria. HHS’ comments expand the set of criteria that ORA previously provided us. HHS has maintained that ORA considered WAAG’s criteria along with the listed criteria in its comments. However, no evidence exists on how ORA considered any set of criteria. ORA appears to have based site selection mainly on the availability of construction funds or congressional indications that such funds would be available for specific sites. 14. We were only pointing out one element of WAAG’s comprehensive criteria. We were not implying that FDA managers were not concerned with staff recruiting and retention. 15. The documentation provided to us by FDA dealt with its schedule to replace equipment. This action may occur whether ORA consolidates its labs or not. As we discuss in this report, we recognize that certain equipment will need to be replaced. However, FDA has not demonstrated that its laboratories lack state-of-the-art equipment because of its current laboratory facility capability. Furthermore, ORA provided us no evidence to show how these equipment needs would differ in the future. In addition, because overall staffing is not expected to decline as a result of ORA’s consolidation plan and ORA has not demonstrated whether or how economies of scale can be realized with equipment usage, we question how consolidation would improve equipment resources. 16. While we recognize that some of ORA’s laboratories have certain deficiencies, this does not mean that the laboratories are structurally unsound. Thus, we do not believe this to be contradictory. 17. We changed this reference to the Atlanta facility to reflect the clarification of dates noted. 18. We deleted this reference in the final report due to its anecdotal nature. 19. We have recognized the agency’s concerns in the final report. 20. Since we did not review the laboratory consolidation efforts of the Environmental Protection Agency, we cannot comment on the relevance of MITRE’s analyses to FDA’s consolidation plans. Furthermore, we are not asserting that FDA should not consolidate its laboratories. Rather we question whether FDA has adequately weighed the benefits of consolidation relative to other alternatives. We have revised our recommendation in the final report to better reflect this concern. 21. HHS has maintained that ORA considered WAAG’s criteria along with the listed criteria provided in its comments. However, no evidence exists on how ORA considered any set of criteria. ORA appears to have based site selection mainly on the availability of construction funds or congressional indications that such funds would be available for specific sites. 22. Our work does not suggest one laboratory field structure or alternative to be better than that proposed by FDA. It does point out, however, that FDA may have overstated the projected monetary and efficiency gains of its proposed laboratory consolidations. In the last few years, FDA has selected Queens, New York; Jefferson, Arkansas; and Los Angeles, California as sites for new laboratories. This appendix gives an overview of the rationales for those site selections. FDA’s current New York lab is located in a 75-year-old GSA-owned warehouse building in Brooklyn. FDA moved its laboratory into the facility in 1964 when space was renovated on the seventh floor to provide 37,000 square feet of laboratory space. Because of the structure and age of the facility, GSA has decided not to support any major renovations to the building to improve the quality of the laboratory. To replace the aging New York facility, a site was selected in Queens, New York, in 1991 before the ORA 21 plan. ORA officials told us that FDA had no choice in selecting this site because the House Committee on Public Works and Transportation and the Senate Committee on Environment and Public Works passed resolutions that authorized leasing funds for the Queens site facility at $7.875 million for a period of 20 years. ORA officials told us that FDA was congressionally mandated to use this site; thus, no other site was considered with the advent of ORA 21. ORA did not pursue other alternatives to replace its Brooklyn facility and may not be able to objectively justify the new location. One ORA headquarters official told us that the Queens site is not the best choice for a mega-lab on the East Coast. Similar views were expressed in a May 1994 report by the Committee on Appropriations’ surveys and investigations staff, which stated, “Other plans in process may also be ill-advised such as the acquisition of a new facility in Queens, New York, for regulatory analysis....” This planned facility is by far the most expensive of the five proposed mega-labs with an estimated leasing cost for 1999 through 2014 of over $200 million. Construction of a facility in Jefferson, Arkansas, is scheduled for completion in 1999 at a cost of about $38 million. In fiscal year 1994, $2.5 million was approved for an architectural and engineering design for the Jefferson facility. The number of analysts expected for the site is between 140 and 150. According to ORA officials, the primary reason for selecting the Jefferson site is because FDA owns land at its National Center for Toxicological Research (NCTR). FDA would then own the newly constructed facility permanently. It appears, however, that FDA was influenced by other factors. For example, a December 1993 ORA options paper stated, “Within the State of Arkansas there has been almost continuous, high-level political activity to build up NCTR and it’s environs to stimulate the State’s economy. A set of unique events has moved that effort to a higher plane. This presents FDA with what is probably a one time opportunity to make a significant expansion in our use of the remnants of the initial structures. Given this set of circumstances, the Commissioner asked Deputy Commissioner for Operations and the Associate Commissioner for Regulatory Affairs, if ORA wanted to (be a player) in the efforts to identify new, and maybe better, things we could do there. They answered yes, as a matter of principle, without having developed a clear picture as to what that would be.” The justification for the proposed mega-lab in Jefferson does not meet even ORA’s limited criteria. Jefferson is clearly not a port of entry into the country, nor is it an area that has a large number of commercial industries. Also, the largest nearby city—Little Rock (about 50 miles away)—is not among the top cities for air traffic, which makes the Jefferson site less accessible for the shipment of samples. Several WAAG members and other ORA staff told us that they strongly opposed the selection of this site. WAAG’s analysis concluded, “An ORA regulatory facility at NCTR would not adequately meet the criteria for an effective field laboratory that services the public on a day-to-day basis.” Several analysts told us that they have several concerns about the Jefferson site, such as accessibility to a major airport, the availability of good schools and universities, and recruitment and retention of qualified analysts. Staff also questioned the logic of building a new laboratory in Jefferson when an existing facility in Kansas City, Missouri, a bordering state, was just built in 1992 and has a capacity for 60 analysts. The Los Angeles laboratory is crowded, with little room for instrumentation or people. Also, the lab is located in a relatively unsafe area with limited parking. FDA is currently investing about $1 million to renovate the facility, including converting office space to additional laboratory space. ORA plans to construct its new mega-lab at the University of California in the Irvine area, where it has purchased land. The construction costs are estimated at about $40 million, and the facility is expected to accommodate up to about 75 analysts with an expansion potential to 125 analysts. FDA was appropriated $10 million for purchasing the land and for architectural and engineering design work. Officials at another ORA lab in California—the San Francisco lab—told us that while a lab may be justified in the Los Angeles area because of the large number of imports and commercial industries, San Francisco should have been considered as a mega-lab alternative. The lab, occupied in 1994, accommodates 50 analysts and has a capacity for 70 analysts. The state-of-the-art facility is located in Alameda, California, and is one of several office complexes in a pleasant area with plenty of free parking. According to ORA’s San Francisco staff person responsible for overseeing the San Francisco site renovation, an identical adjacent unoccupied office building could be converted to a laboratory for about $10 to $15 million. This is considerably less then the estimated $40 million in construction costs for a new Los Angeles facility. ORA officials told us that San Francisco was not considered as a site for a mega-lab and, as part of ORA 21, would be closed in 2014. The only explanation provided was that funds were made available for Los Angeles from the Congress for the land and architectural and engineering design work. 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. 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 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. | Pursuant to a congressional request, GAO reviewed the Food and Drug Administration's (FDA) plan to consolidate its Office of Regulatory Affairs' (ORA) 18 field laboratories for product testing, focusing on: (1) the validity of projected cost savings and operational efficiencies; and (2) site selection criteria. GAO found that: (1) the 20-year consolidation plan, known as ORA 21, proposes to create five mega-laboratories and four special-purpose laboratories; (2) ORA based its plan on the belief that its current facilities are old, need costly repairs, and do not meet the needs for conducting regulatory science in the future; (3) ORA may have overstated the consolidation plan's projected cost savings because ORA made several assumptions about replacement costs, construction costs, and space and staffing requirements; (4) the plan's claims for achieving greater operational efficiencies are also questionable, and ORA did not substantiate claims regarding obsolete equipment, supervisor/analyst ratios, laboratory efficiency, and staff relocation; and (5) ORA conducted limited analysis of the relative efficiency of proposed laboratory sites and based its site selections on areas where it believed that it would receive congressional funding approval. |
A traditional argument for applying a joint and several liability standard to joint returns is that married couples form a single economic unit, so spouses who benefit from each other’s income and assets can be held responsible for the total tax liability generated from the income and assets. The benefit of joint returns is that married couples are taxed as if their combined income were equally split between the spouses. For married couples with substantially disproportionate incomes, such income-splitting may lower their overall taxes because some of the higher earner’s income could fall into a lower tax bracket and be taxed at a lower rate than if it had all been taxed as the income of one person. The benefits of income-splitting first became available in community property states in 1930 as a result of the Supreme Court case of Poe v. Seaborn . In that case, the Court held that in community property states, the wife is vested with a half-interest in her husband’s income. Therefore, for federal tax returns, income was divided equally between husband and wife, regardless of who earned it. The benefits of income-splitting were denied couples living in common law states as a result of another 1930 Supreme Court case, Lucas v. Earl [281 U.S. 111 (1930]. In that case, the Supreme Court rejected a couple’s private agreement assigning one-half of each spouse’s earnings to the other spouse for federal income tax purposes. Income-splitting for all joint filers was added to the Internal Revenue Code by the Revenue Act of 1948 as a means of equalizing the tax rates for married couples in common law states with the tax rates for those living in community property states. Congress subsequently determined that in some instances, it was inequitable to hold taxpayers liable for additional taxes resulting from their spouses’ unreported income. A commonly cited example was a spouse who, unknown to the other spouse, was engaged in an illegal activity, did not report the illegal income, and was subsequently caught and assessed the taxes on the illegal gain. In 1971, Congress enacted the innocent spouse provisions in the Internal Revenue Code (section 6013(e)) to recognize the inequity of holding spouses liable for additional tax assessments in certain cases. The provisions were broadened in 1984 to provide relief from liabilities resulting from grossly erroneous deductions, credits, or basis (i.e., the purchase price of an asset), in addition to unreported income. The current innocent spouse provisions allow relief from the joint and several liability standard when the innocent spouse has filed a joint return with the culpable spouse; the spouse did not know and had no reason to know there was a substantial tax understatement (knowledge test); and taking into account all the facts and circumstances, it is inequitable to hold the spouse liable for the additional tax attributable to the substantial understatement of the culpable spouse. In addition, the spouse requesting relief must meet certain dollar thresholds that vary depending on the cause of the additional assessment: A tax liability resulting from an omission of gross income must exceed $500. A tax liability resulting from a deduction, credit, or basis that has no basis in fact or law must exceed $500 and also be in excess of (1) 10 percent of the innocent spouse’s adjusted gross income for their preadjustment tax year if the taxpayer’s income is less than or equal to $20,000; or (2) 25 percent of the innocent spouse’s income if the taxpayer’s income is greater than $20,000. If the innocent spouse has remarried, the new spouse’s income is included in this calculation. IRS generally follows state law in regard to ownership of property, and the states define ownership of property very differently. In community property states, the income and assets (property) of each spouse belong equally to the other spouse and can be attached to pay the debts (including taxes) of either spouse. About 27 percent of all taxpayers live in the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin). In common law states, spouses do not have an inherent right to each other’s income and assets. As a result, there is a distinct difference in the application of joint and several liability between the residents of community property states versus common law states. For example, a married couple living in a common law state can avoid joint and several liability by filing a “married, filing separate” return, whereas filing a “married, filing separate” return in a community property state will not necessarily result in a similar avoidance of tax. To calculate the potential universe of innocent spouses, we used IRS’ Statistics of Income data for tax year 1992 to estimate the number of joint returns filed that year and whether or not the taxpayers lived in community property states. We used IRS’ information on the results of its 1992 underreporter program to estimate the number and dollar amount of such assessments made against joint filers. We also used the Audit Information Management System (AIMS) database to identify the number and amount of audit assessments made against tax year 1992 joint returns. Finally, we used data from the Bureau of the Census and the Department of Health and Human Services to calculate an annual divorce rate and estimate the number of joint filers that divorce each year. To determine IRS’ practices and procedures for handling innocent spouse cases, we interviewed IRS officials at headquarters, four district offices, and three service centers to discuss their procedures for identifying and processing innocent spouse cases. We selected the Baltimore, Philadelphia, Arkansas-Oklahoma, and San Francisco District Offices and the Philadelphia, Austin, and Fresno Service Centers to give a diverse geographic perspective. We also reviewed innocent spouse cases at the San Francisco District Office and the Fresno Service Center located near our San Francisco office. In addition, IRS, as part of its own efforts to assess the problems related to divorced and separated taxpayers, had requested five Problem Resolution Offices to forward the innocent spouse cases handled between January and June 1996 to its Problem Resolution Office in headquarters. We reviewed the 31 innocent spouse cases. To determine whether the innocent spouse provisions provide the same treatment to all taxpayers, we reviewed the literature examining the provisions and IRS data, and compared the federal innocent spouse provisions to state innocent spouse provisions. To determine the potential effects of changing the current joint and several liability standard to a proportionate liability standard, we used IRS’ Statistics of Income data for tax year 1992, underreporter assessments,and the AIMS database to estimate the number of taxpayers who filed using the “married, filing jointly” status. We also worked with IRS to develop an estimate of the number of taxpayers who had an assessment made against a previously filed joint return to estimate the universe of taxpayers who would have been affected by any changes to the standard. In addition, we reviewed proposed alternatives to the joint and several liability standard prepared by the American Bar Association (ABA) and the American Institute of Certified Public Accountants (AICPA). We also met with North Dakota state officials, who administer a proportionate liability standard on joint state income tax returns. To determine the potential tax administration issues and taxpayer burden associated with establishing a proportionate liability standard, we developed a stratified probability sample of 200 joint tax returns from IRS’ tax year 1992 Statistics of Income file to estimate the amount of income that could be identified as either joint or separate income. We projected this sample to the universe of 48 million taxpayers who used the “married, filing joint” status at a 95 percent confidence level. To determine the potential effects on IRS of requiring it to be bound by divorce decrees, we analyzed the legal ramifications of binding IRS to the terms of lower court decisions. We also discussed the benefits and problems associated with following the provisions of divorce decrees with officials from IRS and officials from California, Wisconsin, and Delaware, whose state tax agencies are bound by divorce decrees. To determine the potential effects on IRS of changing the law to limit its ability to attach community property, we discussed with IRS officials the policies related to the attachment of income and assets of one taxpayer to pay the debts incurred by his or her spouse before the marriage. We performed our review from February 1996 through September 1996 in accordance with generally accepted government accounting standards. We requested comments on a draft of this report from the Commissioner of Internal Revenue, which we received on January 15, 1997. These comments are discussed on pages 23 to 25, and a copy of the comments are included in appendix VI. Because IRS did not have data on the number of innocent spouse requests filed, we developed an estimate of the potential universe of taxpayers that could qualify under the current innocent spouse provisions. We estimated that a spouse from up to 587,000 couples may have been eligible for innocent spouse relief in 1992. About 48 million joint tax returns were filed for tax year 1992. From IRS’ data on tax year 1992 audit and underreporter programs, we estimated that 1.25 million couples filing joint returns were assessed additional taxes under these programs—250,000 were audit assessments and 1 million were underreporter assessments. Of these 1.25 million returns, about 587,000 had additional tax assessments exceeding $500, which is the minimum dollar threshold required for innocent spouse relief. Appendix I describes the methodology we used to make these estimates. However, our estimate of 587,000 couples represents the maximum number of taxpayers potentially eligible for innocent spouse relief; fewer would probably actually qualify. Some couples would also probably have been assessed additional taxes as a result of overstated deductions, credits, or basis, which have other dollar thresholds in addition to the $500 threshold. Data were not available that we would need to estimate the number of joint taxpayers whose tax year 1992 additional tax assessments resulted from overstated deductions, credits, or basis. Also, some of the 587,000 couples may not have qualified for innocent spouse protection because they knew there was a substantial tax understatement. This knowledge would have made them ineligible for relief even if the tax deficiency was solely attributable to the actions of one spouse. Although an unknown number of the 587,000 couples could potentially seek innocent spouse relief, IRS officials told us that the severity of the problem for taxpayers seeking such relief is much greater in the case of divorced or separated taxpayers. Therefore, we also estimated the number of taxpayers who could potentially be eligible for relief and may have divorced during the 3 years since the 1992 joint returns were filed. Using a 2 percent per year divorce rate, we estimated that 35,000 divorced taxpayers might have been eligible for innocent spouse relief for additional tax assessments of more than $500. Appendix I describes how we developed this estimate. IRS did not accumulate data on the number of cases requesting innocent spouse relief or the number of cases for which it grants such relief. Although IRS did not systematically collect data on innocent spouse cases, we found that some IRS operating units we visited maintained some information on the innocent spouse cases they handled. The limited information found on innocent spouse claims indicated that few requests were received, and of these, most were denied. For example, records at the Fresno Service Center indicate it received 90 Offer in Compromise cases requesting innocent spouse relief during the 3 years between March 1993 and February 1996. The service center denied 48 of these requests because either (1) they dealt with taxes reported as owed on the original return but not paid rather than with subsequent assessments; or (2) the issues causing the assessment had already been resolved by IRS’ Appeals Division or the Tax Court, and the claimant had agreed to the decisions. The remaining 42 cases were referred to district offices for processing. As of September 1996, 26 of these 42 cases had been resolved, with 7 being allowed and 19 being denied. We found that most of the cases handled by IRS’ Problem Resolution Office were also denied. In fiscal year 1996, the Problem Resolution Office requested information from five offices on innocent spouse cases. We reviewed 31 Problem Resolution Office cases from 4 district offices and 1 service center where taxpayers raised the innocent spouse issue between January and June 1996. For the 21 cases where a decision had been reached, IRS granted relief in 10 cases. Appendix II shows our analysis of the Problem Resolution cases we reviewed and summaries of some of the cases. Furthermore, according to IRS officials, the Tax Court denied relief in one-third of the innocent spouse cases decided in 1996. Although innocent spouse relief is clearly established in law and regulation, we observed that little information about the criteria for granting it or how to apply for it was available from IRS sources. The innocent spouse relief provisions are described in several IRS publications, including Your Federal Income Tax (Publication 17), Divorced or Separated Individuals (Publication 504), and Exemptions, Standard Deduction, and Filing Information (Publication 501). However, these publications do not provide any guidance on how to request relief. Furthermore, they are developed to help taxpayers prepare their returns, which is far in advance of the time that taxpayers might need information on the possibility of innocent spouse relief. In contrast, Examination of Returns, Appeal Rights, and Claims for Refund (Publication 556) and Understanding The Collection Process (Publication 594) are totally silent about innocent spouse relief, even though these publications are more directly related to the procedures that apply when taxpayers are billed for their spouses’ taxes. IRS also lacks well-defined procedures for taxpayers to request innocent spouse relief. As noted, in those limited cases where IRS has publicized the innocent spouse provisions, there is no guidance as to how taxpayers should request such relief. In those innocent spouse cases we were able to identify and review, we found no consistent process for claiming relief. In most cases, we found that either the taxpayers or their representatives had (1) contacted Problem Resolution Offices, which were established to assist taxpayers who cannot resolve their problems through normal IRS channels; or (2) requested relief through an Offer in Compromise, which is used in the cases of taxpayers who cannot pay the full amount of the balance due and decide to offer a lesser amount. The fact that taxpayers are commonly using these two approaches to seek innocent spouse relief may indicate that taxpayers are not provided with adequate guidance for seeking relief by IRS. In contrast, we found a much more taxpayer-friendly approach taken in the case of “injured spouse” claims. Injured spouses are joint filers whose joint refunds have been seized to pay certain of their spouses’ nontax debts, such as past-due child or spousal support or a federal loan. Injured spouses can apply for their portion of the joint refund by completing Form 8379, Injured Spouse Claim and Allocation. The 1040 instruction booklet provides a clear explanation of the injured spouse provisions, the qualifying conditions to be met, the specific form to be prepared, and how the claim should be filed with IRS. The information is provided under the refund line item instructions and tells taxpayers to attach the Form 8379 to their tax return. We also found confusion within IRS about how taxpayers should request innocent spouse relief. The various IRS units we contacted to determine the procedures they followed in handling innocent spouse cases took different approaches to considering relief. For example, two district offices granted relief using Offers in Compromise based on doubt of liability, while staff at one service center routinely denied such requests as inappropriate. This latter service center staff’s position was that Offers in Compromise based on doubt of liability can be used only to argue that IRS miscalculated the tax assessment, not to argue that a taxpayer is not liable for paying the assessment. An official at one district office said he would advise taxpayers to fill out an injured spouse form, while an official at a service center said he was unaware that innocent spouse relief existed. Critics of the innocent spouse provisions, such as ABA and AICPA, contend that the current provisions do not ensure that taxpayers receive equitable relief. For example, they said that the dollar thresholds included in the provisions result in eligibility criteria for relief based on income and not strictly on whether the spouse was innocent. Also, under the current provisions, spouses can receive relief if deductions have absolutely no basis in fact or law, but not if the deductions are simply erroneous. Furthermore, spouses requesting relief must establish that they did not know and had no reason to know their spouses were cheating on the taxes. Critics note that the concept of “no reason to know” has not only been interpreted differently by various courts, but is difficult for the potential innocent spouse to prove. Appendix II includes several examples that illustrate the issues involved in applying the innocent spouse provisions. According to IRS officials, Congress required innocent spouses to meet certain dollar thresholds to qualify for relief as a way of filtering out insignificant claims. The dollar thresholds clearly exclude some taxpayers from relief and may be inconsistent with the goal of providing relief to deserving taxpayers. In the case of a tax assessment related to an improper deduction, credit, or basis, the amount of the assessment must exceed 10 percent of the claimant’s adjusted gross income (AGI) for the claimant’s most recent tax year if such income is $20,000 or less, but the assessment must exceed 25 percent of AGI if it is more than $20,000. Thus, if a taxpayer’s AGI is $20,000 or less, relief could be available on assessments of $2,000 or less, but if the taxpayer’s AGI is more than $20,000, relief would be available only if the assessment exceeded $5,000. This distinction appears to be more related to an ability to pay or degree of hardship than to the innocence of the taxpayer. The logic behind these dollar thresholds is clouded even more because the potential innocent spouse’s AGI is based on the tax year ending before the notice of deficiency (which may be several years after the tax year of the joint return) and must include the income of any new spouse whether or not a joint return was filed. Finally, the dollar thresholds prevent taxpayers with smaller liabilities from obtaining relief, since the minimum understatement of tax in all cases must be more than $500, which could preclude lower income taxpayers from obtaining relief. The 1984 Tax Reform Act extended relief to include deductions but requires that such items be grossly erroneous, meaning there is no basis in fact or law for the claim. The distinction between a deduction having no basis in law or fact versus its just being erroneous is difficult to comprehend and can lead to various interpretations by IRS and the courts. This problem is compounded by the fact that IRS’ regulations governing innocent spouse relief were issued in 1974 and have not been updated since that time to incorporate the changes to the innocent spouse provisions resulting from the 1984 Tax Reform Act. The “knowledge” factor is perhaps the most subjective element in the current innocent spouse provisions. For someone to prove that they did not know and had no reason to know of a financial transaction undertaken by his or her spouse would generally be difficult, if not impossible. IRS and the courts consider circumstantial factors, such as education, involvement in the family’s financial affairs, and lifestyle, in assessing this contention. For example, one indicator that IRS uses to determine if spouses were aware of the tax avoidance is whether they benefited by living a lifestyle significantly better than could be supported by the reported income. However, according to critics, a determination of whether a taxpayer’s lifestyle was significantly better because of the tax avoidance is fairly subjective and the courts have interpreted the criteria differently. Some district offices have designated an employee as the innocent spouse coordinator so that only one employee applies the knowledge test. Some states have decided not to apply the federal innocent spouse provisions and have modified them for state tax purposes. Our survey of the District of Columbia and the 43 states that have personal income taxes showed that 20 do not have innocent spouse provisions, 18 have innocent spouse provisions based on the Internal Revenue Code, and 6 have less restrictive provisions (see app. III for a listing of the states). California, Iowa, Louisiana, and Oklahoma do not apply dollar thresholds when granting innocent spouse relief, while New York applies a $100 threshold. Massachusetts does not apply the percentage of income threshold for taxes resulting from grossly erroneous deductions. In addition, California and Oklahoma do not require that deductions have no basis in fact or law, simply that they be erroneous. We estimated that if the federal innocent spouse tax code provisions had been modified to eliminate the dollar thresholds as was done by California, Iowa, Louisiana, and Oklahoma, the maximum number of couples filing tax year 1992 returns potentially eligible for innocent spouse relief would have been 710,000. Assuming a divorce rate of 2 percent per year, we estimate that 42,600 of these couples would have divorced within 3 years. Modifying the provisions to allow more taxpayers to qualify for innocent spouse relief would likely result in some revenue loss because IRS might not always be successful in collecting from the culpable spouse. However, since IRS does not maintain data on how often it collects from the culpable spouse, we could not estimate the size of the potential revenue loss. IRS would also incur some additional collection costs associated with pursuing the culpable spouse. An alternative way to ensure that taxpayers are not held liable for their spouses’ taxes would be to replace the joint and several liability standard with a proportionate liability standard. Under the generally accepted definition of proportionate liability, taxpayers would be held responsible only for the taxes generated by their own individual incomes and assets or, for taxpayers living in community property states, for the tax associated with one-half of the community income. We identified three options for administering a proportionate liability standard that represent trade-offs between clearly establishing each taxpayer’s liability on their tax returns and the amount of paperwork and administrative burden created for taxpayers and IRS. Two options in addition to proportionate liability that would limit IRS’ ability to hold taxpayers liable for their spouses’ taxes are to (1) allow taxpayers to amend their filing status after the due date of the return and (2) have each taxpayer identify on the return the percentage of the total liability for which he or she would be responsible. Our review of the literature identified three options for administering a proportionate liability standard. The options are to (1) eliminate joint returns and require all taxpayers to file separately, (2) retain joint returns but modify them so that each spouse’s income and deductions are reported in separate columns, and (3) retain the current joint return requirements but apply proportionate liability only in cases where there are delinquent taxes or subsequent tax assessments. We evaluated the potential effects of these options on IRS’ tax administration processes and taxpayers’ burden. We did not consider how these options would potentially affect tax revenues. Table 1 shows the pros and cons of the three options for taxpayers and IRS. As shown in table 1, establishing proportionate liability on either a separate or joint return is of limited or no benefit to married taxpayers who generally would pay their income tax from joint assets or, if they prefer, already have the option of choosing the “married, filing separately” option to limit their liability to their own income. However, such a system would clearly establish liability so that in the event of a tax shortfall, divorced taxpayers could more easily establish the extent to which they are liable for the unpaid taxes or assessments. This clarity, however, is purchased at the cost of a significant burden for taxpayers. For example, in tax year 1992, about 48 million couples filed joint returns but only about 4.5 million, or 9 percent, of them had unpaid tax liabilities or subsequent tax assessments. Thus, under the separate and modified joint return options, about 43 million more couples would have been burdened by proportionate liability than would have potentially benefited. These taxpayers would, at a minimum, have had to allocate their income, deductions, and credits on a joint return and, if required to file separately, file an additional return. Under the current joint return option, however, only the 4.5 million couples with unpaid tax liabilities or additional tax assessments would potentially have had to proportion their income, deductions, and credits. Since, according to IRS, married couples are less likely to request a proportionate split of their joint tax liability even if one of the spouses is innocent, this number may overestimate how many taxpayers would have actually benefited. We estimate that about 270,000 taxpayers would divorce during the 3 years after the returns were filed. Furthermore, as we reported in September 1996, most married taxpayers would pay higher total taxes if they filed separately rather than jointly. As a result, requiring these taxpayers to file separately could create a higher tax liability for a significant number of taxpayers under the current rate structure. IRS would also face increased return-processing costs under the separate return or modified joint return-filing options, but not under the current joint return option. For example, if taxpayers were required to file separately, IRS would have to process up to 48 million additional returns since each dual-income couple who formerly filed a single joint return would have to file two returns. We estimate that if all 48 million joint filers had to file two returns, it would cost IRS an additional $199 million to process the additional tax returns. If married taxpayers were allowed to file jointly but had to report their income and deductions separately on the return—for example, a tax return column for each spouse—IRS might have to make twice as many data transcription entries as it currently does. If all 48 million joint filers reported two income streams, we estimate that the additional data entry costs could be about $19 million. Appendix IV describes our methodology for estimating these costs. IRS’ underreporter program might also face additional computer matches, but we did not try to estimate these increased costs. There would be no additional return-processing costs under the current joint return option. IRS’ tax compliance costs would increase under all three options; however, it would experience significantly more costs under the separate and modified joint return options than under the current joint return option. For example, IRS’ underreporter program costs could increase because it might have trouble matching proportionate tax returns (i.e., separate returns and modified joint returns) to information returns. In our review of a stratified probability sample of 200 joint tax returns for 1992 and the information returns associated with these returns, we found that 77 percent of the income reported on the returns was separately held and IRS would have little difficulty allocating this income. About 2 percent of the income was reported as joint income, and we could not determine whether 12 percent of the income was jointly or separately held. As a result, IRS would generally have difficulty allocating this income. (App. V lists the various income types and whether they were jointly or separately held.) For separate returns, IRS would not be able to readily match jointly held income to determine whether all the income was reported unless it cross-referenced the return to the spouse’s return. IRS would not have this problem with the modified joint return because both spouses’ income on the joint return could be totaled by computer and matched to information returns. However, under both the separate and modified joint return options, IRS could not easily determine whether jointly held income was correctly apportioned without requiring taxpayers to either document the information provided on the return or to maintain separate information return accounts for all their income. The advantage of establishing individual tax liability only if there was a tax shortfall is that it would create little additional burden for taxpayers or IRS. The disadvantage is that in the event of a tax shortfall, the taxpayers and IRS would have to apportion a jointly reported tax liability between the two taxpayers who signed the return. Since the current information reporting system shows certain income and deductions jointly, Congress or IRS would need to develop guidelines on how such income and deductions should be handled. In addition to increased underreporter costs, IRS would likely face increased collection costs because it would have to collect from each taxpayer rather than the couple or whichever taxpayer it found first. The least costly and disruptive of the three proportionate liability options would be to retain the current joint return and proportion income and deductions only in cases where there are either unpaid taxes or additional tax assessments. This option is endorsed by ABA and is practiced by North Dakota—the only state that has a proportionate liability standard. Each of these entities, however, advocates different methods for proportioning tax liabilities. ABA, which advocates a proportionate liability standard, proposes apportioning the liability reported on the original return by calculating (1) the spouses’ taxes as if they had filed using the “married, filing separately” status; and (2) the percentage of the couple’s combined taxes at the separate rate attributable to each spouse. IRS would then apply each spouse’s percentage to the joint tax to determine each taxpayer’s liability. The burden of proof for calculating the proportionate liability would fall on the taxpayer. If IRS assesses additional taxes through an audit, the deficiency would be the liability of whichever spouse generated the unreported income or disallowed deduction, thus reducing the need for innocent spouse relief. IRS officials believe that innocent spouse relief would still be necessary in certain circumstances, such as when one spouse purchases rental property in both spouses’ names and does not inform the other spouse of the asset or income. North Dakota is the only state that applies a proportionate liability standard to the state income tax return. However, in practice, the North Dakota Tax Commission administers the state tax system as if a joint and several liability standard applied to the state joint returns because it pursues whichever taxpayer it finds first to collect the tax liability. If a divorced taxpayer claims that the tax liability is really attributable to the ex-spouse, the state applies a proportionate liability standard to the joint return. The state uses information returns from IRS to initially apportion reported income and deductions. For income reported in both taxpayers’ names, the state assesses 100 percent of the joint income to both taxpayers, and the burden then falls on the taxpayer to document a different allocation. Joint deductions, such as those for dependents, are allocated in proportion to the amount of income each spouse generated. In other words, if a spouse generated 40 percent of the income, that spouse could claim 40 percent of the deduction. Unreported income is attributed to whoever earned the income. North Dakota Tax Commission officials said that although proportionate liability addresses the problems of some divorced taxpayers, it is not a panacea that produces a just result in all cases. For example, state officials noted that most farm land is held jointly, but the income is claimed only by the farming husband. They questioned the fairness of allowing a wife to disclaim any responsibility for income generated by an asset that was owned by both spouses. State officials said they were also bothered that nonworking taxpayers who are completely supported by their spouses can then disclaim any responsibility for their spouse’s taxes. Such disclaimers are particularly ironic in that nonworking spouses generally establish their claims to assets during divorce proceedings by arguing that they enabled their spouses to generate income. State officials questioned the fairness of allowing taxpayers to make such arguments to bolster their claims to assets and then to escape any tax liability by arguing the income was not theirs. Two other alternatives to proportionate liability have been proposed or adopted at the state level that would limit IRS’ ability to hold taxpayers liable for their spouses’ taxes. First, IRS could allow taxpayers to amend their filing status after the due date of the return. Nine states give taxpayers the opportunity to do this. Second, AICPA advocates replacing the joint and several liability standard with an allocated liability standard. Under this standard, taxpayers would specify on the return a percentage of the total liability for which they would each be responsible. If the taxpayers failed to specify an allocation, they would each be responsible for one-half of the tax liability. Divorcing couples may specify in their divorce decrees how future liabilities resulting from their prior joint returns are handled, i.e., one spouse is entirely liable, both spouses are equally liable, or some other permutation. However, IRS is not bound by these divorce decrees because it is not a party to the decree. IRS officials at the local level said many taxpayers are surprised to discover that IRS is not bound by divorce decrees. According to ABA representatives, many divorce attorneys are not well-versed in tax matters and do not realize that divorce decrees do not provide adequate protection against additional federal taxes. According to IRS officials and private sector practitioners, IRS’ practices in this regard are similar to the practices of private sector creditors, such as credit card companies, which do not feel they are bound by divorce decrees when collecting on joint debts. According to certain members of ABA’s Committee on Domestic Relations, a legislative change to bind IRS to divorce decrees appears to be impractical for two major reasons. First, current federal law provides no mechanism whereby IRS can be a party to divorce proceedings. Federal tax matters are the exclusive jurisdiction of the U.S. Tax Court, federal district courts, the U.S. Claims Court, and the U.S. Bankruptcy Court. Divorce matters, however, are generally handled by state courts. Federal courts have traditionally refused to consider any legal action involving divorce. Thus, providing a legal forum where IRS and the parties to a divorce could resolve issues relating to both tax matters and divorce proceedings would require a fundamental and extensive change in either federal tax law or state domestic relations law. Second, binding IRS to divorce decrees could require IRS to become involved in every divorce settlement or trial. In 1994, about 1.2 million divorce decrees were granted in the United States. To be a party to this many legal proceedings nationwide each year would create a significant administrative burden for IRS. For example, the California Franchise Tax Board is bound by divorce decrees if the decree (1) does not reduce liability for income under the exclusive management and control of the spouse, (2) does not affect taxes that have already been paid, and (3) has been cleared by the California Franchise Tax Board when reportable gross income exceeds $50,000 or the tax liability exceeds $2,500. Once the California Franchise Tax Board has approved the proposed tax allocation, the state becomes a party to the decree and is bound by it. State officials said the requirement has increased demands on administrative resources, and they had a backlog of about 100 requests for approval of tax allocations. The Delaware Division of Revenue is also bound by divorce decrees, even though it is not a party to the decree. As a state agency, the Delaware Division of Revenue considers itself bound by state court decisions. However, most Delaware taxpayers file separately because of the state’s rate structure, so the requirement creates little administrative burden. The Wisconsin legislature recently passed legislation requiring the Department of Revenue to be bound by divorce decrees beginning in the next tax year. Wisconsin officials are just starting to consider the consequences of this legislation on processing returns and revenue collection. IRS officials also believe the number of appeals would increase because divorce decrees can be lengthy and complex documents that are open to more than one interpretation. Furthermore, IRS officials fear that divorce decrees would be manipulated to reduce tax liabilities. For example, one spouse might retain sole ownership of the couple’s residence, the couple’s major asset, while the spouse without assets takes responsibility for the taxes. Thus, IRS would not be able to place a lien against the residence to force collection action for any delinquent taxes. About 13 million, or 27 percent, of all taxpayers who filed joint returns in 1992 lived in community property states. Some of these taxpayers may have been faced with tax liabilities incurred by their spouses before their marriage, which they would not have encountered if they lived in a common law state. This disparate treatment between taxpayers residing in community property states versus those living in common law states occurs because IRS, as with other creditors, follows state law in classifying married couples’ rights in property. Because the income, including wages, of taxpayers living in certain community property states is considered community property, IRS can place a levy on the wages or other separate income of either spouse to satisfy an existing tax debt, even if that tax debt was incurred by the other spouse before their marriage. In contrast, IRS cannot place a levy on the separate income of one spouse to pay the taxes due from the other spouse in a common law state. Once the income of either spouse is placed in a joint account it would be subject to IRS seizure in both community property and common law states. However, the placement of wages into a joint account is a matter of choice on the part of the taxpayers and can be avoided if they so choose. According to IRS officials, the agency does not have specific procedures for placing levies on a spouse’s income for premarital taxes incurred by the other spouse. Officials told us that because community property laws differ from state to state, it is up to IRS collections personnel in each community property state to determine whether they will levy a spouse’s income. Nonetheless, under IRS’ collection procedures, levy action is generally to be taken against the individually held income, such as wages, of the taxpayer who incurred the tax debt or any jointly held income, such as an interest-bearing account, not against the separate income of the other spouse. In 1994, IRS issued 3 million third-party levies. However, the agency did not know how many of these levies were placed on the income of a spouse living in a community property state to pay the premarital tax debts of the other spouse. As a result, we could not assess the effects of changing the law to prevent IRS from making these types of levies. The current tax code contains several provisions that override state community property laws for noncollection activities. For example, the innocent spouse provisions, section 6013(e), specifically prevent IRS from following state community property laws in determining the tax liability on omission from gross income. Also, under section 879(a), community property laws do not apply to the earned income of nonresident aliens. However, making an exemption for this specific collection activity for premarital debts would set a precedent because it would require IRS to ignore state community property laws for a collection activity. Furthermore, unless the states change their community property laws, such a change would not necessarily protect taxpayers’ assets. Private sector creditors could continue to pursue community assets to satisfy community debts even though IRS was precluded from attaching such assets. The inequities created by having IRS follow state community property laws are not limited to levying the income of a spouse to pay the premarital tax debts of the other spouse. For example, the eligibility criteria for injured spouse relief on IRS Form 8379, Injured Spouse Claim and Allocation, specifically state that “Overpayments involving community property states will be allocated by the IRS according to state law. Claims from California, Idaho, Louisiana, and Texas will usually result in no refund for the injured spouse.” Thus, IRS follows state community property laws when withholding refunds to apply against nontax debts. IRS does not track how often innocent spouse relief is requested or granted; however, we estimate that a relatively small number of taxpayers are eligible for relief under the current innocent spouse provisions. The provisions, with their various qualifying criteria, are complex and difficult to meet, and they require IRS staff to weigh various factors in deciding whether to enforce the joint and several liability standard or to relieve taxpayers of their joint liability. IRS provides limited information to taxpayers about the availability of and criteria for relief and does not have a tax form and procedures for requesting and granting relief. Several proposals have been made to modify innocent spouse relief. More taxpayers might qualify for relief if Congress eliminated or modified the dollar thresholds to allow IRS to consider relief for taxpayers with liabilities less than $500. Replacing the joint and several liability standard with a proportionate liability standard may also provide additional relief to taxpayers, but this alternative could create a significant administrative burden for taxpayers and IRS. Requiring IRS to be bound by divorce decrees appears to be impractical because of the legal and administrative hurdles that would have to be resolved. Finally, if the law were changed to prevent IRS from levying the income of one spouse to pay the premarital tax debts of the other spouse, the inequities between taxpayers in community property states and common law states might be reduced. However, no data were available to assess the impact of such a change. To improve IRS’ administration of the innocent spouse provisions of the tax code, we recommend that the Commissioner of Internal Revenue (1) develop new or modify existing publications to better inform and educate taxpayers about the availability of and criteria for innocent spouse relief and, as part of that effort; (2) develop a tax form and procedures for requesting and either granting or denying innocent spouse relief. We also recommend that the Commissioner provide additional internal guidance to IRS employees so that greater consistency in processing innocent spouse cases can be achieved, establish a cost-effective process for monitoring the consistency being achieved, and update IRS’ regulations to reflect current requirements. In written comments on a draft of this report (see app. VI), the Commissioner of Internal Revenue generally agreed with our conclusions and recommendations and said that the findings in our report present a real possibility for imminent legislative reform of the innocent spouse provisions. She said that, thus, it would be preferable to determine if the current legislative session of Congress produces such reforms before devoting the resources necessary to carry out our recommendations. With this overall caveat, the Commissioner agreed with our first recommendation that IRS should modify existing publications to better inform taxpayers about the availability of innocent spouse relief. Likewise, the Commissioner agreed with our second recommendation that IRS develop a tax form and procedures for taxpayers to request innocent spouse relief and for IRS to either grant or deny such relief. She pointed out, however, that implementation of this recommendation would require approval and clearance of such a form from the Office of Management and Budget. The Commissioner also agreed with our third recommendation that IRS provide additional internal guidance to employees so that greater consistency in processing innocent spouse cases can be achieved. She said that the form and accompanying procedures developed under our second recommendation would also largely meet the intent of the third recommendation. The Commissioner said that she understood the concern that prompted our fourth recommendation to establish a cost-effective process for monitoring consistency in processing innocent spouse cases. She said, however, that existing management and information systems do not have the capability to track issues on specific cases and that the only alternative way to accomplish the recommendation, manual tracking of such cases, would be cost prohibitive and less reliable. It appears that the Commissioner misinterpreted the intent of our recommendation. We fully agree with her points about the capability of existing systems and the cost of manual tracking for such cases, and in fact, we considered these issues in arriving at the wording of our recommendation. Recognizing the problems with its existing systems and manual tracking, our intent was to have IRS explore process options that would not be cost prohibitive but would facilitate a greater level of consistency in innocent spouse decisions. We thought that such exploration was needed because we found a substantial amount of inconsistency and subjectivity, both within and among IRS districts, on how to interpret the knowledge factor in the current innocent spouse provisions. As an example of the kind of option that we thought IRS might explore in response to our recommendation, we noted that some districts had designated an employee as the innocent spouse coordinator, so that only one employee in each of those districts applied the knowledge test. This caused us to think that IRS could explore this as an option by first determining whether the districts with such coordinators have achieved greater consistency than those without coordinators. If this proves to be so, IRS could then explore the cost effectiveness of establishing innocent spouse coordinators in the remaining districts. By serving as focal points and monitors in their respective districts, these coordinators might facilitate more consistent decisions within districts, and by networking with each other, they might facilitate consistency among the districts. There may well be other options that IRS could explore before reaching a final decision on the best approach and it was to that end that we worded our recommendation to provide IRS with latitude to decide how it goes about achieving a greater level of consistency in its administration of the innocent spouse provisions. Finally, the Commissioner agreed in principle that IRS should update its innocent spouse regulations to reflect current law, but said that such action would be premature until Congress determines whether to reform the existing provisions. We agree with the Commissioner’s position on this recommendation as well as with her overall statement that it makes sense to wait until Congress decides whether to modify the existing law in the current legislative session before devoting the resources necessary to carry out most of our recommendations. We are sending copies of this report to various other congressional committees, the Secretary of the Treasury, the Commissioner of Internal Revenue, and other interested parties. Copies will be made available to others upon request. Please contact me at (202) 512-8633 if you or your staff have any questions. Major contributors to this report are listed in appendix VII. This appendix describes how we derived the potential universe of taxpayers that could be covered by the current innocent spouse provisions in the Internal Revenue Code. The innocent spouse provisions cover certain taxpayers who are assessed additional taxes of more than $500 after they file a “married, filing joint” tax return. Additional tax assessments generally result from an IRS audit or from underreported income detected in IRS’ underreporter program. We used tax year 1992 audit and underreporter results to estimate the potential innocent spouse universe because that was the latest tax year for which most tax assessments had been completed. To determine the number of married couples filing joint returns that had subsequent audit assessments, we used IRS’ Audit Information Management System (AIMS) database of tax year 1992 audit cases that were closed during fiscal years 1993, 1994, 1995, and the first 9 months of fiscal year 1996. The AIMS data showed that for tax year 1992, 441,224 “married, filing joint” returns were audited and closed by IRS’ Examination Division. However, 190,393 of the 441,224 audits resulted in either no change to the tax liability or in a refund. The remaining 250,831 audits resulted in additional tax assessments. Table I.1 shows the number of tax year 1992 “married, filing joint” return audit cases with additional tax assessments that were closed each fiscal year and shows whether the assessments were for amounts of $500 and less or for more than $500. As shown in table I.1, the 218,467 taxpayers with tax assessments of more than $500 potentially meet the eligibility criteria for innocent spouse relief. Thus, this is the maximum number of taxpayers that could request innocent spouse relief because of an audit assessment. Of the 1.8 million tax year 1992 underreporter cases, 89 percent (about 1.6 million) were assessed additional taxes in fiscal year 1995. The remaining 11 percent (about 200,000 cases) were assessed additional taxes in either 1994 or 1996. Since almost 90 percent of 1992 underreporter cases were assessed in 1995, we estimated the number of potential tax year 1992 innocent spouse cases by evaluating a stratified probability sample of 463 underreporter cases assessed in 1995. Based on the tax year 1992 returns in this sample, we estimated how many of the 1.6 million tax year 1992 returns assessed in 1995 were “married, filing joint” returns and, of those, how many had assessments under $500 and assessments of $500 or more. Although we did not have data to make similar estimates for the 200,000 tax year 1992 returns assessed in 1994 and 1996, we assumed that the filing status and assessed amounts for these returns would be similar to the returns in the 1995 sample where the assessments occurred either 2 years or 4 years after the tax year. We could not directly test this assumption, but our analysis of the data indicates that various characteristics of the returns, such as the amount assessed and the complexity of the underreporting problem, determined when IRS processed the case. We weighted the sample of 463 underreporter cases to represent the number of 1992 tax year returns processed in 1995 and other years and then estimated the potential innocent spouse cases for tax year 1992. We accounted for the stratified sample design and unequal weights for the sample cases when calculating the sampling errors. The point estimates and sampling errors for 1992 are given in table I.2. Adding the tax year 1992 joint filer underreporter cases with tax assessments of more than $500 in table I.2 to the 218,467 joint filer audit cases in table I.1 results in an estimated potential universe of innocent spouse cases of approximately 587,000 that is bounded by a confidence interval of between 531,447 and 643,091 returns. Additional uncertainty about this estimate comes from our previously mentioned assumption about the characteristics of the 11 percent of the 1992 returns that were not assessed in fiscal year 1995. To estimate the number of taxpayers who divorce each year, we obtained data from the Bureau of the Census and the Department of Health and Human Services. Census’ report, entitled Marital Status and Living Arrangements: March 1993, shows that there were 114,602,000 married individuals in the United States at that time. A Monthly Vital Statistics Report, dated October 1995 and prepared by the National Center for Health Statistics within the Department of Health and Human Services, states that approximately 1,191,000 divorces were granted in the United States in 1994. Therefore, an estimated 2,382,000 individuals who were married in 1993 had divorced in 1994. Dividing this number of individuals by the total number of married individuals in 1993 results in an annual divorce rate of 2.0784 percent, which we have rounded to 2 percent for the calculations in our study. To estimate how many of the potential innocent spouse cases would involve divorced couples over a 3-year period, we multiplied 583,410 by the annual divorce rate of 2 percent and then multiplied by 3. As part of IRS’ efforts to address the problems of divorced and separated taxpayers, the headquarters Problem Resolution Office asked the Problem Resolution Offices at four district offices and one service center to identify all cases where the taxpayer raised the issue of innocent spouse relief between January and June 1996. The offices identified 51 cases and forwarded them to headquarters, where we reviewed them. Of the 51 cases, 20 were not innocent spouse cases—for example, the taxpayer was actually an injured spouse or was requesting relief for taxes reported as owed on the original return. Of the remaining 31 cases, 4 involved taxpayers who had already been granted innocent spouse relief but IRS had not correctly transferred the tax liability to the culpable spouse. We did not include these cases since the files contained information only on the processing problem, not the innocent spouse issues. Table II.1 describes the characteristics of the remaining 27 cases. For the 24 cases where we could find data, all of the taxpayers began requesting help because of collection activity, such as having their wages levied by IRS. For the 24 cases where we could determine marital status, 20 taxpayers were divorced and 4 were separated. For the 21 cases where a decision had been reached, IRS granted relief in 10 of the cases. The following cases histories illustrate some of the issues involved in innocent spouse cases. According to IRS’ records, a taxpayer learned of an assessment of over $3,000 against a 1985 joint return when IRS levied her wages in 1992. The assessment was generated primarily by her ex-husband’s disallowed business and moving expenses, although he also had some unreported income. The taxpayer contacted the Problem Resolution Office about innocent spouse relief. Problem Resolution Office staff initially could not explain how to apply for relief but provided assistance during subsequent contacts. The taxpayer submitted documentation demonstrating that the unreported income was generated by her husband and received relief for about $200. According to an IRS official, she could not substantiate her husband’s disallowed business expenses and was held liable for the remainder of the tax. A taxpayer whose ex-husband was a wanted fugitive had outstanding tax liabilities because her ex-husband had failed to report income on their joint return for 1 tax year and had not paid the tax reported for 2 subsequent tax years. The taxpayer remarried, and IRS placed liens against her new husband’s property. IRS denied innocent spouse relief, in part because the liability for 2 years was for taxes reported as due on the original return. IRS did accept an Offer in Compromise for all 3 years. In 1995, a taxpayer wrote to IRS to protest a balance due on joint returns for 3 tax years. The taxes were attributable to income derived from her ex-husband’s fraudulent activities. In 1996, IRS informed the taxpayer she was not eligible for innocent spouse relief for 2 tax years because these balances were for taxes reported as due on the original returns but not paid when the returns were filed. However, IRS staff informed the taxpayer they would consider innocent spouse relief for 1 year if the taxpayer could demonstrate she had no knowledge of the unreported income. IRS denied her request for innocent spouse relief because she could not meet the knowledge test. Subsequently, she submitted third-party statements that she did not live a lavish or enhanced lifestyle as well as copies of police records on her ex-husband’s arrest and trial. IRS eventually granted innocent spouse relief for that 1 year. A taxpayer learned of an assessment of over $12,000 on a joint 1991 return when IRS levied her wages. The couple had legally separated and sold their residence. Although she had reinvested her half of the capital gain on the sale, her ex-husband had not done so within the 24 months required to defer taxes. IRS denied innocent spouse relief because the taxpayer could not meet the knowledge test. According to IRS, she knew of the possibility of the additional tax when she signed the return. A taxpayer learned of an assessment of about $1,200 on joint returns for 2 years when IRS seized her 1995 tax refund. The assessment was generated by her ex-husband’s unreported income. The taxpayer argued that the couple had maintained separate checking and savings accounts, and therefore she did not know of the unreported income. Furthermore, the divorce decree specified that she would assume outstanding credit card debts and her ex-husband would be responsible for all other debts incurred during the marriage. IRS denied innocent spouse relief for 1 year because the assessment for that year was less than the $500 threshold. IRS denied innocent spouse relief for the other year because the taxpayer did not meet the knowledge requirement. Because the unreported income was more than 75 percent of the ex-husband’s total income, IRS staff believe she should have been aware of the income earned even though the spouses had separate accounts. A taxpayer was assessed over $3,000 on joint returns filed in 4 tax years generated by her husband’s disallowed deductions for gambling losses. She was denied innocent spouse relief for 1 year because the assessment for that year was less than the $500 threshold. She was denied innocent spouse relief for the other 3 years because the assessment in each of those years was less than 25 percent of her adjusted gross income. We contacted the state tax agencies to discuss how they handle various issues surrounding joint and several liability when administering the state income tax system. Seven states—Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming—do not tax personal income. Since the tax agencies for these states do not administer any joint income tax returns, we excluded them from our review. The remaining 43 states and the District of Columbia do administer joint returns; however 2 states—New Hampshire and Tennessee—tax only interest and dividends. Table III.1 provides information by state on the type of liability standard the states apply to joint returns, the type of innocent spouse relief they administer, and whether they are bound by divorce decrees. Less restrictive innocent spouse relief (continued) This appendix describes how we estimated the increased returns-processing costs IRS would face if a proportionate liability standard were administered by either (1) eliminating joint returns and requiring all taxpayers to file separately; or (2) retaining joint returns but modifying them so that each spouse’s income, deductions, and credits are reported in separate columns. To estimate the cost of processing up to 48 million additional returns, we determined the distribution of the returns among the standard forms 1040, 1040A, and 1040PC in the 1992 Statistics of Income data. We then estimated the cost of processing these returns using IRS’ Document 6746, Cost Estimate Reference for Service Center Returns Processing for Fiscal Year 1994. The calculation is shown in table IV.1. Number (thousands) To estimate the additional data entry costs for 48 million tax returns if the returns were modified to show two income streams, we also used the distribution of the returns among the standard forms 1040, 1040A, and 1049PC in the 1992 Statistics of Income data and IRS’ Cost Estimate Reference for Service Center Returns Processing Fiscal Year 1994. The calculation is shown in table IV.2. Number (thousands) The extent to which adopting a proportionate liability standard would create an administrative burden for IRS depends partly on how easily IRS could use an automated reporting system to allocate income and mortgage interest payments between the two spouses. We reviewed a stratified probability sample of 200 joint tax returns selected from IRS’ 1992 Statistics of Income database to determine how much income was reported separately for each spouse or jointly for the married couple. We projected the results to the universe of 48 million couples who filed using the “married, filing jointly” status at a 95 percent confidence level. Of all the income in our sample, 77 percent was reported separately. About 2 percent of the income was reported as joint income, and we could not determine whether the income was separate or joint for 12 percent. As shown in table V.1, some types of income were generally reported separately. For example, IRA distributions and unemployment compensation were always reported separately, as was most farm income (Schedule F). As a result, IRS would have little difficulty allocating this income under a proportionate liability standard. In contrast, state and local tax refunds are generally reported in both spouses’ names. As a result, IRS could have difficulty allocating this income between the two taxpayers. We had difficulty determining whether other income categories were separate or joint. For example, we generally could not determine which taxpayer earned the profit or loss reported on Schedule E, supplemental net gains or losses, or net operating losses. Jack Erlan, Evaluator-in-Charge Jonda Van Pelt, Senior Evaluator 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. 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 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. | Pursuant to a legislative requirement, GAO reported on several issues related to the joint and several liability standard that applies to jointly filed federal income tax returns, focusing on: (1) the potential universe of taxpayers that may be eligible for innocent spouse relief; (2) the Internal Revenue Service's (IRS) practices and procedures for handling requests for innocent spouse relief; (3) whether the innocent spouse provisions provide the same treatment for all taxpayers; (4) the potential effects of replacing the joint and several liability standard with a proportionate liability standard; (5) the potential effects on IRS of requiring it to abide by the terms of divorce decrees when those decrees allocate tax liabilities; and (6) the potential effects on IRS of changing the law so that community income of one spouse cannot be seized to satisfy tax liabilities incurred by the other spouse before their marriage. GAO noted that: (1) it estimated that about 587,000 of the 48 million couples who filed joint returns in 1992 had additional tax assessments of more than $500; (2) this estimate represents the maximum number of taxpayers potentially eligible for innocent spouse relief, however, fewer would probably actually qualify; (3) although any taxpayer signing a joint return may seek innocent spouse relief, according to IRS officials, divorced taxpayers are more likely to face the most egregious problems; (4) the limited information that was available indicated that IRS received few requests for innocent spouse relief and denied most of them; (5) GAO observed that IRS publications provide little information on how to request innocent spouse relief and that the publications covering procedures related to the need for relief have no information on relief; (6) critics of the innocent spouse provisions contend that the current provisions do not ensure that all deserving taxpayers receive equivalent relief; (7) GAO estimated that for tax year 1992, an additional 42,600 divorced taxpayers might have been eligible for innocent spouse relief if the dollar thresholds had been eliminated; (8) an alternative way to ensure that taxpayers are not held liable for their spouses' taxes would be to replace the joint and several liability standard with a proportionate liability standard; (9) under such a standard, taxpayers would be responsible only for the taxes generated by their individual incomes and assets or, for taxpayers living in community property states, for the tax associated with one-half of the community income; (10) divorcing couples may specify in their divorce decrees how future liabilities resulting from their prior joint returns are handled; (11) requiring IRS to be bound by divorce decrees is impractical for two major reasons; (12) federal tax matters are the exclusive jurisdiction of certain federal courts, while divorce matters are generally handled by state courts; (13) IRS officials also raised related concerns, such as whether their interpretation of lengthy and complex divorce decrees would increase the number of appeals and whether divorce decrees would be manipulated to reduce tax liabilities (14) IRS can treat taxpayers living in community property states differently from taxpayers living in common law states when collecting taxes; and (15) since IRS does not maintain data on how often these levy actions occur, GAO could not assess the potential impact on IRS of changing the law to treat everyone the way it treats taxpayers in common law states. |
From an estimated $100 million when the act was passed in 1988, revenue from Indian gaming reached $1.2 billion in 1992, $3.2 billion in 1994, and exceeded $6 billion in 1996. As we reported last year, casinos accounted for most of the Indian gaming revenue, and a few large casinos accounted for a major portion of the casino revenue. In 1996, according to the Commission, for every $1 in revenue derived from Indian bingo gaming, almost $15 derived from Indian casino gaming. Although tremendous growth in total revenue has occurred, not every Indian gaming operation has been successful. In addition, not every operation has been without controversy. One contentious issue concerns the types of casino games that can be played within states. The Indian Gaming Regulatory Act of 1988 established several requirements. One requirement is that net revenues from tribal gaming are to be used to (1) fund tribal government operations or programs, (2) provide for the general welfare of the Indian tribe and its members, (3) promote tribal economic development, (4) donate to charitable organizations, or (5) help fund the operations of local government agencies. In addition, tribes may distribute a portion of their net revenues directly to tribal members as per-capita payments. However, such a distribution requires a revenue allocation plan that must be approved by the Secretary of the Interior. The act established three classes of gaming to be regulated by a combination of tribal governments, state governments, and the National Indian Gaming Commission. Briefly, Class I gaming includes traditional forms of Indian gaming connected with tribal ceremonies or celebrations and is regulated solely by the tribes. Class II gaming includes bingo and other similar games and is regulated by the tribes and the Commission. Class III gaming includes casino games and slot machines and, although the Commission has regulatory responsibilities under the act, is regulated primarily by the tribes and states according to a compact that governs the gaming activities. For ease of discussion, we use “Indian bingo gaming” to refer to all Class II gaming and “Indian casino gaming” to refer to all Class III gaming. The compact for Indian casino gaming is a negotiated agreement that establishes the state’s and tribe’s regulatory and oversight roles and specifies the games allowed. It may include provisions concerning the standards for the operation and maintenance of the gaming facility, the application of the tribe’s and the state’s laws and regulations that are related to the gaming activity, and the state’s assessment of the amounts necessary to defray the costs of regulating or overseeing the gaming activity. A compact may cover a single gaming operation or multiple operations, depending upon what is negotiated. The act requires that tribes and states negotiate compacts to balance the interests of both the state and the tribe. In addition, the Secretary of the Interior must approve the compacts. The act also requires that the tribe’s governing body must pass a tribal gaming ordinance or resolution before the tribe can have casino gaming. Furthermore, if a management company is to run the gaming operation, a management contract is required. Per the act, the Commission must approve tribal gaming ordinances or resolutions and management contracts. At the end of fiscal year 1997, of the 275 Indian gaming operations, 203 had casino gaming, according to the Commission. Of these 203, 141 were operating with an approved compact, while 62 were not. Of the 57 Indian casinos in the four states that we visited that had Indian gaming, 45 were operating with a compact approved by the Secretary. Three tribes in Washington operated the remaining 12 without a Secretary-approved compact. Of those, 11 casino operations of two tribes contained slot machines, which Washington does not allow, and Washington would not agree to a compact allowing them. According to state officials, these two tribes are allowed to operate under a court order until pending litigation on this issue is settled. The other tribe with one operation had a compact approved by the state but not by the Secretary, as of the end of fiscal year 1997. The tribe has since submitted the compact for approval, and approval was granted on March 30, 1998. In these four states, about 60 percent of all of the federally recognized tribes (46 of 78) have negotiated compacts, but not all have opened casino operations or had successful operations. Figure 1 shows the number of Indian casino gaming operations by state. The National Indian Gaming Commission is headed by a Chairman and two associate commissioners. The Commission grew from a total staff of 9 in fiscal year 1991 to 37 in fiscal year 1997. With the staffing increases, the Commission’s organization evolved to its current organizational structure, which includes a Chief of Staff and a General Counsel reporting to the Chairman. Reporting to the Chief of Staff are two primary oversight offices—the Office of Contracts and Audits with 3 staff and the Office of Enforcement with 16 staff, including 6 field investigators. The Office of General Counsel has five staff. The Commission’s revenue increased from $1.6 million in fiscal year 1991 to $3.8 million in fiscal year 1997. The revenue came from fees on Indian bingo operations, federal appropriations, and cost reimbursements for conducting background investigations on contractors and processing fingerprints. While the revenues from fees and appropriations have remained fairly constant and are the primary sources of revenue, cost reimbursements have increased dramatically. Expenditures have also increased in the last 7 years—from $1.2 million to $4.6 million. The Commission’s expenditures for the last 4 fiscal years have outpaced its revenues. The Commission used prior years’ carryover balances to make up the difference. Figure 2 shows the Commission’s sources and amounts of revenue and expenditures over the 7-year period. Established by the Indian Gaming Regulatory Act of 1988, the Commission is responsible for ensuring that both Indian bingo and casino gaming operations are in compliance with the act and its regulations. For example, the Commission is responsible for ensuring that the tribe has an approved tribal ordinance concerning the conduct of bingo and casino gaming. In the first few years of existence, the Commission focused its efforts on its responsibility to promulgate regulations. Later, the Commission focused on reviewing and/or approving various gaming reports and submissions for both bingo and casino gaming as well as on its monitoring activities. It reviews or approves (1) tribal ordinances for bingo and casino gaming that establish how tribes will comply with the Commission’s regulations; (2) management contracts that establish the relationship between the tribe and its gaming operator, including the payment to be made for this service; (3) annual independent audits of the financial statements; and (4) background investigation reports. The Commission monitors compliance with its regulations and the requirements of the act. Monitoring activities include examining records of the gaming operation and inspecting the gaming facilities. As a part of its monitoring, six Commission field investigators made over 500 field visits in 25 states during the last 2 years. These visits involved discussions about compliance requirements as well as examinations of the records and inspections of the operations. Also, the Commission took 55 enforcement actions in the last 2 years for violations of the act or of the Commission’s regulations. Much variety exists among the five state gaming agencies that we reviewed that regulate or oversee casino gaming; differences exist in their organization, staffing levels, and funding levels. These differences are not, by themselves, an indication of effectiveness. They merely reflect differences in the scope and level of the state agencies’ responsibilities. For example, the gaming agencies vary from a small organization that reviews compliance and operations at least quarterly to a relatively huge organization that has 24-hour continuous monitoring. Some states’ programs have some unique aspects. For example, Washington limits the number of gaming tables that a casino may have, and Arizona limits the number of slot machines on the basis of tribal membership. Michigan, on the other hand, considers the number of machines in a casino to be a business decision made by each individual operation. (Apps. III through VII provide the details of each state’s program.) The five state gaming agencies varied from a large, multibodied organization to much smaller units. The larger organizations are in New Jersey and Nevada, which primarily oversee billions of dollars in non-Indian casino gaming. The smaller units are in Arizona, Michigan, and Washington—states that oversee Indian casino gaming with many fewer total gaming dollars involved. All five state agencies, although structured differently, include audit and investigations functions. For fiscal year 1997, staffing and expenditures in the states with the larger, more complex organizations were much greater than for the smaller organizations, as would be expected. The number of gaming operations in a state, however, does not correlate directly to the state agency’s staffing level. For example, for 17 Indian casinos, Michigan committed 2 staff to oversee gaming operations. Washington, which has 11 Indian casinos, committed 24 staff to oversee the gaming operations. As we discuss later, staffing and funding levels reflect the states’ roles in oversight or regulation. Table 1 illustrates the staffing and funding variations among the states. Although revenue sources vary somewhat, the gaming agencies in all five states receive their funding from gaming operations within the state; state tax dollars are not used. Generally, the states are reimbursed for the expenditures they actually incur for their licensing, certification, or oversight costs. Arizona bills the tribes for services provided, but if bills for services do not cover all expenditures, Arizona allocates the remaining amount (shared enforcement expenditures) on the basis of the number of gaming machines an operation has. New Jersey also bills for services provided but allocates any remaining costs equally among the casinos. Michigan bills the tribes equally for staff wages and benefits and bills for other expenses as they are incurred. Nevada, depending on the compact, charges the tribes a 1-percent fee or bills for services provided. Washington either bills for services or charges a flat fee, at the option of the tribe. Nevada, Michigan, and New Jersey receive additional revenue from gaming. In Nevada, this additional revenue is largely generated from the fees assessed on gaming revenues. Michigan and New Jersey also receive a percentage of the gaming revenues. Michigan receives an 8-percent fee on electronic video gaming and slot machine earnings because the tribes have the exclusive right to operate such games in the state. New Jersey collects an 8-percent tax on casinos’ gross revenues, which is used to benefit senior citizens and disabled persons within the state. The level of staffing and funding that each state commits to gaming oversight or regulatory activities varied according to the responsibilities each state has for licensing, monitoring, and enforcement. New Jersey is the only casino gaming regulator in the state and, therefore, assumes all of the oversight responsibilities. Nevada assumes all of the responsibility except in the case of one Indian casino gaming operation for which, under the compact, the tribe assumes some of the regulatory responsibility. Arizona, Michigan, and Washington all monitor or oversee Indian casino gaming. Their responsibilities for licensing and enforcement vary according to the compact negotiated. The states differed in how they handled the licensing of gaming businesses and individuals, such as operators, employees, contractors, and suppliers. New Jersey licenses these individuals because the state is the only casino gaming regulator. Depending on the compact, Nevada may license these individuals or the tribe may have the responsibility. In Arizona, Michigan, and Washington, the tribes license businesses and individuals. However, Arizona and Washington have a certification process to certify the businesses and individuals as suitable. Michigan, which has standards for gaming equipment, supplies, and machines, does not certify businesses or individuals associated with Indian gaming casinos. Monitoring activities in the five states were fairly similar, but the frequency of the monitoring varied. For example, all states review the annual financial reports of the gaming operations and conduct informal observations of gaming operations. However, the states perform their monitoring activities at various times. For example, Washington conducts many of its activities weekly, whereas Michigan conducts its activities at least quarterly. In some instances, states conduct their monitoring activities at nonspecific times, such as periodically or ongoing. Table 2 shows how states perform selected monitoring activities at widely differing intervals. New Jersey is the only state of the five that has a state presence in the casinos at all times during operations. This presence is possible, in part, because all of the state’s casinos are located in Atlantic City. The five states varied somewhat in their enforcement authority. New Jersey and Washington have the authority to assess fines or penalties and seize illegal equipment. Arizona and Michigan do not. For Indian gaming, Nevada’s enforcement authority varies according to the compact. Of the five states, only Michigan, which does not certify or license gaming employees or establishments, cannot suspend or revoke any employee’s license. All five states can ultimately suspend or shut down a gaming operation, either directly or through an injunction directing closure. In outlining their views on the elements critical to regulating gaming, the heads of the gaming agencies in all five states stressed the importance of ensuring the integrity of gaming. From their perspective, two critical elements emerge. All agree on the importance of accounting, administrative, and internal controls, such as audits of the financial statements, to assist the regulators and casinos in monitoring gaming operations. Four of the five view the licensing or certification process, which includes background investigations of individuals and companies, as critical. They noted that this process helps to identify individuals and companies having criminal records or involvement with organized crime in order to keep such elements out of the states’ gaming operations. State officials provided a variety of other critical elements. For example, Nevada and Arizona noted the importance of having the regulatory body independent from the industry regulated. Washington and Michigan cited the importance of a cooperative relationship between the tribe and state. New Jersey pointed out that it is important to have a laboratory to evaluate and approve the sophisticated electronic equipment and devices used in the gaming industry and to monitor changes and advances in technology. We provided a draft of this report to the Commission and the gaming agencies in the five states we visited as well as to the tribes whose gaming operations we visited. The Commission’s Director of Contracts and Audits provided several technical comments, which we incorporated into this report. He also pointed out that we did not mention the role of the tribal gaming commissions, whose role the Commission views as significant. We recognize that the tribes have a regulatory role that is based on what is negotiated in their compacts, as stated in the background section of our report. However, the major objectives of our review were to provide information on the Commission’s organization, staffing, funding, and responsibilities from 1991 to 1997 and similar information for five states’ gaming agencies. We obtained comments from each of the five states’ gaming agencies. The Arizona Department of Gaming (see app. VIII), the Deputy Director of the Michigan Gaming Control Board, and the Chairman of the Nevada Gaming Control Board provided technical comments, which we incorporated, as appropriate, into our report. New Jersey’s Division of Gaming Enforcement (see app. IX), New Jersey’s Casino Control Commission, and the Washington State Gambling Commission indicated that the report was accurate. The Arizona Tribal Gaming Regulators Alliance, which represents the Arizona gaming tribes, provided comments on its differences with the information provided by the Arizona Department of Gaming and noted that the draft report did not discuss the regulatory role and commitment of the tribal gaming commissions in protecting the integrity of gaming in Arizona. The Alliance presented its view that the Department is attempting to both attack the sovereignty of Arizona tribes and increase the Department’s role to more than oversight. Specifically, the Alliance stated that the state’s oversight responsibility is limited to monitoring, rather than enforcement; would prefer a different presentation of the state’s revenue and expenditures; and stated that the intervals for monitoring activities were less frequent than what the Department said it performed. Finally, the Alliance concluded that the Arizona gaming tribes would be more agreeable to an increased role by the National Indian Gaming Commission and a reduced role by the Arizona Department of Gaming. The tribal gaming commissions have a regulatory role in Indian gaming activities. However, the scope of our review was to obtain data from the state gaming agencies, including Arizona’s, on their licensing, monitoring, and enforcement concerning gaming activities—not the tribes’. The remaining comments noted above by the Alliance demonstrate the differing views that exist in Arizona between the Alliance and the Department. Because our scope was limited to gathering data from the states, we did not take a position on or try to reconcile these differing views. Appendix X presents the Alliance’s views in their entirety, and we have annotated the Alliance’s letter to indicate the current pages to which the comments refer. In a separate letter, the Ft. McDowell Tribal Gaming Office, of one of the Arizona gaming tribes, found the report informative and noted that it indicates that diverse Indian gaming regulation by states is “creeping” toward increased federal control and more stringent state controls, in spite of Indian gaming efforts to adequately regulate Indian gaming businesses. These comments are in appendix XI. The tribes whose gaming operations we visited in Michigan, Nevada, and Washington had no comments on the draft. At the National Indian Gaming Commission, we met with staff, including the Chairman and an Associate Commissioner, to discuss the Commission’s organization, staffing, funding, and responsibilities. We reviewed documents that they provided as well as the Indian Gaming Regulatory Act, the Commission’s relevant regulations, congressional hearings, and recent legislation proposed to modify the Commission’s responsibilities. To obtain an indication of the type and frequency of contact made with gaming operations by Commission field staff, at our request, the Commission identified the number and type of field visits made during the last 2 years. To obtain information on the organization, staffing, funding, and responsibilities of the state agencies that regulate or oversee casino gaming operations, we visited five states. We were specifically requested to gather this information for Nevada and New Jersey, which are the two states with the largest gaming revenues. We judgmentally selected Arizona, Michigan, and Washington as the other three states to provide information about a variety of tribal-state gaming relationships and to include states that had only Indian casinos at the time of our review. Because our work was performed in a limited number of states, the results cannot be used to make generalized statements about all states’ activities. In all five states, we met with staff to discuss the states’ roles and operations and to obtain various documentation, including copies of organizational charts, state regulations, copies of tribal-state compacts, and state reports on gaming operations. To obtain comparable data on funding, staffing, and monitoring activities, we provided each state with tables in standard format for them to complete. We met with state staff and officials to discuss their states’ regulation or oversight of gaming operations. In addition, we obtained written comments on views of critical regulatory elements from the heads of the Arizona Department of Gaming, the Michigan Gaming Control Board, the Nevada Gaming Control Board, the New Jersey Casino Control Commission, the New Jersey Division of Gaming Enforcement, and the Washington State Gambling Commission. Because our work focused on the states’ perspectives, we did not review the operations of the tribal gaming commissions. However, we visited gaming activities in all five states to observe their operations and procedures. We visited Indian casinos in Arizona, Nevada, Michigan, and Washington and non-Indian casinos in Nevada and New Jersey. Because the funding and staffing figures we used were generally from budgets or other published data, we did not independently verify the accuracy of these figures. When appropriate, however, we asked for clarification of the figures provided. Because it was beyond the scope of what we were asked to do, we did not assess the effectiveness of the Commission’s or state gaming agencies’ programs or operations. We conducted our review from June 1997 through March 1998 in accordance with generally accepted government auditing standards. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies of this report to the Secretary of the Interior; the Director, Office of Management and Budget; the Chairman, National Indian Gaming Commission; the five states’ gaming agencies discussed in this report; tribes whose casinos we visited; and other interested parties. We will also make copies available to others upon request. If you or your staff have any questions about this report, please call me at (202) 512-3841. The Indian Gaming Regulatory Act of 1988 (Pub. L. 100-497) established the National Indian Gaming Commission as an independent agency within the Department of the Interior. Although the Commission began its start-up efforts in May 1990, it did not consider itself operational until early 1993 after the publication of its regulations in the Federal Register. The Commission’s mission is to fulfill the mandates of the act in fostering the economic development of Indian tribes by attempting to ensure the integrity of Indian bingo and casino gaming and to ensure that tribes are the primary beneficiaries. The Commission is responsible for regulating Indian bingo and casino gaming in 28 states and 275 gaming facilities operated by 189 tribes. Figure II.1 shows which states have Indian bingo gaming and the number of operations in each state. Figure II.1: Distribution of 207 Indian Bingo Gaming Operations, by State MT (4) ND (3) MN (16) SD (17) WY (1) (16) NY (4) MI (6) IA (2) CT (2) CO (2) KS (2) NC (2) NM (6) OK (38) AL (1) TX (1) FL (5) As established by the act, the Commission is composed of three full-time commissioners—a chairman appointed by the President with the advice and consent of the Senate and two associate commissioners appointed by the Secretary of the Interior. At least two must be enrolled members of an Indian tribe, and no more than two may be of the same political party. The commissioners serve 3-year terms. The first Chairman of the Commission came on board in May 1990, and the two associate commissioners started in November 1990 and April 1991, respectively. The Commission has had three Chairmen and two acting Chairmen and a total of five associate commissioners. The most recent Chairman started in September 1997. The Commission has evolved to its current organization, which consists of a General Counsel and a Chief of Staff who report to the Chairman. Under the Chief of Staff are the two primary oversight divisions, the Division of Contracts and Audits and the Division of Enforcement, and two other divisions, Chief Financial Officer/Administration and Congressional and Public Affairs. The Division of Contracts and Audits is responsible for overseeing annual audits of tribal gaming operations and management contracts between the tribes and the companies running their gaming operations. The Division of Enforcement is responsible for monitoring compliance with the act and the Commission’s regulations and taking appropriate enforcement actions. The Chief Financial Officer/Administration Division is responsible for budget, financial, and administrative matters, while the Congressional and Public Affairs Division is the liaison to the public and the Congress. Including the three commissioners, the Commission began with 9 staff in fiscal year 1991 and increased to a total of 37 staff by the end of fiscal year 1997. In addition to the Chairman and the two Associate Commissioners, five staff are in the General Counsel’s office. Under the Chief of Staff, 3 staff are in Contracts and Audits, 16 are in Enforcement, including 6 field investigators to cover the 28 states with Indian gaming, 8 are in Chief Financial Officer/Administration, and 1 is in Congressional and Public Affairs. Figure II.3 shows the growth in staffing at the Commission over the last 7 years. The Commission’s revenue comes primarily from fees assessed on Indian bingo gaming revenues, federal appropriations, and cost reimbursements. In fiscal year 1991, the Commission had $1.6 million in revenues—77 percent from appropriations, 23 percent from fees, and no cost reimbursements. By fiscal year 1997, the Commission had $3.8 million in revenues—39 percent from fees, 35 percent from cost reimbursements, and 26 percent from appropriations. The Congress provided for an increase in the Commission’s fiscal year 1998 funding. Starting in 1998, the Commission can charge fees on the revenues of Indian casino gaming as well as Indian bingo gaming. The total amount that can be collected from such fees increased from $1.5 million to $8 million. In addition, up to $2 million can be appropriated. Thus, fees will likely provide the majority of the funding for the Commission. Expenditures for the Commission also have increased each year since fiscal year 1991. During the last 4 fiscal years, expenditures exceeded revenues to the Commission. Unused fees carried over from prior years were used to make up the difference between the two. Table II.1 shows the Commission’s revenues and expenditures since 1991. The Indian Gaming Regulatory Act established the Commission’s responsibilities for the different classes of Indian gaming, charging the Commission with regulating and monitoring Indian bingo gaming and certain aspects of Indian casino gaming. Individual tribes and states regulate casino gaming under negotiated tribal-state agreements, called compacts. The act requires the Commission to provide the Congress with a report on various issues pertaining to the Commission every 2 years. Initially, the Commission focused its efforts on its responsibility to promulgate regulations for Indian bingo and casino gaming. From April 1991, when the third commissioner was approved, until January 1993, the Commission developed, proposed, and issued regulations covering such requirements as the annual fee rates, ordinances, background investigations for gaming licenses, management contracts, monitoring and investigations, and enforcement. During this time, in December 1991, the Commission issued its first and only report to the Congress, although the act established the requirement for a report every 2 years. The Commission also performed other initial responsibilities, such as requesting and reviewing for approval all existing ordinances. The Commission’s more recent efforts have focused on ongoing responsibilities, such as processing fingerprint cards, the review and approval of new ordinances, management contracts, and background investigation reports for Indian bingo gaming and Indian casino gaming, as well as oversight and monitoring of Indian bingo and casino gaming. The Commission’s monitoring responsibilities include examining records and inspecting the facilities. As a part of the Commission’s monitoring, six field investigators made over 500 field visits in 25 states during the last 2 years. These visits, in part, were to monitor and discuss compliance requirements and to inspect gaming operations and their records. Because the Commission assesses a fee on Indian bingo gaming, it is responsible for verifying the gross revenues of Indian bingo gaming, collecting fees, and reconciling the quarterly fee reports from these operations. In addition, the Commission reviews the results of the annual independent audits of the financial statements of Indian bingo gaming and Indian casino gaming operations, which the act requires to be submitted to the Commission. The Commission also has enforcement responsibilities, preparing a quarterly report to the Secretary of the Interior on tribal compliance with the act and its regulations. Depending on the severity of the noncompliance and whether voluntary compliance can be obtained, noncompliance can result in a notice of violation, an order of temporary closure, or a civil fine of up to $25,000. According to the Commission, from 1994 through 1997, the Commission took 67 enforcement actions, of which 55 were taken in the last 2 years, and collected over $1 million in fines for violations of the act or the Commission’s regulations. These actions were against both Indian bingo and casino gaming operations and covered a range of violations including operating casino gaming without a compact, failure to submit an annual audit, and operating in a manner that threatened public health and safety. The Commission also provides training to assist tribes in understanding regulatory requirements. For example, its January 1997 compliance workshop included speakers and information on the quarterly report prepared by the Commission on overall compliance, compacts, background investigations, management contracts and the Commission’s enforcement policy, procedures, and priorities. According to the Arizona Department of Gaming, an Arizona federal district court judge ruled in 1991 that the state of Arizona had to negotiate the scope of games to be included in a compact with the tribes. Although the state successfully negotiated compacts with four tribes, several other tribes asked for mediation to resolve disagreements concerning the scope of gaming to be allowed. Between June 24, 1993, and April 14, 1994, the state agreed to 10-year compacts with 16 of the 21 federally recognized tribes in Arizona. According to the state, these compacts provide for state oversight of casino gaming in Arizona and are generally similar with some minor modifications on a case-by-case basis. Under the compacts, tribal population determines the number of gaming devices authorized and the number of locations authorized. For 11 of the 16 tribes with compacts, the compact allows each to have up to 475 gaming devices at two facilities. Four tribes are allowed up to 900 gaming devices at three locations, and one tribe is allowed 1,400 gaming devices at four locations. While these 16 tribes are authorized a total of 10,225 gaming devices at 38 locations under their compacts, as of the end of December 1997, 14 tribes were operating casinos in 16 locations with a total of 6,490 gaming devices. (See fig. III.1.) In addition, two tribes with compacts have closed their casino gaming operations—one in 1995 and one in 1996. The Arizona State Gaming Agency was established within the Arizona Department of Racing to carry out the state’s responsibilities under the Indian Gaming Regulatory Act and the gaming compacts negotiated pursuant to the act. In 1995, the Arizona Department of Gaming was established as a separate state agency. Its mission is to protect the public by ensuring the integrity of the Indian gaming industry in Arizona. The Department is headed by a Director appointed by the Governor and confirmed by the Arizona Senate. It monitors and enforces compliance by the tribal gaming operations with all compact requirements, including those governing the nature, extent, and conduct of gaming activities; public health, safety and welfare; and other operational requirements. The Department conducts background investigations to ensure that unsuitable individuals or companies are not involved in Arizona’s gaming industry. The Department has two divisions, Enforcement and Administration, each headed by a Deputy Director. The Enforcement Division is divided into five units: Applications/Records, Compliance Audit, Corporate Investigations, Games and Devices Compliance, and Tribal Affairs Investigations. The Applications/Records Unit processes all individual certification applications; collects fees; maintains agency records and databases; and conducts background investigations on individuals. The Compliance Audit Unit performs compact compliance reviews to monitor the tribes’ compliance with all of the provisions of the compact; tests internal controls; and reviews and analyzes financial records of companies applying for state certification. The Corporate Investigations Unit performs the corporate background investigations that are required to obtain state certification. The Games and Devices Compliance Unit ensures that electronic games of chance and related equipment comply with the technical standards set forth in the compacts before the devices are put into operation at the gaming facility and through random inspections and testing. The Tribal Affairs Investigations Unit is the primary unit charged with enforcing compact provisions at gaming facilities. This unit conducts background investigations on all key employees, primary management personnel, and casino employees submitting renewal applications. The Administration Division is responsible for accounting, budget, hearings, purchasing, personnel, planning, and support services. Table III.1 and figure III.3 show how the agency’s staff were distributed for fiscal year 1997 and total staffing for fiscal years 1993 through 1997, respectively. The Department is funded by the gaming industry solely through gaming device assessments and certification fees. The $500 annual assessment for a gaming device is used to fund enforcement and is pro-rated on the basis of quarterly use. The certification fee is nonrefundable and applied to the actual cost of the background investigation. However, should the cost of the investigation exceed the initial certification fee, the applicant is required to reimburse the Department in full for its actual costs before the state issues certification. In fiscal year 1997, enforcement activities represented about 70 percent of the Department’s operating budget, and certification represented the remaining portion of the budget. Actual expenditures for enforcement are allocated to the tribes in two ways. The expenditure may be directly billed to an individual tribe if the expenditure is directly attributed to that tribe. Otherwise, shared enforcement expenditures are billed quarterly to each tribe on the basis of the number of machines a tribe has; the greater the number of gaming devices, the more its share of the shared enforcement expenditures. If revenues exceed expenditures, the distribution is made similarly. Table III.2 shows the change in revenue and expenditures since 1993. The Department of Gaming’s oversight responsibilities include certification, monitoring, and enforcement. The Department is responsible for the certification of individuals and companies involved in gaming, the review of individual tribal members’ applications, and monitoring to ensure that operations are conducted in compliance with the compacts. In Arizona, the compacts call for the tribe to license and the state to certify. The Department certifies non-tribal individuals seeking employment in the gaming industry, manufacturers and suppliers of gaming services, distributors of gaming devices, and management contractors. The tribe licenses these same individuals and companies. However, the tribe is not bound to issue a license if a state certification has been issued. The Department does not certify tribal members. Instead, the state issues a recommendation for licensing on the tribal member. Furthermore, if an individual tribal member is denied a state recommendation, the tribe may allow this person to work at its casino without a state recommendation. The state may appeal the decision at an appropriate tribal forum, and the decision of the tribal forum is final. While this individual would be able to work at a casino gaming operation of his or her tribe, this individual would not be able to work at a different tribe’s casino gaming operation without state certification. According to the Department, under the compacts, the gaming facility operators cannot employ someone who has been convicted of any felony or gaming offense and must terminate any such employee if already employed. Tribal licenses and state certifications are effective for 1 year from the date of issuance. The compact allows tribes to set their fees for licensing and prescribes the state’s fees for certification shown in table III.3. According to the compacts, the primary responsibility for the on-site regulation, control, and security of the gaming operation is that of the tribal gaming agency. The Department has the authority to monitor the gaming operation to ensure that the operation is conducted in compliance with the compact’s provisions and conducts regular inspections of facilities to verify compact compliance. The Department has unrestricted access to public areas but generally must provide notice to enter nonpublic areas. The Department has access to records of the gaming operation and reviews employment records to verify certification status and workpapers prepared for the annual financial audit. The tribe has access to the Department’s records on the tribe’s casino gaming. Table III.4 shows selected monitoring activities and the frequency of the monitoring performed by the state gaming agency. According to the Department, the tribes and the Department have dual responsibilities for ensuring compliance with the compact. The tribe investigates reported violations of the compact provisions and sends copies of the investigative report to the state. In turn, the Department conducts an independent investigation of the reported violations. If the violation is committed by a non-tribal employee or a vendor certified by the Department, the Department may suspend or revoke its certification. If the violation is committed by the gaming operation, the only remedy available to the Department under the compact is to file suit in federal district court to enjoin the gaming activity. The compact does not provide the Department the ability to assess fines or penalties, seize illegal equipment, or resolve patrons’ disputes. The Director, Arizona Department of Gaming, stressed the cash-intensive nature of the industry and identified three critical elements for regulating gaming: (1) a truly independent regulatory body; (2) licensing, reporting, and audit requirements; and (3) minimum levels for internal controls. First, according to the Director, the body that provides oversight must be truly independent and should not be composed of individuals who have an interest in the gaming industry. This body should have broad enforcement authority that should include investigative authority, criminal jurisdiction, subpoena authority, the authority to assess civil fines, and the ability to close noncomplying gaming facilities. Due process requirements must be provided, as well. Second, a licensing component should be included for the independent regulatory body to conduct background/financial investigations of individuals employed in the industry and companies seeking to conduct business with gaming facilities. The Director said that these investigations are extremely useful in identifying and deterring organized crime influences within the industry. Gaming revenues should be reported to the independent regulatory authority, and this authority must be able to conduct independent audits of the gaming facilities. Finally, the independent regulatory authority should be able to establish minimum internal controls for the handling and protection of assets and enforce compliance with these internal controls. Until recently, tribal gaming was the only legalized casino gaming in the state. Non-Indian casino gaming is expected to begin in 1999 as a result of the passage of a voter referendum to allow private casino gaming in the state. Tribal gaming began in Michigan in the early 1980s with high-stakes bingo games, but compacts were not entered into until 1993, when seven tribes signed compacts with the state. As of December 1997, the 7 tribes, of the state’s 11 tribes that are currently federally recognized, operate a total of 17 separate casinos. (See fig. IV.1.) Two of the 17 casinos were the subject of pending litigation over whether the casinos are located on approved tribal lands. The four other tribes have attempted to enter into compacts with the state to open casinos. While the Governor has signed these compacts, the compacts have not been approved by the legislature. Bay Mills Resort and Casino (2 buildings) Soaring Eagle Casino and Resort (2 buildings) Approved games under the compact include dice and wheel games, banked card games, and slot machines, among others. The tribes determine any limitations, such as the number of games, hours of operations, and limits on wagers. The annual gross gaming receipts of the tribes in Michigan cannot be reported because tribal revenues are not public information. With the advent of non-Indian gaming, the state is establishing a much larger regulatory infrastructure that will include the responsibility for non-Indian gaming. Responsibility for oversight of the compacts originally resided with the Office of Racing Commissioner. It was recently transferred to the newly created Michigan Gaming Control Board, which was established in late 1997 to regulate the recently approved non-Indian gaming. The Board’s mission is to properly license and regulate the conduct of private commercial casino gaming activities and to closely monitor the compliance of Native American casino operations with the compacts in order to protect the best interests of the state and its residents and ensure that such gaming activities and operations are conducted in an honest and lawful manner. The Board is headed by an Executive Director, who is appointed by the Governor. It is comprised of three divisions: the Administrative Services Division, Audit and Financial Services Division, and Licensing and Compliance Division. When fully staffed, the Board will have 48 full-time-equivalent staff. An additional 55 state troopers will be assigned by the Michigan State Police to assist the Board, as will five attorneys from the Office of the Attorney General. Indian gaming oversight, although virtually the same as before the new organization, is the responsibility of the Indian Gaming Oversight Section, which reports to the Administrative Services Division. The section consists of the same two gaming specialists—one functions as a regulatory officer who has been in this position since 1993 and the other, as an auditor who has been in this position since 1995. They report to the Deputy Director of the Administrative Services Division. Michigan is reimbursed for its actual oversight costs of Indian casino gaming at $175,000 a year and also receives revenue-sharing funds from certain tribal gaming activities. A provision in the compacts requires each of the tribes to submit $25,000 annually to the state for reimbursement of the actual costs incurred by the state in conducting its oversight responsibilities. With seven tribes, this payment currently totals $175,000 in billings and provides the total annual funding for the Indian Gaming Oversight Section. The total expenditures to support the wages and benefits of the two staff members are divided equally among the seven tribes. Since the first casino opened December 1993, the first payment year was 1994. Any amounts not expended are returned to the tribes. Although funds were returned to the tribes the first 2 years, no funds have been returned since 1995. If the state incurs costs above the $25,000 limit, the compacts, which are in effect for 20 years, do not contain any provision for increasing the amount above $25,000. According to the Michigan Gaming Control Board, the tribes are also required by a federal court consent judgment and order to pay the state 8 percent of their net win from the electronic video gaming and slot machines operated at the tribal casinos—about $38 million in calendar year 1997. (The net win is the amount wagered at each machine minus the payout to the players.) This money is deposited in the state’s Strategic Fund. As part of this agreement, the tribes were given the exclusive right to operate electronic games of chance in Michigan. If this right is rescinded, the tribes’ obligation to make these payments ceases. Thus, when the non-Indian casinos open with their electronic video gaming and slot machines, which, according to Board officials, is anticipated sometime in 1999, the tribes at that time will no longer be required to pay the 8 percent. Table IV.1 shows the increases in expenditures and additional revenues over the years. The compacts in Michigan provide that the regulation of Indian casino gaming is the responsibility of the tribe. Michigan recognizes the tribes as individual sovereign nations and therefore has no regulatory authority over the tribal casinos in the state. This policy is made public by requiring the tribe to post a sign at each casino gaming facility stating that Michigan does not regulate this facility. Regulatory activities, such as licensing, and business decisions as to the numbers of machines and hours of operation are left to the tribes. The state does not license the various Indian gaming entities and employees. According to the compact, the tribes are responsible for licensing and background investigations. However, the compacts do stipulate certain conditions. For example, in licensing suppliers, no casino games of chance, gaming equipment, or supplies may be used unless they meet the technical equipment standards of either Nevada or New Jersey. The compacts also stipulate that upon written request from the state, the tribes will provide information on personnel, suppliers, and others sufficient to allow the state to conduct its own background investigation as it may deem necessary and to make an independent determination as to the suitability of the individuals. Although the state does not regulate Indian casino gaming, the state does have monitoring responsibilities, which Board officials refer to as oversight. The compacts provide for the state to inspect all tribal casino gaming operations and records to determine compliance with the compacts. The state inspects the various records that the tribes are required to maintain. For example, it may review revenues, expenses, daily cash transactions, audits prepared by or on behalf of the tribe, and personnel information. The state also reviews the tribes’ submittals of semiannual financial questionnaires with their payments and reports of what they have done during the last 6 months, such as any procedural or key personnel changes. As part of its audit function, the state audits all of the tribal casinos’ electronic gaming operations to ensure that the tribes have made their required payments to the state. According to Board officials, staff schedule at least one visit each quarter to all of the tribal casinos. Table IV.2 shows selected monitoring activities and the frequency with which they are performed by the state gaming agency. The primary responsibility for enforcement rests with the tribes. The compacts contain no provision for the state to issue fines, seize illegal equipment, or suspend or revoke the licenses issued by the tribes. The state also is not responsible for resolving disputes with patrons. Although the state can ultimately suspend or shut down a gaming operation for a tribe’s noncompliance with the compact, it must seek an injunction directing closure. However, when the state finds a tribe out of compliance, it generally tries to work with the tribe to obtain compliance, according to Michigan staff. The compact provides options for resolving compact disputes between the tribe and the state. Written notice identifying the relevant compact provision is required, and representatives of the state and tribe are to meet in an effort to resolve the dispute. If the dispute is not resolved, the state may serve notice to the tribe to stop the particular activity. The tribe may stop or continue the activity and request arbitration. In responding to our request for views on critical elements in regulating tribal gaming, the Executive Director of Michigan’s Gaming Control Board pointed out that Michigan does not have true regulatory authority over tribal casinos in the state. Rather, the state’s role has been largely oversight in nature. Nevertheless, he cited cooperation between the state and tribe as critical, regardless of whether the authority is oversight or regulatory. The Executive Director also explained that testing and sealing electronic gaming machines with specially designed security tape, coupled with periodic casino inspection visits and audits, have enabled the Michigan oversight program to effectively protect the state’s interests. The testing and sealing program typifies the cooperative and respectful relationship that exists between the oversight staff and the tribes because the tribes cooperate although they are not required to do so. The program also serves to protect both the state’s and tribes’ interests by enhancing public confidence in the integrity of tribal gaming operations in the state. If Michigan were to regulate tribal gaming, according to the Executive Director, it would be essential to have the authority to effectively police and enforce the activity. As such, it would be possible to conduct unannounced inspections (currently, unannounced inspections are restricted to public areas of the casinos) and unannounced audits. Enforcement authority would also allow for penalties for noncompliance and would eliminate the delays that accompany litigation in federal court, which is the only current remedy for dispute resolution. Ultimately, however, such efforts would be ineffective without tribal-state cooperation. Gaming has been present in Nevada for most of the last 100 years. Nevada began its modern era of legalized gambling in 1931 and later, in 1955, inaugurated a policy to eliminate the undesirable element in Nevada gaming and provide gaming regulations. One of the 19 federally recognized tribes entered into the first compact with the state in 1987. Although compacts with six Indian tribes have been approved, only three tribes were operating four gaming facilities as of December 1997. (See fig. V.1.) The remaining tribes had not yet opened facilities. Most casino-type gaming is allowed in Nevada. As of December 1997, Nevada had approximately 2,425 licensed gaming operations; about 80 percent of them consisted of 15 or fewer slot machines. The gross gaming revenue in Nevada for fiscal year 1997 was $7.6 billion. Nevada’s tribal revenue is considered confidential, however, because the disproportionate share of the revenue for one of the four tribal operations would have the effect of releasing confidential revenue figures for a single licensee. Nevada’s gaming regulatory structure consists of the State Gaming Control Board, the Nevada Gaming Commission, and the Gaming Policy Committee. The Gaming Control Board, a three-member body appointed by the Governor, is the regulatory, investigatory, and enforcement branch of the system. The mission of the Board is to regulate the state’s gaming industry to ensure that gaming is conducted honestly, competitively, and free from criminal and corruptive elements; to foster the continued growth and success of gaming; and to ensure the collection of gaming taxes and fees, which are an essential source of state revenue. A five-member Gaming Commission, also appointed by the Governor, considers and acts upon the Board’s licensing recommendations; it is the final authority in gaming matters. A nine-member Gaming Policy Committee is appointed by the Governor as an advisory group to the Board and Commission. It meets as necessary to examine gaming policies and to make recommendations to the Board and the Commission. The Board has six operating divisions in addition to an administrative division that provides staff services. (See fig. V.2.) The six operating divisions and their responsibilities are as follows: The Audit Division audits the records of licensees to determine whether taxable gaming revenues have been properly reported and if the licensees have complied with the regulations. The Corporate Securities Division monitors, investigates, and analyzes activities of registered, publicly traded corporations and their subsidiaries. The Electronic Services Division tests and recommends gaming devices for approval or denial by the Board and Commission. The Enforcement Division is responsible for the enforcement of Nevada’s Gaming Control Act and the regulations of the Board and Commission. The Division conducts inspections and investigates reported violations. The Investigations Division conducts in-depth background and financial investigations on all applicants for gaming licenses and for key employee positions. The Tax and License Division issues all state gaming licenses approved by the Commission and collects, controls, and accounts for all state gaming fees, taxes, fines, and penalties. The Board’s offices are located in Las Vegas, Carson City, or Reno, except for the Enforcement Division, which in addition to those three cities also has offices in Laughlin and Elko. Table V.3 shows the authorized full-time equivalent (FTE) staffing for the divisions; over half of the total FTEs are assigned to the Audit and Enforcement Divisions. 4% Corporate Securities (18) 5% Electronic Services (20) 6% Tax and License (23) Administration (47) Investigations (74) Audit (109) Enforcement (111) The Gaming Control Board had 402 FTEs in fiscal year 1997, approximately half of whom are located in Las Vegas. The Board does not assign specific staff to Indian gaming. As shown in figure V.4, staffing over the last 7 years has remained fairly stable. Nevada imposes various fees on its gaming industry. These fees are a source of revenue for the state, and the cost of the regulatory program is then funded from the state’s general fund. For fiscal year 1997, the statewide gaming taxes and fees totaled about $570 million. About $22 million of that amount was used to fund the State Gaming Control Board and Nevada Gaming Commission. Funding from Indian gaming is governed by the three different compacts with the tribes that operate casinos. As a result, the tribes agree to pay Nevada either (1) a fee of 1 percent of the gross revenue of the licensed gaming establishments located within the Indian reservation or (2) all reasonable costs incurred by Nevada for its oversight or regulatory activities. For non-Indian gaming, the state collects a monthly percentage fee based on gross gaming revenue. The fee ranges from 3 percent to 6-1/4 percent, depending on the amount of the revenue. Additional revenue that the state collects from non-Indian gaming comes from such sources as annual taxes and quarterly license fees for slot machines and other games. For example, a gaming establishment with 1 game is assessed $100 annually, while an establishment with 16 games is assessed $1,000 for each game. Revenue also comes from applicants who bear the entire cost of pre-licensing investigations; and the funds, which are prepaid, cannot be refunded, even if the license is denied. This is true for both non-Indian and Indian gaming—that is, for the two tribes for which Nevada licenses. The following table shows the revenues and expenditures over the last 7 fiscal years. Indian gaming expenditures and revenue are not provided. The Nevada Gaming Control Board declined to release these figures because divulging them could be viewed as releasing confidential revenue figures for a single licensee because of the disproportionate revenue of one Indian gaming operation over the others. Nevada regulates all non-Indian casino gaming in the state, but its regulatory responsibilities over Indian casinos vary according to the three different compacts. Under two of the compacts, the state basically regulates the Indian casino as it does non-Indian gaming. The tribe transfers to the state its civil and criminal jurisdiction—except for taxing authority—for licensing and regulation, together with the authority to enforce all of Nevada’s gaming laws and regulations. Under the third compact, which permits only slot machines, the facility is generally regulated by the tribe as long as it is operated only by tribal members. However, the slot machines are limited in number, must meet state standards, and must be acquired and disposed of through a state-licensed distributor. The tribe is also required to post a sign that indicates that the facility is not licensed by the state. Under one compact, the tribe licenses the applicants but agrees not to hire any non-tribal members until the state makes a suitability determination. Under the other two compacts, the tribes transfer their jurisdiction to the state to license. Except for the one compact, the state licenses all establishments where gaming is conducted and where gaming devices are operated, as well as manufacturers, sellers, and distributors of certain gaming devices and equipment. In addition, it licenses key employees of the gaming industry and issues work permits to casino employees. Licenses are valid for an indefinite period of time, and the costs for the licenses, which the state considers confidential, cover the investigative fees only. The Nevada Control Board conducts in-depth background and financial investigations on all applicants for gaming licenses and for key employee positions to determine their viability, business integrity, and suitability. The license for a gaming device requires the Electronic Services Division to examine, test, and recommend approval or denial. Licensing decisions are made by the Gaming Commission at public meetings held once each month, and licenses are issued by the Tax and License Division. Work permits to ensure the suitability of all gaming employees are reviewed and issued by the Board. The Nevada Control Board is also responsible for monitoring various aspects of the gaming industry, including Indian gaming, depending on the individual compacts. For one compact, the Board conducts random inspections of slot machines and provides other assistance at the request of the tribe. Also, as part of its monitoring, the Board requires various reports from the tribe, including an independent accountant’s report of the gaming operation’s financial statements. For the other two compacts, the Board monitors the Indian gaming operations as it does non-Indian operations. It conducts inspections as well as undercover observations of gaming activities. The Board also investigates post-licensing, non-routine gaming problems, such as hidden ownership interests in casinos, organized crime involvement in Nevada, and intelligence gathering. The Board’s Enforcement Division is staffed or on-call 24 hours a day, 7 days a week at all five offices (Las Vegas, Reno, Elko, Laughlin, and Carson City). The Board audits the accounting records of licensees to determine if taxable gaming revenues have been properly reported and if the licensees have complied with the regulations. It uses information provided by the licensees’ independent accountants to supplement its own monitoring efforts. The length of the audit cycle for the largest gaming operations is about 3 years. However, the Board also uses a regulatory risk evaluation system to determine the nature and frequency of contacts with each licensee. Factors include the licensee’s history of noncompliance, gross gaming revenue, and financial condition, among other things. The Board also monitors stockholder lists for stockholders with holdings large enough to be considered a controlling interest. It inspects gaming devices in its laboratory and in the field to ensure continued integrity and assists in resolving gaming patrons’ disputes through analysis of device electronics. Table V.2 shows selected monitoring activities and the frequency with which they are performed by the Board for the two tribes that transfer their jurisdiction to the state. Two compacts allow for transfer to the state of such criminal jurisdiction as may be necessary to enforce the gaming regulations. Nevada’s gaming regulations allow enforcement actions for various violations, and certain state gaming agents have the powers of peace officers. The state can suspend gaming operations, suspend or revoke the license of any establishment or person, seize illegal equipment, and resolve patrons’ disputes. In addition, the state may also assess a fine of not less than $25,000 or more than $250,000 for each separate violation of the gaming regulations. Under the remaining compact, the tribe has the enforcement responsibilities. However, in connection with any violation of the compact, the compact provides for resolution of disputes between the state and tribe, including mediation and arbitration. And the state can seek an injunction directing closure of the gaming facility. According to the Chairman of Nevada’s Gaming Control Board, critical regulatory elements involve a balance of two issues in its public policy on gambling. On the one hand, the gaming industry is vital to Nevada’s economy, and the state must ensure that regulatory efforts do not needlessly hamper the furtherance of the industry. At the same time, the success of gaming requires public confidence that gaming is conducted honestly and free from corruptive and criminal elements. Such confidence can only be maintained by strict regulation of all gaming operations as well as the manufacturers and distributors of gaming devices. To be effective, the Chairman noted, the regulatory body must maintain independence from the gaming industry. Adequate staff must also be provided to the regulatory body. According to the Chairman, one cannot over-emphasize the need for qualified individuals to test and inspect gaming devices and without whom it would be impossible to ensure the integrity of the gaming devices in play. It is also vital that employees of the regulatory organization be permitted free access to any licensee’s operation 24 hours a day. Such access is necessary to maintain assurance that proper procedures are being followed when regulatory personnel are not present, and establishing the statutory authority to enforce this access is critical. To ensure the legitimacy of individuals connected with the gaming industry, the Chairman said that Nevada focuses intensely on whom it allows into the industry and considers the prelicensing investigation as the cornerstone of Nevada’s gaming regulation. The audit function relies on minimum internal control standards and reports of independent accountants and uses a regulatory risk evaluation system to determine the nature and frequency of contacts with each licensee. He also said that a critical aspect of the audits includes the authority to promulgate internal controls. Finally, the enforcement arm must have the legal authority to discipline gaming licensees for noncompliance with gaming regulations and statutes, serve as a neutral third party when resolving patrons’ or casinos’ complaints, and pursue aggressive prosecution of cheating crimes to protect the revenue as well as act as a deterrent. In November 1976, voters in New Jersey approved a referendum proposal authorizing casino gambling in Atlantic City. According to the New Jersey Casino Control Act, the law that governs the casino industry in New Jersey, casinos are not to be an industry unto themselves. Instead, in keeping with Atlantic City’s traditional emphasis on tourism and the convention industry, the casinos are to be associated with major hotel and convention facilities. In 1978, when the first casino opened in Atlantic City, gross gaming revenues were about $134 million. In December 1997, after almost 20 years of casino operations, Atlantic City had 12 casinos and remains the only location in New Jersey with casinos. Casino win for the casinos totaled $3.9 billion in 1997 from slot machines and table games. New Jersey has no federally recognized Indian tribes and, thus, no Indian casino gaming. In an April 1977 report on casino gambling, the New Jersey State Commission of Investigation recommended that the regulation of casino gambling be a two-tier system. This system was to consist of a decision-making, rule-making, hearing body and an investigative and law enforcement body. The decision-making, rule-making, hearing body became the Casino Control Commission, while the investigative and law enforcement body became the Division of Gaming Enforcement. The Casino Control Commission is the agency of the state government responsible for regulating Atlantic City’s casino gaming industry. The Commission is made up of five members—a chairman and four commissioners appointed to 5-year terms by the Governor with the advice and consent of the State Senate. The Commission determines the granting, suspension, revocation, and renewal of all licenses, registrations, certificates, and permits and promulgates regulations. It holds hearings and can levy penalties on civil violations of the Casino Control Act or regulations promulgated under the act and collects fees, taxes, and penalties assessed. In addition to its Office of the General Counsel, the Commission has four operating divisions. These are the Division of Compliance, the Division of Financial Evaluation, the Division of Licensing, and the Division of Administration. The divisions are staffed by a variety of professionals, including auditors and financial analysts. In addition, a staff of inspectors is in each casino around the clock. Figure VI.1 shows the Commission’s organizational structure. The Division of Compliance develops and revises regulations under which the casinos operate and monitors the casinos’ compliance with gaming rules and regulations and internal controls. The Division of Financial Evaluation is responsible for ensuring the integrity of financial controls in casinos, tracking casinos’ revenues, and making sure that all of the appropriate taxes and fees are paid. It also analyzes the financial stability of casino operators and collects fines, penalties, or other assessments imposed by the Commission. The Division of Licensing is responsible for handling initial and renewal applications for casino employees and casino service industries, tracks dealings with companies permitted to do business with casinos, handles most of the contested cases, and promulgates regulations affecting licensing issues. The Division of Administration provides support services to the Commission. The Commission also establishes affirmative action requirements for casinos, certain licensees, and construction contractors and subcontractors for hiring women, minorities, and persons with disabilities. It also establishes affirmative action requirements for the purchase of goods and services from minority-owned and women-owned business enterprises. In fiscal year 1997, the Casino Control Commission had a total of 360 staff. Figure VI.2 shows the staffing, by division, for fiscal year 1997. Figure VI.2: New Jersey Casino Control Commission Staffing, by Division, at the End of Fiscal Year 1997 7% Administration (25) 8% Other (29) 9% Financial Evaluation (34) Licensing (57) Compliance (215) The Division of Gaming Enforcement is a law enforcement agency within the Department of Law and Public Safety. It is headed by a Director appointed by the Governor with the advice and consent of the State Senate and serves during the Governor’s term of office. The Division is charged with carrying out the investigations necessary for the licensing of casinos, their employees, and the service industries that do business with them, ensuring integrity, monitoring casino operations, and scrutinizing gaming. The Division has investigatory and prosecutorial functions and is staffed by attorneys, investigators, and state police. The Division performs investigations and then prosecutes the case before the Casino Control Commission, which then may grant or revoke a license or assess fines and/or penalties. The Division prosecutes criminal violations of the Casino Control Act, except those it refers to the Division of Criminal Justice. Figure VI.3 shows the Division’s organizational structure. The Licensing Investigation Bureau conducts background investigations to ensure that casino employees, casino entities, and service industries do not have links to organized crime and meet the standards of employment established by law, including financial stability, integrity, and good character. The Criminal Enforcement Bureau enforces New Jersey’s criminal statutes and the provisions of the Casino Control Act. The Regulatory Enforcement Bureau provides continuous oversight of the revenues from casino gaming and is responsible for ensuring the integrity of the casino games, accounting, and internal controls. In addition, this Bureau enforces the state’s alcoholic beverage control rules and regulations. The Division also has three bureaus with prosecution responsibilities—the Licensing Prosecution Bureau, the Casino Criminal Prosecution Bureau, and the Regulatory Prosecution Bureau. The Technical Services Bureau is responsible for ensuring the integrity of slot machines and electronic games in Atlantic City. It operates a slot machine laboratory to test machines and provides technical assistance to others. The Casino Intelligence Bureau oversees and directs all intelligence for licensing, regulatory, and criminal matters. Finally, the Administrative Services Bureau provides support for the division. Table VI.1 provides staffing for the various bureaus within the Division as of the end of fiscal year 1997. Other - (Executive) From fiscal years 1991 through 1997, total staffing for casino regulation in New Jersey decreased. Figure VI.4 provides end-of-fiscal-year staffing for the Casino Control Commission and the Division of Gaming Enforcement. The money needed to regulate casinos in New Jersey comes from licensing fees and assessments charged to the casino industry. No tax money is used to support either the Casino Control Commission or the Division of Gaming Enforcement. In addition, the state collects 8 percent of the gross revenues from Atlantic City casinos, which goes into the Casino Revenue Fund. In 1997, this fund received about $308 million. Civil penalties collected are used to fund programs related to compulsive gambling. Should the penalties collected exceed $600,000, the additional amount collected goes to the Casino Revenue Fund. The revenue needed to fund casino regulation comes from fees charged for casino licenses and other forms of licensure or approval and an annual $500 per machine slot machine assessment. In addition, if revenues from the preceding sources are not sufficient to cover all expenditures, the state allocates the remaining costs among the casinos for payment. The moneys collected are deposited into the state of New Jersey Casino Control Fund,from which funds are appropriated to pay for the operations of the Casino Control Commission and the Division of Gaming Enforcement. Table VI.2 provides total funding and expenditures for the Casino Control Commission and Division of Gaming Enforcement for fiscal years 1991 through 1997. According to a 1986 report by the Casino Control Commission, New Jersey believed that its Casino Control Act was the toughest gaming control measure ever enacted. As a result of this act and the regulations promulgated by the Casino Control Commission, New Jersey started with extremely strict controls and, on the basis of changes in technology and experience with the industry, has made adjustments to work with the industry to develop rules that make sense. Nonetheless, applicants for casino licenses undergo complete investigations; accounting and internal controls are monitored; accounting, administrative, and financial records are audited; and the state has the authority to assess fines, close operations, and seize illegal equipment. In New Jersey, every employee who has anything to do with the operation of the casino, and companies doing regular and continuing business with casinos must be licensed. In addition, every labor organization that represents or seeks to represent employees who are employed in a casino hotel, casino, or a casino simulcasting facility owned by a casino licensee must register annually. The level of information required from an applicant and the effort required for the state to grant a license varies depending on the position held or the type of business license. For example, a casino service employee pays a fee of $60 for a one-time registration; a gaming-related casino service industry pays a minimum of $5,000, while a casino pays a minimum of $200,000 for its initial license. The depth or complexity of the investigation involved in granting a license generally is reflected in the initial or minimum charge shown in table VI.3. Casino Control Commission and Division of Gaming Enforcement staff maintain a 24-hour-a-day presence in each casino in Atlantic City. The state has a variety of controls on and performs a variety of monitoring of the money that flows through the casino. For example, the access door to the cash boxes on slot machines has a second lock to which only the state has the key. When the moneys are collected, the state unlocks its lock and monitors the collection. In addition, the state both observes and verifies the “hard” (coin) and “soft” (bill) counts of funds and verifies the amount received. The verification of the money counts is important to the state in monitoring the flow of money and because 8 percent of this money goes to the Casino Revenue Fund, as mentioned above. The state monitors the casino’s accounting and internal controls to ensure that all funds are accounted for and proper procedures are followed. It also limits the amount of complimentary items or services such as food, room, beverage, or travel that a casino can provide to casino patrons at little or no cost and monitors the amount provided. Table VI.4 shows selected monitoring activities and the frequency with which they are performed. The state, through the Casino Control Commission, has the authority to suspend or shut down a gaming operation or suspend or revoke a license. The state may also assess fines or penalties or seize illegal equipment. On the basis of its investigations, the Division of Gaming Enforcement presents the information to the Commission for an administrative decision. While the Atlantic City police have jurisdiction in the hotels, the Division of Gaming Enforcement has jurisdiction on the casino floor and uses state police to deal with any criminal violations. At the Casino Control Commission’s office in the casino, part of the inspector’s job is to accept patrons’ complaints. These complaints typically include concern about the payoffs from table games, malfunctioning slot machines, or funds received from cashiers. We obtained comments from the Chairman, Casino Control Commission, and the Director, Division of Gaming Enforcement, on what they view as critical regulatory elements. Each noted the importance of insuring the integrity of gaming and the criticality of licensing and internal control systems and provided additional comments. The following summarizes their responses. The Chairman of the Casino Control Commission stated that it is critical to maintain the integrity of the industry and keep proper controls over and accounting for casino revenues. The state’s licensing system ensures the integrity of the companies and individuals involved in gaming, and its rulemaking process ensures the integrity of the games. Internal control systems assist the casinos and the regulators in monitoring gaming operations. The Chairman said that he recognizes that the approach to handling these two critical elements varies among states and stated his belief that New Jersey has the “tightest and most complex system of controls.” The state’s licensing system is designed to keep unsavory individuals, including anyone associated with organized crime, from direct and indirect employment in the casino industry. The state licenses all casino companies, their officers, directors, management, financial sources, and other employees involved in gaming operations. They undergo complete background investigations and must satisfy standards of honesty, integrity, good character, and financial stability. In addition, all entities doing regular and continuing business with a casino licensee must be licensed. The integrity of the games played is ensured, according to the Chairman, by the state’s establishment of the rules for the various games and the use of on-site inspectors who observe play 24 hours a day. The inspectors observe the play to ensure that dealers are following the rules and that the public is not being cheated. According to the Chairman, the system of regulation has been described as “people watching people, watching people.” He pointed out that because of the internal control requirements in New Jersey, a conspiracy among numerous people in different departments would be required in order to misappropriate casino revenue. For example, when money is collected from the casino floor, three separate casino departments are involved—accounting, games, and security. As a result, the Chairman believes that misappropriation of casino revenue is more difficult. The Chairman also pointed out other areas that should be considered. These include the ability of casinos and management to contribute to political campaigns, the ability of casino employees and regulators to gamble, pre- and post-employment restrictions, and ethics codes for commissioners and regulators. The Director, Division of Gaming Enforcement, told us that the overall objective of a regulatory system is to ensure the integrity of gaming operations and public confidence in the gaming industry. According to the Director, to do this requires a determination as to who qualifies for licensure as well as the oversight of the gaming operations. Substantial resources must be allocated to underwriting the regulatory system, and once such a system is established, it is critical to assemble a professional staff to develop and implement the regulations to ensure the integrity of the system. In addition, a laboratory is needed to evaluate and approve the sophisticated electronic equipment and devices. The licensing process includes the investigation of casino entities, their employees, and those companies with which they transact business, directly or indirectly. This is an ongoing process in which licenses are subject to renewal and investigations are conducted on a continuing basis. Oversight of gaming operations includes enforcing the New Jersey Casino Control Act and the regulations promulgated thereunder. The Director noted that the act, the regulations, and the required internal controls make for a system of checks and balances which, if properly implemented and monitored, ensure the integrity of the industry. Because the gaming industry uses highly sophisticated electronic games and equipment such as slot machines and bill and coin acceptors, the state established and developed a laboratory capable of evaluating and approving these devices. In the Director’s view, it is important for the laboratory to continuously monitor the changes and advances in technology. Washington’s legalized gaming began with social gambling activities, such as bingo, authorized in 1973, and card games, authorized in 1974. Although Indian casino gaming first began in Washington in the 1970s, the first two tribes did not enter into compacts to operate casinos until 1991. Washington has 27 federally recognized tribes in the state. As of December 1997, 17 tribes had compacts with Washington, 11 of which were operating casinos. (See fig. VII.1.) According to the Director, Office of Policy, Planning and Support, one operation closed because of competition with recently opened Canadian casinos, and one operation is expected to open in 1998. Three tribes were operating casinos without approved compacts. One of the tribes had a compact agreed to with the state but did not obtain the required approval of the Secretary of the Interior until March 30, 1998. The two other tribes had no compact agreed to with the state and were operating slot machines, which Washington does not allow and would not agree to in a compact, at 11 casinos. Washington does not oversee these 11 casinos, which are under litigation. “Banked” card games, in which the house serves as the bank, were approved for non-Indian gaming in October 1997. Banked games have been allowed in Indian gaming, but the numbers of tables for the games are limited by the compact. Slot machines are illegal in all Washington gaming establishments. The net profit in tribal gaming establishments amounted to about $150 million last fiscal year. This is in addition to the approximately $750 million annual total from all non-Indian regulated gaming activities under the Commission’s jurisdiction, which included non-casino activities, such as bingo and unbanked card games. The Washington State Gambling Commission was established in 1973 to keep out the criminal element and promote the social welfare of the people by limiting the nature and scope of gambling activities and by strictly regulating and controlling them. In 1992, the Commission was given the responsibility for negotiating and implementing the terms of the compacts. The Commission primarily regulates non-Indian, non-casino gaming, such as bingo and unbanked card games. The only casino-type gaming that the Commission oversaw at the time of our review was Indian. Other commissions regulate pari-mutuel betting on horse races and the state lottery. The Commission operates under a five-citizen board appointed by the Governor and approved by the State Senate for a single 6-year term with staggered expiration dates. Also on the board are four members of the legislature—one each from the majority and minority parties of the two branches of the legislature—appointed to act as coordinators between the legislature and the Commission. They are nonvoting members for routine Commission business, except for the approval of tribal gaming compacts. The board generally meets monthly to approve licenses; hear administrative cases; promulgate regulations; and interact with licensees, public officials, and the public. Figure VII.2 shows the organization of the Commission. The board appoints the executive director to manage the day-to-day activities of the Commission. The Commission has three operating divisions: (1) licensing operations, which is responsible for all licensing investigations, including certifying qualifications of persons involved in Indian casino gaming activities, and for maintaining agency records and activity reports; (2) field operations, which is responsible for the day-to-day investigation of complaints, inspections, and audits of licensed operators and for training licensees; and (3) special operations, which is responsible for monitoring tribal gaming activities, investigations of illegal or criminal activities, and criminal intelligence. Agents in the Tribal Gaming Unit must complete training courses on Native American cultural heritage and on the specific tribal culture of the casino the agent oversees. A fourth division, Policy, Planning and Support, consists of Public Affairs, Legal Services, Business Operations, and Information Services. Human Resources reports to the Executive Director. The Commission, located in Olympia, has three regional offices throughout the state—Spokane in the east, Lynnwood in the northwest, and Tacoma in the southwest. The Commission’s staffing for fiscal year 1997 was 137, of which 24 staff were assigned to Indian gaming. The remaining 113 regulated non-Indian gaming activities. Figure VII.3 shows how the staff were distributed among the various divisions. After initial increases, Commission staff for both Indian and non-Indian gaming have remained fairly constant in recent years. Figure VII.4 shows staffing levels over the last 7 fiscal years. All revenue for the Commission, which included about $1.6 million from Indian gaming last fiscal year, is derived independently from gaming operations and is deposited into a revolving fund controlled by the Commission. Under the compacts, the tribes are to reimburse the state gaming agency for all reasonable costs and expenses actually incurred by the Commission in carrying out its responsibilities as authorized under the provisions of the compact. Reimbursement for monitoring, investigative, and processing costs is on an hourly basis or a flat fee, at the option of the tribe. Administrative actions, such as certifying a license, are reimbursed for the costs incurred that exceed the fees received. The state does not provide an appropriation for the Commission, and no taxes are assessed on gaming revenues at the state level. The Commission’s total revenue of almost $9.7 million for fiscal year 1997 included about $1.6 million from Indian gaming sources and about $8 million from non-Indian gaming. Both types of revenue have generally been increasing since 1991, or when initially collected. The Commission’s expenditures for Indian casino gaming totaled about $1.6 million and for non-Indian gaming, about $7 million. While the Commission’s expenditures for Indian gaming are increasing, non-Indian gaming expenditures have varied. Table VII.1 shows the revenues and expenditures since fiscal year 1991. The state’s oversight responsibilities for Indian casino gaming are established in the compacts. Although the tribal gaming agencies have the primary oversight responsibility, the state also has oversight responsibilities. State activities consist of certification of tribal gaming licensees, weekly monitoring of various gaming activities, and the ability to take various enforcement actions. The state also limits the number of gaming facilities, number of gaming stations, amount of wagers, and hours of operation. The state reviews the operations of an establishment after it has been in operation for 6 months, and increasing the scope of the operation is conditioned upon a favorable review. For example, tribes may operate up to 31 gaming tables and allow wagers up to $250 during the first 6 months, after which these may be increased to 52 tables and wagers up to $500. For Indian casino gaming, the compacts assign the licensing responsibility to both the state and the tribal gaming agency, but the state, through its certification process, assumes final responsibility for approving an applicant. Licenses are required for all gaming employees, management companies, manufacturers and suppliers of gaming services, and financiers—those extending financing to the gaming operation. No license is required for nongaming employees, such as those involved in food and beverage service. The state certifies and recertifies the applicants annually. Table VII.2 shows the basic fees for selected certifications; it does not include additional fees necessary to defray the cost of background investigations. Applicants submit their completed applications to the tribal gaming agency. Once the tribal gaming agency transmits the completed application package to the state gaming agency, the state conducts a background investigation to ensure that the applicant is qualified for state certification. The tribal gaming agency may also conduct a background investigation or may rely on the state’s certification. According to the compact, the tribal gaming agency has the primary responsibility for on-site regulation, control, and security. However, the state gaming agency has the authority to monitor whether the gaming operation is conducted in compliance with the provisions of the compact. State agents have free and unrestricted access to all areas of the gaming facility and access to all records. They conduct scheduled and unscheduled inspections, investigations, and/or audits of all Indian casino gaming activities to ensure compliance with the terms of the compacts. The state periodically performs various monitoring activities at the tribal gaming operations. Table VII.3 shows selected monitoring activities and the frequency with which they are performed by the state gaming agency. Although, according to the compact, the tribal gaming agency has primary responsibility for the enforcement of the compact, the state has similar enforcement authorities. The state has the authority to suspend or revoke license certifications; seize illegal equipment, such as slot machines; and resolve patrons’ disputes. In addition, the state can seek an injunction directing closure of a gaming facility if it determines that any violation of the compact has occurred. The compact also contains provisions for the imposition of fines or penalties, which vary depending on whether the infraction was a repeat violation. For example, for the first violation of the licensing and certification requirements, a gaming supplier could be fined up to $5,000; for the second violation, up to $20,000. The payments for imposed fines go to nonprofit organizations. In recognition of the government-to-government relationship that exists between the state and the tribes, several remedies for breach of compact provisions are allowable. Methods for resolution of compact disputes include good faith negotiations; mediation; arbitration (nonbinding as well as mandatory and binding); and, for breach of provisions, injunction. According to the Executive Director of the Commission, although several elements are critical to regulating gaming, the most critical is the compact. The compact should contain provisions to ensure that the interests of all parties are met and that the integrity of gaming is beyond reproach. As such, he said that the compact should require comprehensive background investigations of managers and operators. It should also include a framework of controls and procedures that allow for independent verification that the games are operated fairly and the proceeds are used lawfully. In state certification of individuals and entities involved in gaming, according to the Executive Director, ensuring that precertification investigations are adequate is the most important step in ensuring that individuals with undesirable histories or the criminal element do not infiltrate gaming. Similarly, the financial investigations that the state conducts to certify management companies or any entity providing financing to the tribe are to ensure that the money is from a legitimate source. Another critical element that the Executive Director cited is maintaining and building a positive and cooperative partnership. This partnership involves the state’s dealing with tribes on a government-to-government basis while balancing the state’s duty to the public. He said that a cooperative partnership also includes having voluntary compliance as the goal, instead of taking a heavy-handed approach. 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 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 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. | Pursuant to a congressional request, GAO reviewed the roles of the National Indian Gaming Commission and states in casino gaming regulation, focusing on: (1) information on the Commission's organization, staffing, funding, and responsibilities from 1991 through 1997; (2) similar information on state gaming agencies in Arizona, Michigan, Nevada, New Jersey, and Washington, as it relates to casino gaming; and (3) views of the heads of the gaming agencies from the five states on the elements critical to regulating gaming. GAO noted that: (1) in 1991, the Commission's organization consisted of three commissioners and six other staff; (2) by 1997, the Commission's staffing had increased to 37 and included two oversight offices--the Office of Contracts and Audits and the Office of Enforcement; (3) funding for the Commission, which comes from fees assessed on Indian bingo operations, appropriations, or cost reimbursements, increased from $1.6 million in 1991 to $4.6 million in 1997; (4) expenditures were greater than revenue during the last 4 fiscal years, but the use of carryover balances from prior years sustained the Commission; (5) during the early 1990s, the Commission promulgated regulations for the Indian gaming; (6) later, it focused on its responsibilities to: (a) monitor gaming operations; and (b) review or approve various gaming reports and submissions for both bingo and casino gaming; (7) the gaming agencies in the five states GAO reviewed vary considerably in their organization, staffing, and funding for casino gaming, a situation that reflects the differences in the scope and level of the responsibilities that state agencies have; (8) in fiscal year 1997, Nevada and New Jersey, the two states that almost exclusively regulate non-Indian casino gaming, had the largest organizations, in part, because they regulate all or almost all of the casino gaming in their states; (9) New Jersey had a staff of about 700 and a budget of about $54 million to license, monitor, and enforce the gaming requirements for 12 non-Indian casinos in Atlantic City; (10) Nevada had a staff of about 400 and a budget of $22 million to regulate over 2,400 gaming operations; (11) Arizona, Michigan, and Washington had smaller organizations and shared responsibilities with the tribes; (12) although these three states oversee about the same number of Indian gaming operations, staffing and funding levels varied; (13) licensing, monitoring, and enforcement activities also differed in these three states; (14) in all five states, gaming operations fund each state's regulatory or oversight program; (15) the heads of the gaming agencies in all five states GAO visited cited the importance of ensuring the integrity of gaming and identified what they viewed as critical regulatory elements; and (16) from their perspective, the critical elements are: (a) the use of accounting, administrative, and internal controls to assist the regulators and casinos in monitoring gaming operations; and (b) the licensing process, because it helps to identify and deter organized crime. |
DOD received approximately $2.6 billion in funding for fiscal year 2009 to research, develop, test, and evaluate (RDT&E) space systems. The Air Force conducts the majority of the DOD space-related technology development. DOD’s current portfolio of space systems comprises satellites, ground-based systems, and associated terminals and receivers. All of these systems are expected to play an increasingly important role in military operations. The bulk of major space system acquisitions in DOD’s space portfolio, however, have experienced problems during the past two decades that have delayed deployment and driven up cost. In our past work, we found that satellite programs cost more than expected and took longer to develop and launch than planned. We recently reported that estimated costs for major space acquisition programs increased from initial estimates of $11.4 billion to $22.4 billion for fiscal years 2008 through 2013, and programs are facing potential capability gaps in areas such as positioning, navigation, and timing; missile warning; communications; and weather monitoring. Cost and schedule problems like these are commonly tied to unstable requirements, weak investment practices, poorly executed acquisition strategies, and immature technologies. Our past work and studies on the defense industrial base indicate space system acquisitions could benefit from a greater diversity of suppliers. A 2008 report for DOD states that over the past few decades, the space industrial base has consolidated from over 50 suppliers in the early 1990s to four prime contractors who now manage thousands of subcontractors for DOD systems. According to a 2007 DOD study, the U.S. space industry has had to adjust to declining demands in the areas of satellites and launch, which has led to consolidation. We reported in 2008 that the consolidation of numerous firms over two decades to a small number of major space contractors has made it difficult for new suppliers to enter the market. Federal agencies with an annual extramural R&D budget of at least $100 million are required to establish and operate an SBIR program. The SBIR program budget is computed as 2.5 percent of an individual agency’s extramural R&D budget. Within DOD, each military service and DOD component uses this percentage to determine its own SBIR budget. The U.S. Small Business Administration (SBA) communicates federal SBIR guidance through the SBIR Policy Directive and reports on the implementation and operation of the SBIR program at 11 federal agencies. DOD is the largest agency participating in the SBIR program, and DOD’s fiscal year 2009 SBIR program budget was over $1.22 billion—more than half of the entire fiscal year 2009 governmentwide SBIR program budget of over $2 billion. DOD’s Office of Small Business Programs (OSBP) oversees the DOD SBIR program, develops DOD SBIR policy, annually collects reporting data from each of the services and components, and oversees the topic-generation and solicitation process. DOD generally relies on its military and defense components to implement its SBIR program. The DOD SBIR program comprises 12 services and components, of which the Air Force, Army, Navy, Missile Defense Agency (MDA), and Defense Advanced Research Projects Agency (DARPA) are the major services and components contributing to the program (see fig. 1). The DOD SBIR program is currently authorized through January 31, 2011. The Small Business Innovation Development Act of 1982 required the SBA, after consultation with certain agencies, to establish a policy directive for the three-phase structure (see table 1) to include, among other things, timing for receipt and review of proposals and funding guidelines. The SBA recently raised the award limits for Phase I and Phase II contracts, and the first DOD solicitation using the increased funding limits for its SBIR program had a closing date for receipt of proposals of June 2010. The SBA’s SBIR Policy Directive provides agencies the discretion to make awards in amounts higher than the limits set forth in the guidelines, and they must provide written explanation to the SBA for these instances at the end of the year. Awards can be made to successful applicants in the form of grants, contracts, or cooperative agreements. DOD uses contracts to make awards. Before Phase I of the award process, DOD develops research topics to solicit R&D ideas that address critical technology needs of a DOD program. Research topics are generated by DOD service and component representatives—typically scientists and engineers—based on DOD technology needs and are approved in a departmentwide review process. The Director of Defense Research and Engineering, and a multiagency integrated review team (IRT), review and approve the SBIR topics. DOD announces SBIR project opportunities through three annual solicitations for which small businesses can submit Phase I SBIR proposals to address the research topics. Small businesses submit proposals electronically through the DOD SBIR Electronic Submission Web site. DOD published 109 space-related topics throughout the 2009 fiscal year solicitation cycles. After the solicitation’s closing date, proposals are evaluated, and source- selection and contract-award decisions are made. DOD invites small businesses with promising technologies that have completed Phase I to submit proposals for a Phase II contract. The Phase II award decision considers, among other things, a proposal’s commercial potential. Contracting officials and technical monitors are involved in the evaluation and selection of SBIR proposals. In Phase III, the SBIR technology is expected to transition into a DOD acquisition program or into a commercial-sector product or service. We have previously reported technologies in this phase of development typically need to have customer “pull” into commercialization or entry onto an acquisition program. However, SBIR technologies that demonstrate significant potential for advancing capability or reducing cost can be picked up by the commercial or government sector for further development or use in an acquisition program in Phase II or III. In Phase III, small businesses must find non-SBIR funding from acquisition programs or private investors, or both, to produce or continue developing their technology. DOD is working to commercialize technologies under its space-related SBIR program to deliver warfighter capabilities, but lacks complete data on its commercialization efforts and therefore has limited insight into the program’s effectiveness. DOD invests about 11 percent of its SBIR budget in R&D and is soliciting more space-related research proposals from small businesses. DOD has taken steps departmentwide and within individual services and components to encourage the use of SBIR technologies and to enhance activities and efforts that can increase the transition of those technologies. DOD can document the results of its efforts with various examples of space-related technologies it has transitioned for use by major space-system acquisition programs. However, DOD currently lacks complete data on the number of technologies commercialized and therefore cannot determine the return on its space-related SBIR investment. Further, there are challenges to executing the SBIR program that DOD officials acknowledge the agency needs to address, such as the lack of overarching guidance for the management of the DOD SBIR Program. DOD is investing in R&D through its SBIR program to meet space-related technology needs. Specifically, from 2005 through 2009, DOD invested approximately 11 percent of its total SBIR budget on space-related Phase I and II SBIR contract awards (see table 2). DOD awarded 1,122 space-related Phase I SBIR awards and 501 space- related Phase II awards for fiscal years 2005-2009; both represent around 11 percent of total DOD Phase I and II SBIR awards for the same time period. Of the roughly 500 Phase II space-related contracts, Air Force officials could not identify how many received space-related Phase III contracts. Table 3 identifies the number of Phase I and II contracts awarded by DOD and those that were space-related for fiscal years 2005 through 2009. The number of space-related Phase I research topics submitted by DOD services and components has increased from less than 8 percent in 2005 to nearly 14 percent in 2009 (see fig. 2). Topics are generated based on user needs to fill technology gaps in DOD acquisition programs. According to OSBP officials, DOD requires that at least 50 percent of SBIR topics are endorsed by acquisition programs to increase the likelihood of transitioning a technology into an acquisition program. Officials from the Air Force’s Space and Missile Systems Center, which itself represents the majority of DOD’s space-related technology development, said that almost all of their topics are based on technology needs of space program offices. DOD officials said the agency takes steps to clearly define program needs throughout the topic-generation process so SBIR technologies are more likely to align with DOD acquisition needs. We previously reported that technologies are more apt to be successful in technology transition if they are relevant, marketable, and gain product-line support from the acquisition community. There are a variety of programs and initiatives within DOD designed to increase the commercialization of SBIR technologies. Several are unique to individual military services and agencies. Although these efforts are not specific to space technology development, they are intended to accelerate the commercialization of technologies through their transition into DOD acquisition programs or commercial-sector products or services. DOD officials described the following initiatives; however, we did not assess their effectiveness. Commercialization Pilot Program: The National Defense Authorization Act for Fiscal Year 2006 authorized this program in 2006 under the Secretary of Defense and the Secretary of each Military Department. The Act authorized the program to increase commercialization and accelerate the fielding of capabilities by identifying and selecting projects that meet high-priority requirements, and by formalizing collaboration among small businesses, prime contractors, and DOD science and technology acquisition communities. But, according to DOD officials, it is too soon to determine the results. DOD has provided support for the annual conference on commercialization and issued memorandums to encourage services and components to identify technologies with the greatest potential, link science and technology with acquisition programs, and leverage all available technology-development and transition tools and mechanisms. The military services and DOD components have implemented varying approaches to the program. The Air Force’s version of the program emphasizes the involvement of DOD, prime contractors, and small businesses and uses SBIR technology-transition plans to ensure all parties sign an agreement to transition a technology. Air Force officials believe their efforts under this program will increase technology transition. Missile Defense Agency (MDA) Technology Applications Program: MDA implemented this program in 1986, which attempts to accelerate the maturation and commercialization of small-business technologies by leveraging the expertise of technology professionals and business experts. This program is available to all SBIR contract awardees on a voluntary basis, and assists small businesses in technology maturation and transition for the life cycle of the technology. MDA uses non-SBIR funds to administer this program. Navy Transition Assistance Program: The Navy started this program about 10 years ago to help small businesses understand and facilitate the transition of their SBIR technologies. Under this program, consulting services are offered to all small businesses with a Phase II award, free of charge, by Dawnbreaker, an outside contractor that specializes in acquisition support; market assessments and studies; and technology- readiness management. Dawnbreaker can provide consulting services with small businesses for a 10-month period and provides information and tools on technology transition, and helps small businesses develop marketing tools. About 250 Phase II small businesses participate in this program, of the 400 Phase II contracts awarded by the Navy annually. Defense Advanced Research Projects Agency (DARPA) Transition Support Pilot Program: DARPA developed a program to transition innovative technologies to the most critical U.S. military end users as well as within DARPA, civilian agencies, and in the private sector. DARPA developed the program in collaboration with The Foundation for Enterprise Development, a nonprofit organization that creates and engages in research and education programs to inspire innovation and entrepreneurship for solving problems of national and global importance. DARPA offers the program to all small businesses with an active DARPA SBIR Phase II contract. Small businesses that participate in the program receive guidance and assistance from the Foundation for Enterprise Development, in identifying and facilitating introductions to potential collaborators, funding sources, and end users to expedite the transition of promising technologies. Army Technical Assistance Advocates: The Army initiated a network to coordinate small businesses, research laboratories, and prime contractors to increase Army SBIR technology transition and commercialization success. The advocates provide technical assistance to small businesses engaged in SBIR projects through a network of scientists and engineers engaged in a wide range of technologies. Air Force Commercialization Pilot Program Initiatives: These initiatives include interactive technology interchange workshops, such as “Industry Days,” that bring small businesses, prime contractors, and DOD representatives together to discuss technology needs and partnering opportunities. The partnering efforts are solidified by the signing of SBIR technology-transition plans, or agreements between all of the interested parties that state the terms for commercialization of a particular technology. The Air Force also assigns transition agents to facilitate collaboration and assist in technology transition. In our previous report, we found that technology-transition agreements and product-line relationship managers, with responsibilities similar to transition agents, reflect best practices and are tools used by leading commercial companies to aid in the transition of technologies to product development. Other Initiatives: DOD established the Fast Track Program in fiscal year 1996 and the Phase II Enhancement Program in fiscal year 2000 to leverage funds from outside investors and address funding gaps among SBIR phases. Both programs are designed to encourage rapid transition of SBIR R&D into commercialization and DOD acquisition programs. A small business can apply to participate in the Fast Track Program during Phase I, and the Enhancement Program in Phase II. Under the Fast Track program, small businesses can potentially receive interim funding of $30,000 to $50,000 in matching funds from non-SBIR sources to alleviate a funding gap between Phase I and Phase II. Under the Enhancement Program, a military service or DOD component can provide additional Phase II funding that matches the investment funds the small business obtains from non-SBIR sources. The Enhancement Program can extend an existing Phase II contract for up to 1 year and match up to $500,000 of non- SBIR funds. DOD military services and DOD components can tailor the implementation of these two programs to meet their own needs. DOD efforts have resulted in successful transitions that services and components describe on a Web site that highlights successful transitions to promote the SBIR program. Air Force officials described the commercialization of some space-related technologies that range from software training solutions to hardware that supports multiple payloads aboard a single launch vehicle, and various DOD officials highlighted the potential value of developing space-related technologies through the SBIR program. The following examples are considered commercialization success stories for technology transition. Evolved Expendable Launch Vehicle Secondary Payload Adapter (ESPA): The Air Force had a need for a low-cost launch capability to launch smaller secondary satellites. To address this need, a small business, through an SBIR contract, developed a standard adaptor to accommodate several small satellites for the Evolved Expendable Launch Vehicles (EELV) that will allow low-cost access to space for the small-satellite community. The ESPA is an aluminum ring that attaches to a rocket and has the capability to mount one primary satellite and up to six small satellites, resulting in increased access to space by the small-satellite community and decreased launch costs. The ESPA was successfully demonstrated on Space Test Program-1 in March 2007. The Secretary of the Air Force issued a policy in 2008 to make ESPA-hosted satellite launches a routine operation starting no later than fiscal year 2012. Standard Space Trainer (SST): DOD awarded a Phase III contract for the SST in August 2008. The Air Force had a significant need for an integrated simulation-based operator training and rehearsal capability for satellite-system ground control, because future generations of military satellites will be expected to use one common ground system to operate multiple satellite constellations. The SST is a satellite-operator instructional simulation that supports multiple satellite systems through the use of a system similar to a video game console, increasing efficiencies and potentially reducing training costs. The SST can be used to support various types of training—independent qualification training, unit qualification training, and crew training—and it supports instructional simulations that mimic the behavior of common military satellites, subsystems, space flight, orbital mechanics, and satellite operations. Advantages of using the SST include flexible instructor control features, increased instructor and student productivity, quick setup, and lower training costs. For example, with this SBIR technology, an instructor can monitor up to six students, provide targeted instruction to any student, and alter the events during a scenario. In addition, according to officials from the 533rd Training Squadron, the squadron that evaluated the SST, required instructor manpower has been reduced significantly and student evaluation productivity has increased dramatically as a result of the SST. Low Shock Separation System (Lightband system): According to the Air Force, vibration during the launch and satellite separation from the rocket has caused government satellites to malfunction. Small satellites are particularly susceptible to launch- and separation-related vibrations because of the close proximity of sensors and instruments to the shock source, necessitating a low-shock separation system. A small company developed the Lightband system under SBIR contracts to provide a capability that would reduce on-orbit failures. The Lightband system is the first payload-separation system that generates significantly less vibration during payload separation from the launch vehicle. According to the Air Force, the Lightband system is 25 percent lighter, 50 percent smaller, 40 percent cheaper, and generates less than 5 percent of the vibration of existing conventional separation systems, and it is estimated that this SBIR technology could save spacecraft programs several million dollars in life-cycle costs per spacecraft. According to DOD officials, DOD collects and maintains data on Phase I and II of the SBIR contract process, but it does not have complete and consistent data on Phase III. Various DOD officials stated that data are hard to track and there are inconsistencies in recording and defining commercialization. Further, DOD does not require the services and components to track and report these data. As a result, DOD does not have a complete picture of contract awards and does not know how effectively it is commercializing SBIR technologies by transitioning them into a DOD acquisition program or a commercial-sector product or service. Although a 2006 RAND study and a 2009 National Research Council study found that DOD is to some extent achieving SBIR program goals, as stated in the SBIR Policy Directive, the studies noted that DOD can not understand how well the SBIR program is performing or if improvements are necessary without complete commercialization data. Furthermore, we have previously reported that complete, accurate, and timely government contracting information is essential for tracking how public funds are being spent governmentwide. Of the roughly 500 Phase II space-related contracts awarded in fiscal year 2005 through 2009, DOD officials could not determine or specify the total number of space-related Phase III contract awards. According to OSBP officials, DOD does not require the services and components to track and report Phase III award data, and DOD officials we spoke with explained that it is hard to track the data because the two databases available for tracking SBIR contract award data are limited in capturing all commercialization activity. The databases were designed to track only government and not commercial transactions. For example, the Federal Procurement Data System–Next Generation database is used departmentwide by contracting officials to track all DOD contract actions. According to DOD officials, if a small business secures commercial-sector funding for its Phase III SBIR project, that contract may not be captured in this database because it only captures federal contract awards. Subcontracts to prime contracts are not captured. Additionally, when small businesses merge, change names, or are bought out by large businesses, DOD contracting officials, who are responsible for entering contract results in this database, lose sight of the transition of technologies and are unable to input accurate information concerning the outcome of SBIR projects. The Company Commercialization Report (CCR) database, which is maintained by OSBP, contains historical contract information for small business participating in the DOD SBIR program. According to DOD officials, OSBP uses the commercialization database to reconcile with data from the Federal Procurement Data System–Next Generation database to prepare an annual report required by the SBA, but the reporting of Phase III contract data by small businesses through the commercialization database is voluntary and may not include all commercialization actions. According to OSBP officials, DOD services and components may be using different methods or approaches to quantify their commercialization efforts. In addition to the limitations with DOD databases and tracking capabilities, we heard from several key DOD officials that the Phase III data entered into the Federal Procurement Data System–Next Generation database is not always entered consistently, and some services and components have different definitions for Phase III. For example, some SBIR contracting officials do not consistently include the SBIR contract- phase determination when they enter information into the database. We previously reported that the definition of Phase III awards is not clearly defined by the authorizing legislation and—as acknowledged by DOD officials and a 2009 National Research Council study—agencies sometimes differed on the meaning of “commercialization.” Also, as previously noted, interpretation of SBIR policy can vary across DOD services and components. In our previous reports, while not specific to the SBIR program, we highlighted long-standing data-collection and evaluation issues related to the Federal Procurement Data System–Next Generation database. For example, we previously reported on concerns regarding the timeliness, accuracy, and ease of use of this federal database. Furthermore, although we reported in 2009 that moving to electronic data submission improved the accuracy and timeliness of data, we also reported that data in this federal database remained inaccurate and that officials do not always input required information into the database. DOD SBIR program officials acknowledge challenges in executing their SBIR programs, including ongoing revisions to SBIR guidance and limited resources. For example, DOD has issued SBIR program management guidance to its services and components through more than 40 memorandums, including some supplemental e-mail guidance, over 17 years, rather than a comprehensive SBIR program manual or instruction that encompasses all required policy and procedures. One Air Force official said his office relied on a binder compiled with guidance his office received over the years from DOD and did not know if it was complete. To address this issue, OSBP recently established a working group to draft an overarching DOD Directive that will delineate policy as well as responsibilities and authorities under the SBIR program. The group will work with contracting officials and program managers to determine the best way to balance the need for standardization while maintaining flexibility in executing the program. However, because the officials we spoke with believe that any changes to the SBIR program, which is currently authorized through January 31, 2011, could affect the content of the DOD Directive, DOD officials suspended this effort until Congress reauthorizes the program. Military service and DOD component officials we interviewed stated they have limited resources to manage the program because the SBIR Policy Directive prohibits using SBIR funds to administer the program. For example, Air Force officials noted that some systems engineers had to split their time between SBIR responsibilities, including technical oversight and other assigned responsibilities. Additionally, Army officials said the Army’s Director of SBIR oversees over 600 SBIR contracts at any given time, and they stated that SBIR resources—both funding and personnel—are inadequate to manage the program. According to DOD, OSBP are investigating methods to improve overall commercialization results within the department, including the consideration of a policy for more consistent resource allocations throughout the department. To address these and other issues with managing the SBIR program, DOD OSBP officials said they established an SBIR Improvement Working Group in December 2008. The group drafted a report in December 2009 that identified the top eight initiatives for the DOD SBIR program. According to the DOD OSBP officials we interviewed, three of the eight initiatives have already been accomplished: DOD has pursued legislative proposals to allow a portion of SBIR funding for program management, reauthorized the Commercialization Pilot Program so the services can continue to utilize SBIR funds to implement the program, and clarified/improved discretionary technical assistance rules. According to DOD officials, the following initiatives are still in progress: Develop and issue an overall DOD Directive for SBIR. Establish a steering committee to work on improvements including standardization of best practices. Coordinate SBIR integration into acquisition strategies. Evaluate quality of information in SBIR database. Update the SBIR topic criteria and improve the review process. Most stakeholders in the space industrial base that we spoke with—DOD, prime contractors, and small businesses—generally agreed that small businesses participating in the DOD SBIR program face difficulties transitioning their space-related technologies into a DOD acquisition program. Stakeholders we spoke with told us there are difficulties inherent to the development of space technologies, challenges due to SBIR program timing and funding parameters, and other challenges related to participation in the DOD space acquisitions environment. All three groups we interviewed offered suggestions for improving DOD’s SBIR program. We did not verify validity of the concerns or recommendations cited by these officials and are not generalizing this information to the entire space acquisitions community or the DOD SBIR program; rather we present common opinions and observations of only those individuals interviewed. Stakeholders we spoke with in the space industrial base—DOD, prime contractors, and small businesses—agreed that small businesses face inherent challenges in developing space technologies. They agreed that some small businesses have fewer in-house resources, limited DOD contacts, and they find working in the space community unique and challenging. Some of the difficulties they cited follow. Harsh space environment: To meet DOD’s requirements to be flight- ready for the harsh space environment, technologies need more expensive materials and testing in specialized facilities. For example, flight-ready hardware for the space environment requires electronic components that can withstand radiation from space-derived particles or nuclear detonations. All three groups interviewed noted that small businesses typically do not own the appropriate testing facilities, such as thermal vacuum chambers, that are used for testing spacecraft or parts under a simulated space environment and instead must rely on government, university, or large-contractor testing facilities, which can be costly. However, an official from one prime contractor said it offers a discount on using its testing facilities to small businesses that subcontract with it during Phase II of the SBIR program. Sustaining operations through delays and cancellations: According to a small-business official, DOD space and weapons acquisitions program delays and cancellations can affect small businesses’ ability to stay in business. Air Force officials agree that small companies can be at a greater disadvantage than larger companies when space acquisition programs are delayed or system development goals are far off into the future, because some small companies that rely on a specific government contract may not be able to stay in business if they have to wait too long to receive the contract award. For example, Air Force officials stated that nine SBIR contracts may have been canceled as a result of the cancellation of the Transformational Satellite Communications System in fiscal year 2010. Obtaining security clearances: Small business, DOD, and prime contractor officials said small businesses’ participation in DOD space acquisition programs may be inhibited by their lack of security clearances. One small business said some small businesses are unable to learn enough about potential projects that are deemed classified to submit a proposal, because DOD provides limited information regarding project requirements to those companies without security clearances. However, several small businesses noted that because security clearances are costly, many are unable to invest in security clearances without an assured contract award. Moreover, one told us that the development time frames for SBIR contracts are too short to apply for and receive top-secret clearances. In addition, two of the three prime contractors we spoke with said that the lack of a security clearance represents a major barrier for any small business that aspires to participate in DOD space acquisition programs. Forging relationships: Small businesses struggle to break through the insular culture of space system acquisitions to develop working relationships with DOD officials and prime contractors, according to all three groups interviewed. With DOD: According to small businesses we interviewed, it is difficult to identify appropriate points of contact within DOD, and one small business said that DOD consistently awards contracts to those companies with whom it has previously worked, making it difficult for new, small companies to develop similar relationships. Two small- business owners said access to the space acquisition community is difficult because it is a cohesive network of space system developers. Specifically, one of the small businesses noted that the domination of the space industrial base by a few prime contractors prevents small- business participation because the prime contractors usually serve as the lead integrators for space programs. Prime-contractor officials acknowledged they have some of their own preferred suppliers. One DOD official agreed that it is difficult for small businesses to forge new relationships within the DOD space system acquisitions community because it is difficult for DOD’s SBIR program officials to convince program managers to consider SBIR technologies as potential solutions for technology gaps as the solutions may not be the same as those advocated by the prime contractors. In addition, he noted that large prime contractors partner with many of the program managers and advise them about acquisitions concerning new technologies—and these prime contractors may see the SBIR program as a source of competition. With prime contractors: Officials from all the prime contractors we spoke with generally agreed that small businesses face challenges in working with prime contractors for several reasons. First, DOD does not require prime contractors to work with small businesses to commercialize their technologies. Two prime contractors suggested that DOD could facilitate these working relationships by providing incentives for larger contractors to work with SBIR companies. Second, two of the three prime contractors interviewed indicated that they would prefer to buy a small business with a promising technology, rather than partner with the business in question, to maintain exclusive rights to the technologies developed. Third, one prime contractor noted that it prefers to use established subcontractors that have a history of being reliable, are expected to be around in the future, and are able to manufacture the volume of units requested. Despite the challenges noted, all the prime contractors we spoke with have developed initiatives for working with small businesses. For example, one prime contractor established the position of a full-time SBIR program manager in 2005 to provide information and guidance regarding the government’s SBIR program to the entire small business community, work with those leaders associated with research and technology and technology integration regarding SBIR activities, and release a bimonthly SBIR activity report. Risk-averse space community: All three groups we interviewed said that small businesses find it difficult to break into the DOD space system acquisitions environment because the space community is risk averse— DOD officials see unproven companies as risky for expensive space programs because any delays, problems with technologies, or other issues have significant consequences. Various small businesses we spoke with believe that program managers prefer to award space-related contracts to large contractors, in whose quality, practices, and longevity they have confidence. Air Force officials we spoke with agreed that most program managers are risk averse to integrating technologies developed by small businesses before they have been demonstrated for a space environment because they are trying to meet cost, schedule, and performance goals. In addition, an official claimed the ingrained belief that only large businesses can handle the complexities of building major space systems, such as satellites, constituted the largest obstacle faced by those officials attempting to implement the SBIR program. Two prime contractors agreed that the DOD space community is highly risk averse and consider small business technologies risky investments—specifically, one noted that technologies are perceived to be risky because of the uncertainty associated with small businesses’ ability to remain in business over the long development cycle of a space system. The three groups we interviewed—small businesses, DOD officials, and prime contractors—described how SBIR program administration, timing, and funding impede the efforts of small businesses developing space- related technologies to transition their technologies. The following reflects the opinions of most of the interviewees. Inexperienced contracting staff: Small-businesses and Air Force officials we interviewed believe issues regarding SBIR contract awards result from, in part, inexperienced contracting staff managing SBIR contracts in DOD. Air Force officials we spoke with acknowledged that the SBIR program is often used as a training ground for inexperienced contracting staff because contract award size is relatively small and the DOD’s SBIR program has a structured contract process in place. One official noted that this practice can create problems for small companies, because some of these inexperienced contracting officials may not understand the intricacies of the SBIR program. Two small businesses we spoke with indicated that they had experienced contract issuance delays because inexperienced contracting staff managed their SBIR contracts. Small businesses we spoke with said they experienced financial hardship because they needed to retain employees or project teams while waiting for contract awards. For example, one small business we spoke with noted that it encountered a 9-month delay in the awarding of a contract after receiving a notice of selection for a Phase II SBIR contract, and the delay was almost devastating. Two small businesses suggested that DOD expedite the contract-award process to limit the need for small businesses to retain expensive technical staff prior to the start of any contract work. Low funding limits: According to some small businesses and DOD officials, low SBIR funding limits may hinder space technology development because SBIR funding limits are not adequate to fulfill the stringent level of testing required to qualify materials for space technology development or to mature technologies to the degree required by DOD. Prior to March 2010, when the SBA increased SBIR funding limits for Phase I from $100,000 to $150,000 and for Phase II from $750,000 to $1,000,000, funding limits had remained stagnant since 1992. For example, one small-business official noted it was unrealistic to mature a technology to the extent some space programs require within the SBIR funding limits. Another small business said it had the opportunity to transition its technology if it could effectively demonstrate the subsystem, but to do so, it needed an advanced microcircuit that cost $750,000—as much as it would receive for a typical Phase II contract award. DOD officials said a small business typically needs additional funding to supplement its SBIR Phase I and II contracts to be in a position to insert its technology into a major space acquisition program. According to the SBA, DOD can award SBIR contracts in amounts that are larger than the prescribed limits to small businesses to help bridge the funding gap and mature their technologies further, but DOD is required to report annually to the SBA when it exceeds the funding limits. In addition, DOD implemented several initiatives to stimulate additional investment in promising SBIR technologies. For example, the Fast Track Program and Phase II Enhancement funding utilizes matching funds from outside the SBIR budget to help small businesses between phases of the SBIR program. One DOD official suggested that DOD provide stable funding for space-related SBIR technologies, because it is difficult to establish an effective development plan for space acquisition programs when funding for space- related SBIR projects is unstable. Contract award disbursement amount and timing: Two small- business officials said they experience financial hardships when contract award disbursements are misaligned with initial costs incurred to develop their technology. According to the small businesses we interviewed, if disbursements do not adequately match the development needs of the small business, the small business may need to use its own money for hiring or delay development of the product until it receives the remainder of the contract award. Further, they said the contract award disbursement schedule and amounts vary across and within the DOD military services and may not coincide with the development progress and test plans of the small business. One small businesses we spoke with noted that a larger contract award distribution allotment is particularly important at the beginning of a contract, because it needs the funding to hire new staff and begin development of the technology. Two small businesses suggested DOD distribute SBIR funding up front, instead of in equal increments throughout the contract period. Synchronizing with the DOD acquisition timeline: According to small businesses and DOD officials we interviewed, opportunities to transition technologies are missed because the SBIR program timeline is not aligned with the DOD acquisition timeline. DOD officials noted that opportunities for the insertion of new technologies by means of on-ramps typically occur when there is a new system acquisition or a system upgrade, but it may take too long to develop an SBIR technology to address needs. Furthermore, these opportunities are generally limited. Additionally, inserting a technology at the right time can be difficult due to technology freeze dates—the point at which no new technologies can be added—and any SBIR technology in development would have to wait for the next program upgrade. Small businesses participating in the SBIR program identified other challenges they believe inhibit their ability to participate in DOD space system and weapon acquisitions, such as the potential for the loss of intellectual property and a lack of technology “pull” from DOD acquisition programs. Some of these identified challenges follow. Loss of proprietary information: Ten small businesses we interviewed are reluctant to enter into partnerships with prime contractors out of concern that they could lose their proprietary information through either an infringement from prime contractors or a mishandling of proprietary information by DOD program officials. The three prime contractors we spoke with said they take intellectual property rights of small businesses seriously, and they noted that specific procedures are in place to safeguard intellectual property rights of small businesses, such as the signing of nondisclosure agreements. A DOD official said that the fear of losing proprietary information is a misperception on the part of small businesses, because DOD services and components take steps to work with and protect the small businesses’ intellectual property rights. Additionally, the SBIR Policy Directive requires agencies to ensure SBIR businesses’ proprietary information is protected. However, according to five small businesses we interviewed, incidents have occurred in which DOD officials appear to have shared proprietary information with prime contractors. For example: One small business we interviewed disclosed that DOD hired it to teach several prime contractors how to recreate a specific infrared technology it had developed so that the prime contractors could evaluate the technology. Although the prime contractors signed nondisclosure agreements that permitted them to use the technology for evaluation but did not give them the right to sell the technology, the small business said a DOD military service is currently procuring systems from the prime contractors that incorporated the technology they developed. The small business attempted to seek recourse against the prime contractors but could not sustain the legal fees. Another small business developed a system to enhance data, and within 4 months of the successful use of the system in military operations, the Air Force turned to a prime contractor to assess and then expand upon the system to enable more users to access the technology. The small business claims that the prime contractor would not have been able to do this, however, without access to the small business’ proprietary information; thus the small business believes that the Air Force might have allowed the prime contractor to review documents containing proprietary information during the prime contractor’s initial assessment of the technology. Limited technology “pull” from acquisition programs: The small businesses we interviewed cited three reasons for the limited “pull”— identified need and support—for SBIR technologies: DOD segments may solicit topics for SBIR technologies for which they have no validated requirements, short tenure among DOD officials, and a lack of SBIR knowledge and training for program managers. According to three small businesses we interviewed, the research ideas or SBIR topics are not created with a specific end-user or acquisitions customer in mind, which can limit the likelihood of insertion into DOD acquisition programs. One small business claimed that the DOD research laboratories use SBIR as a “sandbox” to research interesting ideas, reducing the benefits of the program to the warfighter. DOD officials told us, however, that at least 50 percent of SBIR topic solicitations must be endorsed by acquisition programs. Four small businesses we spoke with noted that short tenures among DOD officials involved in developing SBIR technologies inhibits the ability of small businesses to transition their technology because those with decision-making authority may leave—and the interest in a technology with them. For example, one small business told us that a DOD service agreed to sponsor its technology for Fast Track funding but did not follow through because of a turnover in staff and a change in priorities. Another small business claimed that an official interested in its technology transferred, leaving it without a sponsor. According to DOD officials we spoke with, the network for sharing SBIR information is fractured and informal, and the short tenure of program managers can affect the effectiveness of informal sharing networks, making it is less likely small businesses will have the contacts needed to keep apprised of SBIR topics and technologies worked on by other DOD services and components. DOD officials suggested that DOD increase coordination efforts across services and components to share information on small-business technology development efforts. DOD officials we spoke with agreed that short tenure for program office officials affects small businesses trying to transition technologies into programs of interest, but one DOD official noted that small businesses also have a responsibility to market their product to various program offices and should not depend solely on technology “pull” by a program office or official. Several GAO reports have indicated that short program-manager tenure has hampered technology system acquisitions, and some of the reports noted the need to extend program-manager tenure as a way of increasing stability and accountability on acquisition programs. Two small businesses we interviewed said that program managers, who are charged with planning and developing future and current acquisitions, do not understand the value of using an SBIR technology and therefore are less likely to consider it for insertion into an acquisition program. A DOD official we spoke with who is involved with the SBIR program agreed that some program officials lack a thorough understanding of the SBIR program, but he noted that DOD is currently developing training modules to address this concern. Two small businesses suggested that DOD increase program manager attention to SBIR technologies and improve their knowledge of SBIR policies and contract award process. DOD is using the SBIR program to provide opportunities for small businesses to participate in the space industrial base. Its investment should be matched with efforts to get the most return. However, data needed to track commercialization success are limited. DOD is taking steps to increase the transition of SBIR technologies into DOD acquisition programs or commercial-sector products or services, and is addressing management challenges through the development of an overarching DOD SBIR directive and standardizing best practices. Despite these efforts, challenges remain as DOD strives to improve the program. Moreover, there are perceived challenges for small businesses, rooted in the costs associated with spacecraft development, the administration of the SBIR program, as well as reluctance on the part of prime contractors and program managers to work with new, unproven companies. While there are steps DOD can take that would offer improvements in the short run, additional improvements may require more insight and longer-term solutions. We recommend the Secretary of Defense take the following three actions: In the near term, consider collecting data on all SBIR technologies that transition into DOD acquisitions or commercial-sector products or services, as well as ensuring that these data are defined and recorded consistently. By collecting and analyzing these data, DOD would have a better understanding of its return on investment for space-related and other technologies developed under the SBIR program, and how public funds are being spent. Complete efforts to develop and issue SBIR program guidance to ensure DOD military service and component-level SBIR officials are managing the program in a manner intended to meet the full intent of the SBIR Policy Directive. In the long term, examine the challenges offered by small businesses, government officials, and prime-contractor officials in this report and assess the extent to which there are cost-effective improvements that could be made to address them. In doing so, DOD may want to compare and contrast SBIR efforts among all the military services. We provided a draft of this report to the Secretary of Defense and the office of the Administrator of the Small Business Administration (SBA). Written comments from DOD and SBA are included in this report as appendixes II and III, respectively. DOD partially concurred with our recommendation that DOD, in the near term, should consider collecting data on all SBIR technologies that transition into DOD acquisitions or commercial-sector products or services, as well as ensure that these data are defined and recorded consistently. DOD agreed that collecting commercialization data on SBIR technologies is beneficial and that it has systems to collect these data; however, DOD also noted it would not be cost-effective to collect data on government and commercial/private awards at the prime and lower tier levels because DOD does not have the resources nor the responsibility to capture all public and private data for the DOD program. For DOD to have a better understanding of its return on investment for commercializing space-related and other technologies, it must strengthen its evaluation of the SBIR program. To do this, DOD needs more complete data as well as data that are consistently defined and recorded, as we recommended. While DOD noted that it collects commercialization data in two ways—by requiring that proposing firms report prior SBIR commercialization and through the Federal Procurement Data System— the data being reported are not always recorded consistently. Improving data collection efforts in these areas would substantially improve DOD’s insight into the SBIR program’s effectiveness. Regarding the collection of commercialization data for firms no longer participating in the DOD SBIR program, we recommended that DOD consider collecting this information. This consideration would involve identifying the cost to capture these data and identifying the benefit gained from better understanding the investment. If DOD determines that the collection of this information is cost prohibitive, DOD should not be expected to collect it. However, it would still behoove DOD to assess the extent to which collecting this data would be cost prohibitive against the potential value the data could bring to increasing small business participation in space. In its comments, SBA noted that it is developing a commercialization data collection system that will capture public and private commercialization results for firms re-applying for awards under the SBIR program. We believe that SBA’s efforts to improve data collection and management of SBIR data should ease the burden on DOD resources and costs to collect comprehensive data. While the SBA’s new data system will provide programwide data, SBA stated that it encourages agencies to explore agency-specific approaches to collecting and measuring commercialization results. DOD did not address how it will ensure that commercialization data are defined and recorded consistently within the department. We continue to believe that inconsistencies in recording and defining Phase III data among the military services and components will not give DOD a good sense of what benefits industry and government are deriving from the SBIR program. Improvements in data collection would provide DOD with substantive data for evaluating its SBIR investment. DOD agreed with our recommendation that the department complete efforts to develop and issue SBIR program guidance to ensure military service and component-level SBIR officials are managing the program in a manner intended to meet the full intent of the SBIR Policy Directive. In response, DOD stated that it suspended efforts on finalizing a DOD SBIR Directive because of multiple delays in SBIR program reauthorization and that draft legislation being proposed will create major changes to the program that will significantly affect the content of the DOD SBIR Directive. We acknowledge that the SBIR Directive may be significantly changed. DOD commented that it intends to finalize the DOD Directive within 180 days of issuance of the updated SBIR Policy Directive. DOD did not concur with our recommendation that DOD should, in the long term, examine the challenges offered by small businesses, government officials, and prime contractor officials in this report and assess the extent to which there are cost-effective improvements that could be made to address them. DOD noted that it does not concur that the individual challenges in our report should be assessed on an individual basis and that many of the cited challenges are issues facing the entire small-business community. DOD further noted that it addresses the challenges faced by SBIR program participants through an SBIR steering committee, working groups, conferences, and training workshops. We do not believe that our report focuses on individual concerns or challenges but rather examines broader challenges that DOD may want to address in the future. We acknowledge DOD’s broad-scale efforts to address issues facing the entire small-business community. However, given the fact that most stakeholders in the space industrial base that we spoke with—DOD, prime contractors, and small businesses—generally agreed that small businesses participating in the DOD SBIR program face difficulties transitioning their space-related technologies into DOD acquisition programs, it would still be in DOD’s best interest to assess the extent to which there are cost-effective improvements that could be made to address these difficulties. While we acknowledge that some of the transition challenges may be faced by the entire SBIR community, others, like the high cost of testing technologies so they are flight-ready for the harsh space environment and the high cost of obtaining security clearances that enable small businesses to submit classified proposals, may be more prominent to SBIR companies working in the space sector. To assist DOD with addressing the difficulties that SBIR companies state they are having in transitioning their space-related technologies, we continue to believe that DOD could look to the individual military services for ways to overcome these difficulties. The SBA commented that it is interested in following up on the concerns expressed by small businesses regarding the safety of intellectual property when working with the SBIR or DOD acquisition programs. The SBA stated that it is currently working to clarify SBIR data rights in its SBIR Policy Directive. The SBA is also working with the various SBIR agencies on ways to provide further guidance to contracting officers who are new to the program and to prevent lengthy delays between selection of the awardees and funding agreement awards. DOD also provided technical comments that have been incorporated where appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, and other interested parties. The report also is available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions about this report, please contact me at (202) 512- 4841 or [email protected]. 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 provided in appendix IV. To determine the extent to which the Department of Defense (DOD) is utilizing the Small Business Innovation Research (SBIR) Program to develop and transition space-related technologies, we reviewed DOD acquisition policies, memorandums, and other guidance concerning the SBIR Program. We analyzed data and interviewed officials from the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics (AT&L)—specifically the Office of Small Business Programs (OSBP), Small Business Administration (SBA), Army, Navy, Air Force, Space and Missile Systems Center (SMC), Air Force Research Lab (AFRL), Defense Advanced Research Projects Agency (DARPA), and the Missile Defense Agency (MDA). We reviewed SBA policies, and SBIR success stories. We also assessed the extent to which DOD is delivering space- related warfighter capabilities through the SBIR Program, by analyzing data and interviewing officials from the Army, Navy, and Air Force, and we attended conferences to identify small-business development opportunities and determine steps DOD is taking to involve small businesses. We analyzed data from OSBP for fiscal years 2000 through 2009 to determine the investment DOD makes in space-related SBIR Phase I and II awards each year. To identify the space-related portion of total SBIR investment, OSBP officials provided data from the Federal Procurement Data System–Next Generation (FPDS-NG). FPDS-NG contains detailed information on contract actions and identifies, among other data, the contract types used by federal agencies in procuring goods and services. Though we have previously reported that governmentwide FPDS-NG data are incomplete and lack internal controls, FPDS-NG is the official federal contracting database, and is therefore one of the systems DOD uses to track its SBIR contracts; the second system is the Company Commercialization Report (CCR) database, a system in which the reporting of Phase III contracts by small businesses is voluntary. DOD’s OSBP reconciles the CCR database with the FPDS-NG for its own annual reporting requirement to the SBA. An OSBP official pulled space-related SBIR contract information from the FPDS-NG database after we asked for the data for our review. However, a DOD OSBP official told us that the FPDS-NG database was not designed to extract space-related contract data from its database. Using a keyword search query, OSBP officials separated out all DOD SBIR efforts containing reference to “space platforms,” for fiscal years 2005 through 2009, which they explained were the best data available for identifying DOD’s space-related SBIR contracts. These are the data we used to determine DOD’s space-related topics, proposals, and investments for fiscal years 2005 through 2009. We did not test the reliability of these data. To identify challenges small companies face to participating in the space industrial base, we interviewed 28 small businesses to obtain their perspectives on existing challenges. We identified the small businesses primarily through DOD’s SBIR program Web site, a network of small aerospace companies in the Los Angeles, California, area, and additional referrals by existing SBIR companies. Half of the SBIR companies represented in our sample are located in California, which is where most DOD space work takes place, while the remaining SBIR companies in our sample are located in Colorado, New Mexico, Ohio, Virginia, Connecticut, Massachusetts, and Washington, D.C. We contacted companies across all three Phases of the SBIR award process. Our findings, conclusions, and recommendations are limited by the evidence we have cited. We were unable to make generalizable statements about the target population because we conducted a nonprobability sample of interviews. We also interviewed various space and other program managers at the Army, Navy, Air Force, DARPA, and MDA to determine their views on existing challenges. Further, we interviewed representatives from three prime contractors currently working on DOD space acquisition programs to identify the challenges they believe exist to small businesses in participating in DOD space and weapon acquisitions. We attempted to assess the commercialization success of space-related technologies through the SBIR Program at DOD, but DOD does not have complete and consistent commercialization data. We also reviewed studies and reports on the overall SBIR Program, DOD’s SBIR Program, and the defense space industrial base. We conducted our work from August 2009 to October 2010 in accordance with generally accepted government accounting standards. Those standards require that we plan and perform the audits 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. In addition to the contact named above, key contributors to this report were Art Gallegos, Assistant Director; Maria Durant; Claire Buck; Amanda Jones; Morgan Delaney-Ramaker; Arturo Holguin; Sylvia Schatz; and Nathan Pope. | To be competitive in the global economy, the United States relies heavily on innovation through research and development (R&D). The Small Business Innovation Development Act of 1982 established the Small Business Innovation Research (SBIR) Program to stimulate technological innovation among small businesses. SBIR offers one avenue for introducing technological innovation in the Department of Defense (DOD) space sector. GAO was asked to assess (1) the extent to which DOD is utilizing the SBIR program to develop and transition space-related technologies; and (2) whether small businesses face challenges to participating in the space industrial base. To do this, GAO analyzed program documentation and DOD data on the SBIR program and interviewed key officials. DOD is working to commercialize space-related technologies under its SBIR program by transitioning these technologies into acquisition programs or the commercial sector, but has limited insight into the program's effectiveness. DOD has invested about 11 percent of its fiscal years 2005-2009 R&D funds through its SBIR program to address space-related technology needs. Also, DOD is soliciting more space-related research proposals from small businesses. For example, the number of space-related research requests submitted by the military services and DOD components has increased from less than 8 percent in 2005 to nearly 14 percent in 2009. Further, DOD has implemented a variety of programs and initiatives to increase the commercialization of SBIR technologies and has identified instances where it has transitioned space-related technologies into acquisition programs or the commercial sector. For example, a small business developed an aluminum ring that enables multiple payloads to attach to a single launch vehicle. However, DOD lacks complete commercialization data to determine the effectiveness of the program in transitioning space-related technologies into acquisition programs or the commercial sector. Of the nearly 500 space-related contracts awarded in fiscal years 2005 through 2009, DOD officials could not, for various reasons, identify the total number of technologies that transitioned into acquisition programs or the commercial sector. For example, there are inconsistencies in recording and defining commercialization. Further, there are challenges to executing the SBIR program that DOD officials acknowledge and are planning to address, such as the lack of overarching guidance for managing the DOD SBIR Program. Most stakeholders GAO spoke with in the space industrial base--DOD, prime contractors, and small-business officials--generally agreed that small businesses participating in the DOD SBIR program face difficulties transitioning their space-related technologies into acquisition programs or the commercial sector. Although GAO did not assess the validity of the concerns cited, stakeholders GAO spoke with identified challenges inherent to developing space technologies, challenges because of the SBIR program's administration, timing, and funding issues and other challenges related to participating in the DOD space acquisitions environment. For example, some small-business officials said that working in the space community is challenging because the technologies often require more expensive materials and testing than other technologies. They also mentioned that delayed contract awards and slow contract disbursements have caused financial hardships. Additionally, several small businesses cited concerns with safeguarding their intellectual property. GAO recommends that DOD consider collecting data on all SBIR technologies that transition into DOD acquisitions or the commercial sector and ensure these data are defined and recorded consistently; complete efforts to develop and issue SBIR program guidance; and review the challenges identified by stakeholders in this report to assess the extent to which there are improvements that could be made to address them. DOD partially concurred to collect data, and concurred to develop and issue guidance. DOD did not agree to review the challenges identified by stakeholders. GAO believes this recommendation remains valid. |
Information security is a critical consideration for any organization that depends on information systems and computer networks to carry out its mission or business. It is especially important for government agencies where maintaining the public’s trust is essential. The dramatic expansion in computer interconnectivity and the rapid increase in the use of the Internet are changing the way our government, the nation, and much of the world communicate and conduct business. Without proper safeguards, systems are unprotected from individuals and groups with malicious intent to intrude and use the access to obtain sensitive information, commit fraud, disrupt operations, or launch attacks against other computer systems and networks. These concerns are well-founded for a number of reasons, including the dramatic increase in reports of security incidents, the ease of obtaining and using hacking tools, the steady advance in the sophistication and effectiveness of attack technology, and the dire warnings of new and more destructive attacks to come. Computer-supported federal operations are likewise at risk. Our previous reports, and those of agency inspectors general, describe persistent information security weaknesses that place a variety of federal operations at risk of disruption, fraud, and inappropriate disclosure. We have designated information security as a governmentwide high-risk area since 1997—a designation that remains today. Recognizing the importance of securing the information systems of federal agencies, Congress enacted the Federal Information Security Management Act of 2002 (FISMA) to strengthen the security of information and systems within federal agencies. FISMA requires each agency to develop, document, and implement an agencywide information security program to provide information security for the information and systems that support the operations and assets of the agency, using a risk-based approach to information security management. Congress created FDIC in 1933 to restore and maintain public confidence in the nation’s banking system. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 sought to reform, recapitalize, and consolidate the federal deposit insurance system. The act created the Bank Insurance Fund and the Savings Association Insurance Fund, both of which are responsible for protecting insured bank and thrift depositors. It also abolished the FSLIC and created the FSLIC Resolution Fund to complete the affairs of the former FSLIC and liquidate the assets and liabilities transferred from the former Resolution Trust Corporation. Further, the act designated the corporation as the administrator of these funds. As part of this function, it has an examination and supervision program to monitor the safety of deposits held in member institutions. FDIC insures deposits in excess of $7 trillion for about 8,800 institutions. Together, the funds administered by FDIC have about $53 billion in assets. FDIC had a budget of about $1.1 billion for calendar year 2005 to support its activities in managing the funds. For that year, it processed almost 21 million financial transactions. The corporation relies extensively on computerized systems to support its financial operations and store the sensitive information it collects. Its local and wide area networks interconnect these systems. To support its financial management functions, the corporation relies on several financial systems to process and track financial transactions that include premiums paid by its member institutions and disbursements made to support operations. In addition, FDIC uses other systems that maintain personnel information for its employees, examination data for financial institutions, and legal information on closed institutions. At the time of our review, there were about 6,100 users on its systems. In our report on the results of our audit of the FDIC funds’ financial statements for 2003 and 2004, we noted that FDIC’s implementation of a new financial system would significantly change its information systems environment and the related information systems controls necessary for their effective operation and that, consequently, continued commitment to an effective information security program would be essential to ensure that the corporation’s financial and sensitive information would be adequately protected in the new environment. To support the corporation’s financial management functions in 2005, FDIC implemented its new financial system in May 2005. The new financial system is composed of 26 separate applications that either replaced or modified previous applications to support the New Financial Environment (NFE). In addition to changing financial systems, FDIC has undergone organizational changes in the last year that include the reorganization of the Division of Information Technology. This division oversees the development and operation of the corporation’s computer systems and software. It maintains the corporation’s communications network and provides the expertise necessary for developing new information management systems needed by the FDIC’s bank examiners, researchers, legal case managers, and finance officers. According to FISMA, the Chairman of FDIC is responsible for, among other things, (1) providing information security protections commensurate with the risk and magnitude of the harm resulting from unauthorized access, use, disclosure, disruption, modification, or destruction of the agency’s information systems and information; (2) ensuring that senior agency officials provide information security for the information and information systems that support the operations and assets under their control; and (3) delegating to the agency’s Chief Information Officer the authority to ensure compliance with the requirements imposed on the agency under FISMA. The corporation’s Chief Information Officer is responsible for developing and maintaining a departmentwide information security program and for developing and maintaining information security policies, procedures, and control techniques that address all applicable requirements. The objectives of our review were to assess (1) the progress FDIC has made in correcting or mitigating remaining information system control weaknesses reported as unresolved at the time of our prior review in 2004 and (2) the effectiveness of the corporation’s information system controls for protecting the confidentiality, integrity, and availability of computerized data. An integral part of our objectives was to support the 2005 financial audit by assessing, as of December 31, 2005, the degree of security and controls over systems that support the generation of the FDIC funds’ financial statements. Our scope and methodology was based on our Federal Information System Controls Audit Manual, which contains guidance for reviewing information system controls that affect the confidentiality, integrity, and availability of computerized data. Focusing on FDIC’s financial systems and associated infrastructure, we evaluated the effectiveness of information security controls that are intended to prevent, limit, and detect access to computer resources (data, programs, and systems), thereby protecting these resources against unauthorized disclosure, modification, and use; provide physical protection of computer facilities and resources from unauthorized use, espionage, sabotage, damage, and theft; prevent the exploitation of vulnerabilities; prevent the introduction of unauthorized changes to application or ensure that work responsibilities for computer functions are segregated so that one individual does not perform or control all key aspects of computer-related operations and, thereby, have the ability to conduct unauthorized actions or gain unauthorized access to assets or records without detection. In addition, we evaluated aspects of FDIC’s information security program. This program includes assessing risk; developing and implementing policies, procedures, and security plans; promoting security awareness and providing specialized training for those with significant security responsibilities; testing and evaluating the effectiveness of controls; planning, implementing, evaluating, and documenting remedial actions to address information security deficiencies; detecting, reporting, and responding to security incidents; and ensuring the continuity of operations. To evaluate FDIC’s information security controls and program, we identified and examined pertinent FDIC security policies, procedures, guidance, security plans, and relevant reports provided during field work. In addition, we conducted tests and observations of controls in operation and reviewed corrective actions taken by the corporation to address vulnerabilities identified during our previous review. We also discussed with key security representatives, system administrators, and management officials whether information system controls were in place, adequately designed, and operating effectively. We performed our review at FDIC headquarters in Washington, D.C., and its computer facility in Arlington, Virginia, from September 2005 through February 2006. Our review was performed in accordance with generally accepted government auditing standards. FDIC has taken steps to address security control weaknesses. The corporation has corrected or mitigated 18 of the 24 weaknesses that we previously reported as unresolved. For example, the corporation has established and implemented procedures to ensure that dataset naming conventions comply with FDIC standards; developed and implemented automated procedures to ensure that access to sensitive production data is limited; and documented the appropriate controls of system interconnections, sharing information between applications, and rules concerning the behavior of users within each application between the Department of Agriculture’s National Finance Center and FDIC. While the corporation has made progress in strengthening its information security controls, it is still in the process of completing actions to correct or mitigate the remaining six previously reported weaknesses. These weaknesses include not adequately securing personal firewall settings on laptop computers, using live data for testing, and not ensuring that only authorized application software changes are implemented. Failure to resolve these issues could leave the corporation’s sensitive data vulnerable to unauthorized access and manipulation. FDIC has not effectively implemented information security controls to properly protect the confidentiality, integrity, and availability of its financial and sensitive information and information systems. In addition to the 6 previously reported weaknesses that remain uncorrected, we identified 20 new information security weaknesses during this review. Most of the identified weaknesses pertain to access controls. A primary reason for these weaknesses is that FDIC has not yet fully implemented its information security program. As a result, weaknesses in controls over its financial and sensitive data increase the risk of unauthorized disclosure, modification, or loss of data. Because of these heightened risks, we concluded that the weaknesses we identified constituted a reportable condition with respect to FDIC’s information systems security for 2005. Protecting the resources that support critical operations from unauthorized access is a basic management objective for any organization. Organizations accomplish this objective by designing and implementing controls that are intended to prevent, limit, and detect unauthorized access to computing resources, programs, and information. Access controls include (1) user accounts and passwords, (2) access rights and permissions, (3) network services, (4) configuration assurance, (5) audit and monitoring of security- related events, and (6) physical security. Inadequate access controls diminish the reliability of computerized information, and they increase the risk of unauthorized disclosure, modification, and loss of sensitive information and of disruption of service. A computer system must be able to identify and differentiate among users so that activities on the system can be linked to specific individuals. When an organization assigns unique user accounts to specific users, the system distinguishes one user from another—a process called identification. The system must also establish the validity of a user’s claimed identity through some means of authentication, such as a password, that is known only to its owner. The combination of identification and authentication, such as user account/password combinations, provides the basis for establishing individual accountability and for controlling access to the system. Accordingly, agencies implement procedures to, among other things, (1) modify vendor-supplied default authenticators during information system installation and (2) create, use, and remove user accounts. FDIC has not adequately controlled user accounts and passwords to ensure that only authorized individuals are granted access to its systems and data. For example, the corporation did not change vendor-supplied administrator accounts and passwords or remove inactive user accounts. In 2002 and 2003, we reported the existence of these weaknesses and in 2004 reported that FDIC had corrected them. The reemergence of these weaknesses demonstrates that FDIC had not implemented disciplined processes for ensuring that such issues do not recur. As a result, there is increased risk that unauthorized users could gain valid user identification and password combinations to claim a user identity and then use that identity to gain access to corporation systems. A basic underlying principle for secure computer systems and data is the concept of least privilege, which means that users are granted only those access rights and permissions needed to perform their official duties. User rights are allowable actions that can be assigned to users or groups. File and directory permissions are rules associated with a particular file or directory; they regulate which users can access the file or directory and in what manner. Organizations establish access rights and permissions to restrict legitimate users’ access to only those programs and files that they need to do their work. Assignment of rights and permissions must be carefully considered to avoid giving users unnecessary access to sensitive files and directories, especially to protect personal information maintained in systems of records. Further, the Privacy Act of 1974 requires federal agencies to limit the collection, disclosure, and use of personal information maintained in systems of records and to establish reasonable safeguards over those records. FDIC sometimes permitted excessive access to the computer systems that support its critical financial and regulatory operations. For example, the corporation inadvertently granted excessive access to insurance and research data that could result in the inappropriate modification or deletion of this data. FDIC also permitted each user on its networks to have access to sensitive Privacy Act-protected information including names, addresses, and Social Security numbers of individuals corresponding with the corporation. The FDIC Office of Inspector General recently reported on the misuse of sensitive employee information, including Social Security numbers, resulting in fraud. We recently testified that, once a Social Security number is obtained fraudulently, it can then be used to create a false identity for financial misuse, assume another individual’s identity, or to fraudulently obtain credit. As a result, there is increased risk that FDIC’s sensitive data and personally identifiable information may be compromised. Networks are a series of interconnected devices and software that allow individuals to share data and computer programs. Because sensitive programs and data are stored on network servers or transmitted along networks, effectively securing networks is essential to protecting computing resources and data from unauthorized access, manipulation, and use. Remote access controls should restrict access to networks from sources external to the network. Controls should also limit the use of systems from sources internal to the network to authorized users for authorized purposes. Organizations secure their networks, in part, by installing and configuring network devices that permit authorized network service requests and deny unauthorized requests and by limiting the services that are available on the network. FDIC did not sufficiently control certain network services. It did not securely configure Internet-accessible remote access services to its network resources. For example, the remote access configuration did not support the government advanced encryption standard and certificates used for authentication did not require passwords and could be stored as insecure files. FDIC permitted the use of unencrypted network protocols on its UNIX systems, thereby increasing the risk of unauthorized disclosure of sensitive information, including valid user passwords. As a result, increased risk exists that a malicious user could gain unauthorized access to network resources. To protect an organization’s information, it is important to ensure that only authorized configurations are placed in operation. This process, known as configuration assurance, is accomplished by verifying the correctness of the security settings on hosts, applications, and networks, and maintaining operations in a secure fashion. FDIC did not consistently implement secure configurations of various computing devices. Specifically, the corporation did not securely configure a key production database server, desktop workstations, and handheld personal digital assistants. For example, it deployed workstations with outdated versions of third party application software. It also configured an application server and laptop computers to permit or enable the use of unnecessary applications or vulnerable services, including wireless technologies. As a result, increased risk exists that a malicious user could exploit the insecure configurations to gain unauthorized access to these devices and the information they contain. To establish individual accountability, 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, or logs of system activity, they can use to determine the source of a transaction 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- and audit-related events. FDIC did not sufficiently log and monitor key security- and audit- related events. For example, it did not monitor all accesses between systems for mainframe environments and FDIC did not review all changes to security administrator accounts. The corporation also did not prepare key security reports such as the failed logon attempt report and financial transaction audit logs that were critical to monitoring financial activities. Moreover, one database supporting a financial application did not have auditing enabled for changes to sensitive tables or actions taken by administrators. As a result, increased risk exists that unauthorized or inappropriate system activity may not be detected. Physical security controls are important for protecting computer facilities and resources from espionage, sabotage, damage, and theft. These controls involve restricting physical access to computer resources, usually by limiting access to the buildings and rooms in which the resources are housed and periodically reviewing access granted to ensure that it continues to be appropriate based on criteria established for granting such access. At FDIC, physical access control measures such as guards, badges, and alarms, used alone or in combination, are vital to safeguarding critical financial and sensitive information and computer operations from internal and external threats. The corporation has taken steps to improve its physical security and access to its data center; nevertheless, weaknesses similar to those reported in previous audits have recurred. A recently implemented consolidated physical access system did not allow the corporation to effectively track and review physical access activity to the data center. Moreover, the corporation did not adequately maintain documentation on approved access request forms. For example, 40 percent of the data center access request approvals reviewed were not current. As a result, the corporation increased the risk of inappropriate access to sensitive areas. In addition to access controls, other important controls should be in place to ensure the security and reliability of an organization’s information. These controls include policies, procedures, and control techniques to (1) appropriately segregate incompatible duties and (2) prevent unauthorized changes to application software. Weaknesses in these areas could increase the risk of unauthorized use, disclosure, modification, or loss of FDIC’s financial and sensitive information. Segregation of duties refers to the policies, procedures, and organizational structure that help to ensure that no single individual can independently control all key aspects of a process or computer-related operation and thereby gain unauthorized access to assets or records. Often segregation of duties is achieved by dividing responsibilities among two or more individuals or organizational groups. This division of responsibilities diminishes the likelihood that errors and wrongful acts will go undetected because the activities of one individual or group will serve as a check on the activities of another individual or group. Inadequate segregation of duties increases the risk that erroneous or fraudulent transactions could be processed and improper program changes could be implemented. FDIC did not always assure appropriate segregation of incompatible duties. It granted NFE accounts payable users inappropriate access to perform incompatible functions, such as the ability to both initiate and authorize the same transactions. Another individual performed multiple incompatible functions that included serving as an NFE security administrator, performing financial operations functions such as updating financial records and reports, and testing NFE monitoring programs. As a result, increased risk exists that erroneous or fraudulent transactions could be processed without detection. It is important to ensure that only authorized and fully tested application programs are placed in operation. To ensure that changes to application programs are necessary, work as intended, and do not result in the loss of data or program integrity, such changes should be documented, authorized, tested, and independently reviewed. In addition, test procedures should be established to ensure that only authorized changes are made to the application’s program code. As reported in calendar year 2004, and once again recurring this year, the corporation did not consistently implement effective application change controls. FDIC has not fully developed procedures to ensure that only authorized changes were made to the production version of application code for all applications. As a result, the risk of unauthorized, untested, or inaccurate application modifications is increased and could result in unauthorized users gaining access to key financial or sensitive information. FDIC has made progress in developing and implementing its FISMA- mandated information security program. For example, the corporation has established a memorandum of agreement and an interagency security agreement with a critical service provider, and it has implemented a program for periodically testing and evaluating the effectiveness of its information security policies, procedures, and practices. However, a key reason for the weaknesses in FDIC’s information system controls is that the corporation has not fully implemented elements of its information security program. Among other things, FISMA requires agencies to develop, document, and implement the following: policies and procedures that cost-effectively reduce risks and ensure compliance with applicable requirements; plans for providing adequate information security for networks, facilities, and systems or groups of information systems; security awareness training to inform personnel—including contractors and other users of the agency’s information systems—of information security risks and responsibilities of personnel in complying with agency policies and procedures; a process for planning, implementing, evaluating, and documenting remedial actions to address any deficiencies in their information security policies, procedures, or practices; and plans and procedures to ensure continuity of operations for information systems that support the operations and assets of the agency. A fully implemented security program is critical to providing FDIC with a solid foundation for resolving existing information security problems and continuously managing information security risks. A key element in implementing an effective information security program is to develop and implement risk-based policies, procedures, and controls that provide security over an agency’s computing environment. Developing and documenting security policies are important because these are the primary mechanisms by which management communicates its views and requirements; they also serve as the basis for adopting specific procedures and technical controls. In addition, agencies need to take the actions necessary to effectively implement or execute these procedures and controls. If properly implemented, they can help to reduce the risk that could come from unauthorized access or disruption of services. FDIC has documented various policies for establishing effective information security controls; however, the corporation has not consistently implemented them. For example, policies requiring the monitoring and review of critical security events related to the mainframe computer or certain financial transactions were not always followed. The corporation also did not effectively implement policies regarding physical access, business impact analyses, sensitive Privacy Act-protected data, wireless configurations, or user account management. As a result, FDIC has less assurance that its systems and information are sufficiently protected. The objective of system security planning is to improve the protection of information technology resources. A system security plan provides an overview of the system’s security requirements and describes the controls that are in place—or planned—to meet those requirements. Office of Management and Budget (OMB) guidance directs agencies to develop and implement system security plans for major applications and for general support systems and also directs that these plans address policies and procedures for providing management, operational, and technical controls. National Institute of Standards and Technology (NIST) guidelines state that, when nonmajor applications are bundled with a general support system, the security requirements for each of the nonmajor applications should be included in the general support system’s security plan. Further, agencies are responsible for ensuring that appropriate security controls are in place for the information or application, as well as the systems on which they reside. If an agency’s information is processed on another organization’s general support system, the agency needs to ensure that adequate protection is provided for its information, including making an assessment of the sponsoring system’s security plan. In the security plans we reviewed, FDIC generally included elements such as security controls currently in place, or planned, the name of the individual responsible for the security of the system, and a description of the system and its interconnected environment. However, we identified instances where security plans were incomplete. For example, FDIC did not integrate the security plans or requirements for certain nonmajor applications into the security plan for the general support system. Two of FDIC's nonmajor applications, the corporation’s human resources and time and attendance systems, are not included in FDIC general support systems security plans. As a result, FDIC cannot ensure that appropriate controls are in place to protect its systems and critical information. Computer intrusions and security breakdowns often occur because computer users fail to take appropriate security measures. For this reason, it is vital that employees and contractors who use computer resources in their day-to-day operations be made aware of the importance and sensitivity of the information they manage, as well as the business and legal reasons for maintaining its confidentiality, integrity, and availability. FISMA requires that each agency provide security awareness training to inform personnel, including contractors and other users of information systems that support the operations and assets of the agency, of the information security risks associated with their activities and their responsibilities in complying with agency policies and procedures designed to reduce these risks. In addition, individuals with significant responsibilities for information security should receive specialized training with respect to their responsibilities. The corporation uses a Web-based security awareness training application and requires that all network users (employees and contractors) take the training. The application tracks users that complete the awareness training and those that do not. Users that do not take the training within required time frames are denied access to the FDIC systems. On the other hand, individuals with significant security responsibilities did not consistently receive specialized training. For example, the corporation’s FISMA report for fiscal year 2005 stated that only 58 percent of such employees had received specialized training. Until FDIC ensures that each of these employees receives appropriate security training, security lapses are more likely to occur. The development and implementation of remedial action plans are key components of an effective information security program. These plans assist agencies in identifying, assessing, prioritizing, and monitoring the progress in correcting security weaknesses that are found in information systems. FISMA says that agencies must develop a process for planning, implementing, evaluating, and documenting remedial actions to address deficiencies in the information security policies, procedures, and practices of the agency. According to OMB guidance, agencies should take timely and effective action to correct deficiencies that they have identified through a variety of information sources. To accomplish this, remedial actions should be developed and implemented for each deficiency, and progress for each should be tracked. FDIC has developed a process for planning and implementing remedial actions that includes the necessary elements for addressing deficiencies in information security. Indeed, we determined that FDIC has corrected 18 of the 24 deficiencies we reported as unresolved at the time of our last review. However, we found that, in some instances, FDIC did not effectively implement or accurately report the status of its remedial actions. For example, the corporation closed weaknesses identified by its security test and evaluation process without ensuring that adequate security controls were in place to resolve the weaknesses. To illustrate, it closed remedial actions for 29 logical access, 3 segregation of duties, and 6 audit log control weaknesses in the New Financial Environment (NFE) without fully testing compliance with stated security requirements. In this instance, FDIC reported the weaknesses as resolved and remedial action as complete when it established a plan to address the weaknesses, not when the corrective controls were actually implemented. In addition, tests were not performed to verify that the vulnerability was addressed by the plan’s implementation. Further, the Chief Information Officer stated that, in granting NFE interim authorities to operate, the closing of high priority items related to auditing, without adequately resolving the vulnerability, resulted in a residual risk to the operations and assets of the corporation that is not fully acceptable. Without a mature remediation process, the corporation cannot ensure that the organization’s weaknesses are mitigated to reduce risks. Continuity of operations controls should be designed to ensure that, when unexpected events occur, essential operations continue without interruption or can be promptly resumed, and critical and sensitive data are protected. These controls include environmental controls and procedures designed to protect information resources and minimize the risk of unplanned interruptions, along with a well-tested plan to recover critical operations should interruptions occur. NIST recommends that a formal business impact analysis be performed to allow management to better understand and measure the financial and nonfinancial risks associated with the potential loss of any mission-critical system. Corporation policy requires that a business impact analysis be conducted as frequently as changing conditions mandate, but that a review of the analysis should be conducted no less than annually. This analysis is an essential step in the process to develop and test contingency plans since the impact analysis establishes the risks associated with disruption and helps prioritize the recovery process. If service continuity controls are inadequate, even relatively minor interruptions can result in lost or incorrectly processed data, which can cause financial losses, expensive recovery efforts, and financial or management information to be inaccurate or incomplete. FDIC did not update its business impact analysis to reflect the significant changes resulting from the implementation of the New Financial Environment; consequently, the continuity plans and testing do not reflect the current environment. We previously reported a similar business impact analysis weakness in the corporation’s information security controls. Although FDIC performed a limited disaster recovery test for the New Financial Environment, the April 2005 test was conducted prior to implementation of the new production system. Further, at the time of our review, the corporation had not tested the new production environment. Without a current business impact analysis for the new system and the successful restoration of the new production environment, the corporation cannot ensure that NFE will be recovered in a timely manner in the event of a disaster. While FDIC has made progress in addressing our previous recommendations, information security weaknesses continue to impair the corporation’s ability to ensure the confidentiality, integrity, and availability of financial and other sensitive data. The severity of these weaknesses was such that we reported information system control weaknesses to be a reportable condition in our 2005 financial audit report since financial and sensitive information are at increased risk of unauthorized access, modification, and/or disclosure, possibly without detection. Until FDIC fully implements key security control elements that include enhanced access permissions, system monitoring, physical access, and continuity of operations, its facilities and computing resources and the information that is processed, stored, and transmitted on its systems will remain vulnerable to unauthorized access, modification, or destruction. To help fully implement the corporation’s information security program, we recommend that the FDIC Chairman take the following five actions: consistently implement the corporation’s documented policies and procedures related to information security, include security plans or requirements for nonmajor applications into the plans for general support systems, provide specialized training to individuals with significant security report weaknesses as closed in remedial action plans only when corrective actions have been completed, and update continuity of operations plans and test them for the New Financial Environment. We are also making recommendations in a separate report designated for “Limited Official Use Only.” These recommendations address actions needed to correct specific information security weaknesses related to access and other information system controls. We received written comments on a draft of this report from FDIC’s Deputy to the Chairman and Chief Financial Officer (these are reprinted in app. I). In these comments, the Deputy acknowledged the benefit of the recommendations made as a part of this year’s audit and provided examples of actions that FDIC has taken with regard to security. The Deputy stated that FDIC concurred with one of our recommendations, partially concurred with three, and did not concur with one. He also stated that FDIC disagreed with our assessment that its information system control weaknesses were sufficient to constitute a reportable condition. According to the Deputy, FDIC agreed with our recommendation that it include security plans or requirements for nonmajor applications into the plans for general support system and stated that it had added these applications into such security plans. However, the Deputy questioned the need for the corporation to assess the security plans for its payroll service provider (the National Finance Center), as we had stated in a draft of this report. FDIC considers that such effort on its part would be duplicative, because its payroll service provider is federally certified and audited by the Department of Agriculture’s Inspector General, and FDIC reviews the IG assessments. In addition, the Deputy stated that the corporation has secured the appropriate agreements required for interconnections of systems, as required by NIST. We agree with the FDIC position and have revised the report accordingly. With regard to our recommendation that FDIC consistently implement the corporation’s documented policies and procedures related to information security, FDIC partially concurred. The corporation agreed with some aspects of our analysis and took remedial action, such as removing certain inactive accounts from computers, in conformance with corporation policy. However, FDIC did not agree with other aspects of our assessment. For example, we identified a machine in FDIC’s security testing lab as not compliant. According to the Deputy, the risk from this vulnerability was fully mitigated because the machine was not a production computer, and software was implemented to prevent simultaneous connection to the production network and to wireless computing network. We disagree that these conditions fully mitigate the risk posed by this vulnerability: in certain circumstances, one vulnerable machine on a network could be used to gain access to related networks and compromise the confidentiality, integrity, and availability of information and information systems as a whole. Even with mitigating controls, such vulnerability increases risk. With regard to our recommendation that FDIC provide specialized training to individuals with significant security responsibilities, FDIC partially concurred. The corporation acknowledged that a “small subset” of employees with significant security responsibilities did not attend the originally scheduled specialized training; however, according to the Deputy, these employees have since attended training or were provided with training materials. Accordingly, FDIC believes that it is now in compliance with this recommendation. As stated in our report, FDIC reported that only 58 percent of such employees had received specialized training. If the remaining 42 percent have now received the appropriate training, FDIC will have satisfied our recommendation. With regard to our recommendation that FDIC update its continuity of operations plans and test them for the New Financial Environment, FDIC partially concurred. According to the Deputy, the corporation has now updated its Business Impact Analysis (on which its continuity of operations plans are based), and it retested its disaster recovery program in 2006, including a full test of the New Financial Environment. Accordingly, FDIC believes that it is now in compliance with this recommendation. The Deputy described the corporation’s concurrence as partial because of the timing of several events, including the corporation’s response to Hurricane Katrina and other priorities. According to the Deputy, FDIC had exercised its discretion in continuing to rely on its previous Business Impact Analysis because of these other priorities. In addition, the Deputy stated that although the corporation did not test the New Financial Environment in a production environment, it ran a limited test of the system before it went into production. At the time of our review, however, the Business Impact Analysis did not reflect the current environment, which had been significantly changed as a result of the implementation of the New Financial Environment. An outdated Business Impact Analysis increases risk because this analysis provides a mechanism for identifying the business functions that will be affected by availability problems and thus forms the basis for disaster recovery planning and testing. FDIC’s recent actions to address this risk are thus important; although we have not evaluated these actions, if they have been implemented appropriately, FDIC will have satisfied our recommendation. FDIC did not concur with our recommendation that it report weaknesses as closed in remedial action plans only when corrective actions are taken. According to the Deputy, the corporation disagreed with the assessment on which this recommendation was based: that is, that it did not effectively implement or accurately report the status of remedial actions. According to FDIC, our observation was based on a single instance that was part of a pilot test process, and thus the finding was not valid for the program that was in place through most of 2005. However, we disagree with FDIC’s characterization that our observation was based on a single instance. Our finding is based on a remediation plan that FDIC developed following a security test and evaluation of its New Financial Environment. In that plan, dated November 2005, we found 38 control weaknesses that were closed without test or validation. FDIC also provided us with an updated remediation plan for this test, dated December 2005, which did not include the improperly closed weaknesses or any indication that they had been addressed. We also disagree that our finding was not valid for the process that was in place for most of 2005. Our analysis was based on the process in effect from March to December 2005. Further, several of the items that were improperly closed were the same weaknesses that we identify in this report. For example, we found that the corporation closed weaknesses that had been identified in areas such as security awareness training, segregation of duties, encryption, and audit and monitoring; however, during our audit we found that these weaknesses still existed. After the end of the review period, FDIC informed us that it was improving its process to ensure that weaknesses were not closed without corrective action, but we have not evaluated this improved process. In his comments, the Deputy stated that FDIC is now in compliance with our recommendation, because its mature program requires full monitoring of remedial actions and testing for completion. If FDIC’s process has been implemented appropriately, the corporation will have satisfied our recommendation. Finally, the FDIC does not share our assessment that it had a reportable condition due to the severity of the risk impact or the magnitude of the collective vulnerability posed by potential control issues. However, we believe that the problems we identified in this report concerning FDIC’s security program adversely affected the overall security posture of the corporation and did merit a reportable condition. These problems included the (1) lack of consistent implementation of documented policies and procedures related to information security, (2) absence of integration of nonmajor applications into general support security plans, (3) lack of specialized security training for trusted employees, (4) an oversight process that allowed weaknesses to remain open even though they were reported as closed, (4) lack of updated Business Impact Analyses and contingency plans, (5) failure to test the New Financial Environment in a production environment, and (6) significant access controls vulnerabilities described in a separate report. All of these vulnerabilities contributed to our reinstating a reportable condition on FDIC information security controls. We are sending copies of this report to the Chairman and Ranking Minority Member of the Senate Committee on Banking, Housing, and Urban Affairs; the Chairman and Ranking Minority Member of the House Committee on Financial Services; members of the FDIC Audit Committee; officials in FDIC’s divisions of information resources management, administration, and finance; and the FDIC inspector general. We also will make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions regarding this report, please contact me at (202) 512-6244 or by e-mail at [email protected]. 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 II. In addition to the individual named above, the following people made key contributions to this report: William Wadsworth; Ed Alexander, Jr.; Gerald Barnes; Angela Bell; Mark Canter; Jason Carroll; Lon Chin; Barbara Collier; Anh Dang; Kristi Dorsey; Denise Fitzpatrick; Ed Glagola; Nancy Glover; David Hayes; Sairah Ijaz; Kevin Metcalfe; Duc Ngo; Tammi Nguyen; Eugene Stevens; Charles Vrabel; and Chris Warweg. | The Federal Deposit Insurance Corporation (FDIC) has a demanding responsibility enforcing banking laws, regulating financial institutions, and protecting depositors. The corporation relies extensively on computerized systems to support and carry out its financial and mission-related operations. As part of the audit of the calendar year 2005 financial statements, GAO assessed (1) the progress FDIC has made in correcting or mitigating information security weaknesses previously reported and (2) the effectiveness of the corporation's information system controls to protect the confidentiality, integrity, and availability of its key financial information and information systems. FDIC has made progress in correcting previously reported weaknesses. Specifically, the corporation has corrected or mitigated 18 of the 24 weaknesses that GAO previously reported as unresolved at the time of the last review. Among actions FDIC has taken are developing and implementing procedures to comply with its computer file naming convention standards and developing and implementing automated procedures for limiting access to sensitive information. Nevertheless, FDIC has not consistently implemented information security controls to properly protect the confidentiality, integrity, and availability of its financial and sensitive information and information systems. In addition to the remaining six previously reported weaknesses for which FDIC has not completed corrective actions, GAO identified 20 new information security weaknesses. Most identified weaknesses pertain to access controls over (1) user accounts and passwords; (2) access rights and permissions; (3) network services; (4) configuration assurance; (5) audit and monitoring of security-related events; and (6) physical security that are to prevent, limit, or detect access to its critical financial and sensitive systems and information. In addition, weaknesses exist in other information security controls relating to segregation of duties and application change controls. A key reason for these weaknesses is that FDIC has not fully implemented elements of its information security program. For example, it has not consistently implemented its security-related policies, addressed security plans for certain applications, provided specialized training to individuals with significant security responsibilities, implemented remedial action plans for resolving known weaknesses, and updated or tested continuity plans in light of its implementation of the new financial environment. As a result, financial and sensitive information are at increased risk of unauthorized access, modification, and/or disclosure, possibly without detection. Because of this, GAO reported information system control weaknesses to be a reportable condition in 2005. |
Federal law generally recognizes two forms of human trafficking—sex trafficking and labor trafficking. The Trafficking Victims Protection Act of 2000 (TVPA), as amended, defines human trafficking under the term “severe forms of trafficking in persons.” Pursuant to the TVPA, as amended, sex trafficking is the recruitment, harboring, transportation, provision, obtaining, patronizing, or soliciting of a person for the purpose of a commercial sex act. Sex trafficking is a “severe” form of trafficking where it involves force, fraud or coercion, or where the victim has not attained 18 years of age, in which case force, fraud or coercion are not necessary elements. In the case of sex trafficking, a perpetrator—which could be a pimp, intimate partner or relative of the victim—generally forces the victim to engage in commercial sexual activity. For instance, victims may be forced to act as hostesses in a “cantina,” which is a bar at which payment for drinks includes the company of women. Additional payment can be made for sexual contact, and officials told us that many cantinas may contain rooms for the purpose of sexual acts, while others pay for the transaction at the bar and then engage in the sexual act in a nearby hotel. The TVPA defines labor related trafficking generally as the recruitment, harboring, transportation, provision, or obtaining of a person for labor or services, through the use of force, fraud, or coercion for the purpose of subjection to involuntary servitude, peonage, debt bondage, or slavery. Labor trafficking can take various forms, such as debt bondage, domestic servitude, and forced labor. For example, in one case, workers from Thailand were brought to the United States with the understanding that they would have highly-paid work as welders. However, once they arrived in the country, they were forced to work in restaurants without pay, had their passports confiscated, and were confined to cramped apartments without any electricity, water, or gas. Federal efforts to combat and prevent human trafficking in the United States have evolved over time, including various laws that have established federal agencies’ roles in these efforts. During the 1990s, the United States began to take steps to address human trafficking at home and abroad. DOJ prosecuted trafficking cases under several federal criminal statutes, including the involuntary servitude statutes, the Mann Act, and labor laws on workplace conditions and compensation. However, involuntary servitude was restricted to cases of physical abuse including force, or threats of force, or threats of legal coercion, and did not include psychological coercion, which is often used by today’s traffickers. These statutes spread enforcement authority across the federal government and resulted in different case outcomes, depending on the charges brought or which agency learned of the allegations of abuse. Over the past few decades, Congress has taken numerous legislative actions to help combat human trafficking and ensure that victims have access to needed services. In October 2000, the TVPA was enacted to combat trafficking in persons, ensure just and effective punishment of traffickers and protect trafficking victims. Among other things, the TVPA, as amended, makes it illegal to knowingly or recklessly use force, fraud, or coercion to recruit, entice, harbor, transport, provide, obtain, advertise, maintain, patronize, or solicit any person to engage in a commercial sex act. The TVPA also makes it illegal to take the above actions, and thus cause a person under 18 years of age to engage in a commercial sex act, with or without the use of force, fraud, or coercion. In addition, the TVPA criminalizes the use of certain means, including force, threats of force, physical restraint, or serious harm or threats of such harm to knowingly provide or obtain persons for any labor or services, such as working in farms, factories, and households. The act also updated and supplemented existing involuntary servitude statutes used to prosecute trafficking crimes, enhanced the penalties for trafficking crimes, and provided a range of new protections and assistance for victims of trafficking. The TVPA provided for the creation of the Interagency Task Force to Monitor and Combat Trafficking, now known as the President’s Interagency Task Force to Monitor and Combat Trafficking in Persons, as a cabinet-level entity that convenes routinely to advance and coordinate both federal policies and the implementation of the TVPA. As amended by the Trafficking Victims Protection Reauthorization Act of 2003, the TVPA also established the Senior Policy Operating Group (SPOG), consisting of senior officials from 14 federal agencies and the White House National Security Council and the Domestic Policy Council, to coordinate activities of federal departments and agencies regarding policies (including grants and grant policies) involving international human trafficking and the implementation of the TVPA. This multidisciplinary approach includes the enforcement of criminal and labor law, development of victim-centered identification and protection measures, support for innovations in data gathering and research, education and public awareness, enhanced partnerships and research opportunities, and strategically linked foreign assistance and diplomatic engagement. Congress also reauthorized the TVPA in 2005 and 2008; and, in 2013, further amended provisions of the act, its reauthorizations, and other related laws. In 2015, the President signed into law the JVTA, which, among other things, required the Attorney General to ensure that law enforcement officers and federal prosecutors receive anti-trafficking training; required the Federal Judicial Center, the research and education agency of the federal judicial system, to provide training for judges on ordering restitution for victims of certain trafficking-related offenses under chapter 77 of title 18, U.S. Code; mandated that the Secretary of Homeland Security implement a human trafficking training program for department personnel; and required the Attorney General to implement and maintain a national strategy for combating human trafficking. In addition to the federal statutes, the 50 states and the District of Columbia have laws that address human trafficking to some degree, whether explicitly under a “human trafficking” statute or pursuant to other relevant laws. State laws differ and may include various features that criminalize sex or labor trafficking or other related conduct; require training for law enforcement; lower the burden of proof for sex trafficking of minors by not requiring force, fraud or coercion as elements of the offense; and provide victim assistance, among other things. Several components within DOJ, DHS, Defense, Labor, and State have responsibility for investigating and prosecuting human trafficking crimes, as shown in figure 1. In addition to federal investigative and prosecutorial agencies, other agencies play a role in helping to identify human trafficking, such as the Transportation Security Administration (TSA), U.S. Citizenship and Immigration Services (USCIS), U.S. Customs and Border Protection, Federal Emergency Management Agency, and Coast Guard. These agencies may also encounter human trafficking victims in their daily operations, including at airports, land borders, and seaports. EEOC and Labor’s Wage and Hour Division may encounter human trafficking when conducting investigations related to their statutory authority. For example, EEOC investigates alleged violations of Title VII of the Civil Rights Act of 1964 prohibiting employment discrimination based on, race, color, religion, sex, and national origin, which in certain circumstances involve human trafficking victims. In addition to investigating and prosecuting human trafficking crimes, federal agencies, primarily DOJ and HHS, support state and local efforts to combat human trafficking and assist victims. Several components within DOJ’s Office of Justice Programs, including the Office of Juvenile Justice and Delinquency Prevention, Office for Victims of Crime (OVC), Bureau of Justice Assistance (BJA), and National Institute of Justice (NIJ), administer grants to help support state and local law enforcement in combating human trafficking and to support nongovernmental organizations and others in assisting trafficking victims or conducting research on human trafficking in the United States. HHS also provides grant funding to entities to provide services and support for trafficking victims, primarily through components of the Administration for Children and Families (ACF), including the Children’s Bureau, Family and Youth Services Bureau, Administration for Native Americans. Further, ACF established the Office on Trafficking in Persons in 2015 to coordinate anti-trafficking responses across multiple systems of care. Specifically, HHS supports health care providers, child welfare, social service providers and other first responders likely to interact with potential victims of trafficking through a variety of grant programs. These efforts include integrated and tailored services for victims of trafficking, training and technical assistance to communities serving high-risk populations, and capacity-building to strengthen coordinated regional and local responses to human trafficking. HHS also established the HHS Task Force to Prevent and End Human Trafficking in 2015 to strengthen the health and well-being of victims of trafficking through strategic initiatives and policies. The federal government has a number of efforts underway to combat human trafficking and assist victims in the United States, including task forces, working groups, as well as training and public awareness campaigns. In 2011, partly in response to a 2007 GAO report that recommended a federal coordinating body to combat human trafficking, DOJ, in collaboration with DHS and Labor, established Anti-trafficking Coordination Teams (ACTeams). The teams are located in six U.S. cities and are comprised of federal investigators and prosecutors from the USAO, FBI, ICE HSI, and Labor’s Inspector General and Wage and Hour Division. The Federal Enforcement Working Group, which oversees the ACTeams, selected these cities based on the agencies’ commitment to combat human trafficking and to reflect a diversity of city size, federal agency staffing levels, nature of human trafficking threats, and federal agency experience with human trafficking investigations and prosecutions. The purpose of the ACTeams is to coordinate federal criminal human trafficking investigations and prosecutions to protect the rights of human trafficking victims, bring traffickers to justice, and dismantle human trafficking networks. Pursuing trafficking investigations and prosecutions also involves the support of state and local law enforcement, which may be in the best position to find trafficking victims because of their familiarity with their respective jurisdictions; and nongovernmental organizations, where victims may more readily seek assistance. Moreover, victim service organizations assist human trafficking victims by providing assistance to address their short-term and long-term needs—such as legal and immigration services, housing, employment, education, food, clothing, job training, medical care, and child care. Since 2004, OVC and BJA have partnered to support multidisciplinary task forces that bring together law enforcement and victim service providers. This partnership supports a state, local, or tribal law enforcement agency and a victim service provider. OVC awards support the provision of a comprehensive array of culturally and linguistically appropriate direct services to trafficking victims, while BJA awards support the coordinated efforts of local, state, federal, and tribal law enforcement to investigate and prosecute traffickers. In fiscal year 2014, OVC and BJA undertook an analysis of the enhanced collaborative model and examined how well the funded task forces were operating. Based on both qualitative and quantitative analyses, program improvements were made, and a new solicitation incorporating these improvements was issued in fiscal year 2015. During fiscal year 2015, OVC and BJA provided nearly $22.7 million to 16 task forces in 14 states. Another key federal effort to combat human trafficking in the United States is DHS’s Blue Campaign, which the department describes as the unified voice for DHS’s efforts to combat human trafficking. The Blue Campaign raises public awareness about human trafficking, leveraging partnerships to educate the public to recognize human trafficking and report suspected instances. The Blue Campaign also offers training to law enforcement and others to increase detection and investigation of human trafficking, and to protect victims and bring suspected traffickers to justice. Federal agencies have begun efforts to assess the prevalence of human trafficking in the United States and develop data standards and definitions to help facilitate prevalence studies. The Human Smuggling and Trafficking Center (HSTC) is an interagency federal effort designed to be an all source clearinghouse and information center for human trafficking, smuggling, and terrorism information. The HSTC disseminates information, conducts strategic assessments, and identifies issues needing facilitation among multiple agencies. In July 2014, HSTC completed a Human Trafficking National Assessment, which focused on identifying federal data sources useful for human trafficking analysis and provided some initial assessment of the data for the purposes of identifying trends and patterns. HSTC officials noted, however, that they faced challenges understanding the landscape of the data collected, assessing the quality of the data, and identifying the gaps in data collection. As a result, the officials were unable to infer high levels of human trafficking in areas with high numbers of victims or cases or prosecution. Thus, several member agencies expressed concern over the methodology, data collected, and data analysis used in the assessment, and because HSTC products require the approval of all of the member agencies, the report was not released. HSTC has released other assessments of human trafficking, including regional assessments and industry assessments for particular industries where human trafficking may occur, including fishing, agriculture, garment, and sex tourism. In addition, HHS’s Office on Trafficking in Persons, which is part of the Administration for Children and Families, and the Office on Women’s Health are sponsoring the Human Trafficking Data Collection Project. The purpose of the project is to inform the development of an integrated data collection platform regarding human trafficking victimization; establish baseline knowledge of human trafficking and victim needs; and support effective prevention and intervention responses. According to HHS officials, the project takes a public health approach to human trafficking in order to (1) better collect data from federal and state data systems and national surveys to support analysis that will uncover specific risk factors for human trafficking among high-risk populations; (2) improve coordination of data collection on human trafficking across multiple health and human service systems such as refugee resettlement, child welfare, runaway and homeless youth, community health, and domestic violence programs; and (3) explore new data collection strategies, through public health methodologies, for compiling prevalence estimates. HHS, in consultation with key stakeholders, has developed draft data fields and definitions for human trafficking and expects to begin piloting the data collection effort in fall 2016. Further, NIJ has focused its resources on improving the science that lies behind prevalence estimates of human trafficking in the United States, among other topics. NIJ has awarded grants for the development and testing of methodologies that could be used to calculate human trafficking prevalence. In fiscal year 2015, NIJ awarded two grants for nationwide research on the prevalence of human trafficking. Abt Associates was awarded $996,870 to conduct a study on “Advancing Human Trafficking Prevalence Estimation,” and Northeastern University was awarded $462,973 for a study on “Capturing Human Trafficking Victimization through Crime Reporting”. According to Abt Associates, the study being performed by Abt Associates will not give numbers on the prevalence of human trafficking; rather, it will provide a methodology to calculate prevalence. In addition to federal efforts designed to determine the prevalence of human trafficking in the United States, federal agencies and federally- funded entities maintain data that, although not specifically intended to do so, could give an indication of human trafficking and where it is occurring across the country. However, considering that human trafficking is likely underreported, as with most clandestine crimes, and most of these data are based on information reported to law enforcement authorities or hotlines, these data cannot be used to assess prevalence. In 2008, Office of Justice Programs’ Bureau of Justice Statistics, in partnership with BJA, established the Human Trafficking Reporting System, which is a database used to collect data on human trafficking cases from OVC- and BJA-funded anti-trafficking task forces. However, these task forces represent a small percentage of law enforcement agencies. Further, these task forces are unlikely to be a representative sample of human trafficking in the United States since areas with high trafficking are more likely to have a task force. Since 2012, OVC also requires victim service providers that receive OVC grant funding under the trafficking victims services grants to biannually report the number of human trafficking victims that received services as a result of that funding. OVC maintains this data in the Trafficking Information Management System. According to OVC, in 2015, 54 grantees across 3 grant programs were required to report information. OVC grantees reported providing services to 3,889 human trafficking victims from July 2014 to June 2015. However, OVC grantees likely represent a small subset of service providers working with human trafficking victims. ACF also requires victim service providers that receive ACF funding under the trafficking victim service grants to report the number of human trafficking victims and eligible family members who received services as a result of that funding. According to ACF, in 2015, grantees reported providing services to 1,726 individual clients through the Trafficking Victim Assistance Program. In January 2013, the FBI, through its Uniform Crime Reporting Program, began collecting data on human trafficking in the United States, and in 2014, the FBI reported 443 offenses that involved human trafficking. However, because the Uniform Crime Reporting Program primarily collects data on crime-related incidents that have been reported to state, local, and tribal police that have the ability to report the data to the Uniform Crime Reporting Program, the FBI’s human trafficking report does not include unreported incidents. The Executive Office for U.S. Attorneys maintains data on the number of human trafficking matters received by each of the 94 USAOs, as well as matters that are ultimately prosecuted. In fiscal year 2015, the 94 USAOs reported prosecuting a total of 252 human trafficking cases. Other DOJ prosecuting units, including the Civil Rights Division, also maintain data on human trafficking prosecutions. In addition, federal investigative agencies, including FBI and ICE HSI, keep data on investigations and arrests. See appendix II for federal human trafficking prosecution and investigation data from fiscal years 2013 to 2015. Other federally-funded entities also collect human trafficking data based on victim reports that may not be referred to law enforcement, which may also provide an indication of human trafficking. For example, funded through an HHS grant, the NHTRC is a national anti-trafficking hotline and resource center serving victims and survivors of human trafficking and the anti-trafficking community in the United States. The NHTRC collects human trafficking data through its website and is based on aggregated information learned through signals—phone calls, emails, and online tip reports—received by the hotline. In 2015, NHTRC identified 5,544 potential trafficking cases. The NHTRC determined that 4,136 were related to sex trafficking, 721 were related to labor trafficking, and 178 were related to both sex and labor trafficking. The type of trafficking was not specified for 509 of the tips. Further, NHTRC was able to determine that 4,683 of the reports involved a female victim, 574 involved a male victim, 3,559 involved an adult victim and 1,621 involved a minor. Further, 1,660 involved U.S. citizen victims and 1,041 involved foreign national victims. However, the data do not define the totality of human trafficking or of a trafficking network in any given area. NCMEC is a private, nonprofit corporation supported by federal grant funding, as well as corporate in-kind and private donations, whose mission is to help find missing children, reduce child sexual exploitation and prevent future victimization. To advance its mission, NCMEC operates the CyberTipline in which the public and electronic service providers can report suspected child sexual exploitation, including child sex trafficking. NCMEC makes the CyberTipline reports available to international and domestic law enforcement agencies, including the FBI Child Exploitation Task Forces and the Internet Crimes Against Children Task Forces. From July 1, 2014 through March 31, 2016, NCMEC received 13,529 reports related to child sex trafficking. Based on the data collected by federal agencies and federally-funded entities, there was some consistency with respect to states that have had the most reported human trafficking activity. For example, 9 states— Arizona, California, Florida, New York, Ohio, Pennsylvania, Texas, Virginia, and Washington—were in the top one-third with respect to investigations referred by law enforcement agencies to the USAOs for federal prosecution and calls and tips related to human trafficking. We found that federal law enforcement efforts and grant funding have been targeted in these locations, as discussed later in this report. According to federal, state, and local law enforcement officials and prosecutors we interviewed, investigating and prosecuting human trafficking crimes is challenging for multiple reasons, including a lack of victim cooperation, limited availability of victim services, difficulty identifying human trafficking, and others. Federal, state and local agencies have taken or are taking some actions to address these challenges, such as increasing the availability of services, primarily by providing funding through grants. Officials in 25 of the 32 interviews we conducted with law enforcement and prosecutorial agencies reported that they faced challenges with victim cooperation. In general, officials stated that obtaining the victim’s cooperation is important for human trafficking investigations and prosecutions because the victim is generally the primary witness and source of evidence. The officials told us that human trafficking victims may be unable or unwilling to cooperate with the investigation or prosecution because they distrust law enforcement, may be traumatized by abuse or addicted to drugs, have a sentimental attachment to the trafficker, do not see themselves as victims, or fear retaliation from the trafficker. For example, some victims may not cooperate because the trafficker is holding or threatening the victim’s family abroad. Officials also stated that juvenile victims can present challenges because they may come from troubled homes or foster care and may feel that they are better cared for by the trafficker than at home and do not want to receive any help. Law enforcement are to use a victim centered approach when combating human trafficking that may help improve the victim’s ability and willingness to cooperate. This approach seeks to minimize retraumatization associated with the criminal justice process by providing the support of victim advocates and service providers, empowering survivors as engaged participants in the process, and providing survivors an opportunity to play a role in seeing their traffickers brought to justice. Such an approach places value on the identification and stabilization of victims and providing immigration relief, as well as the investigation and prosecution of traffickers. Identifying, not criminalizing, victims is the first step in adopting a victim-centered strategy and to achieve this goal, officers must be committed to helping victims feel safe, secure, and stable. Officials in 12 of the 32 interviews we conducted with law enforcement and prosecutors told us there are strategies that may help improve the victim’s ability and willingness to cooperate, such as facilitating access to immigration relief and protecting the victim’s family abroad for foreign victims, or providing services to both foreign and domestic victims. Immigration relief: T visa, U visa, or Continued Presence. According to USCIS, immigration relief options encourage victims to report crimes and work with law enforcement. Trafficking victims may seek immigration relief in the form of T nonimmigrant status (T visa) for victims of a severe form of trafficking who meet certain criteria and U nonimmigrant status (U visa) for victims of qualifying criminal activity, including human trafficking and fraud in foreign labor contracting, who satisfy U visa-specific criteria. The T visa and U visa allow the victims to remain in the country, for up to 4 years, which may be extended under certain circumstances, so they can assist with the investigation or prosecution of human trafficking or qualifying crimes, respectively. Individuals with T or U visas are authorized for employment incident to their nonimmigrant status, and U visa applicants may receive work authorization while their application is still pending. U visa holders may be eligible for lawful permanent residence if, among other things, they have been physically present in the United States continuously for at least 3 years since admission as a U nonimmigrant. For T visa holders, the physical presence requirement may be satisfied by demonstrating continuous physical presence either for 3 years since the date of admission as a T nonimmigrant, or during the investigation or prosecution of trafficking, whichever period of time is less. Further, ICE can grant Continued Presence, which is a temporary form of protection available to foreign national victims of human trafficking without lawful immigration status if they are potential witnesses to that trafficking, and upon the application by federal law enforcement officials to DHS. Continued Presence allows victims to remain and work in the country temporarily, for 1 year, and may be renewed in 1 year increments, during the ongoing investigation into the human trafficking-related crimes committed against them. See appendix II for information on T and U visa applications and petitions, and Continued Presence approvals and denials for fiscal years 2013 through 2015. Further, working through ICE and FBI personnel stationed at U.S. embassies, U.S. investigative and prosecutorial agencies have protected U.S. trafficking victims’ family members in a foreign country. Victim services. Federal agencies have victim service coordinators who help navigate the victim through the criminal justice process and connect the victim with appropriate services. Additionally, OVC and ACF provide grants for comprehensive and specialized victim service programs to non- governmental organizations and others. These organizations utilize grant funding to provide services such as shelters, medical services, substance abuse treatment, legal services, food and clothing, mental health, literacy education, job training, interpreter and translation services, support groups, and mentoring programs for human trafficking victims. Officials in 9 of the 32 of interviews we conducted with law enforcement and prosecutors reported that providing these services helps stabilize victims and encourages them to cooperate. For example, the officials reported that mental health and substance abuse services are vital to stabilize the victim so that they can provide an accurate recount of the trafficking situation and may help them to testify. While victim services may help victims recover and possibly cooperate more fully, the availability of services is limited. Officials in 15 of the 32 interviews we conducted with law enforcement officials and prosecutors reported limited availability of services in their area of responsibility. Below are examples of the types of limitations in services for human trafficking victims. Short-term assistance. Of the 15 officials who reported limited availability of services in their area of responsibility, 8 told us that short-term assistance, particularly shelters were needed. According to officials, many victim assistance service providers that typically serve other populations may not be prepared or willing to deal with human trafficking victims as very few shelters specialize in services for human trafficking victims. For example, in some cases these shelters are designed to address the needs of survivors of domestic violence, such as resources to become financially stable and access to government services and childcare, whereas, trafficking victims need medical and psychological assistance tailored to meet their unique needs. Further, officials told us that shelters may not accept human trafficking victims because they fear that the victim will recruit women from the shelter for the trafficker. Long-term assistance. Of the 15 officials who reported limited availability of services in their area of responsibility, 7 told us that there is insufficient long-term assistance, including housing, mental health services, and drug rehabilitation, available for trafficking victims. For example, law enforcement officials in one of our site visits told us that their areas of responsibility are ill-equipped to provide long-term services to human trafficking victims. As a result, victims are sent to other states to receive services. In addition, a service provider told us that finding long-term housing presents a challenge when the victim has a criminal background or bad credit history. Further, other officials told us that in some circumstances services are more limited for U.S. citizens than for foreign victims. The officials explained that, historically, the federal government’s efforts to combat human trafficking in the United States and assist victims have been focused primarily on foreign nationals. While the TVPA of 2000 included certain provisions for services for victims of human trafficking in the United States, its reauthorization in the William Wilberforce Trafficking Victims Protection Reauthorization Act of 2008 established a program specifically to assist U.S. citizen and lawful permanent resident victims of trafficking. In recent years, DOJ, HHS, and some states, including those within the scope of our review, have taken steps to increase the availability of services, primarily by providing funding through grants. Two of the six service providers we spoke with told us that in some instances no one service provider can provide all the services a human trafficking victim needs and organizations must work together to help victims. Further, 5 of the 6 service providers we spoke with reported that victim services are limited for human trafficking victims; in particular, they reported difficulty finding shelter or housing options for victims. When asked about actions the federal government could take to address this challenge, 2 of 6 service providers noted that it would be helpful if the federal government increased funding. In 2015, DOJ increased funding to support services specifically for human trafficking victims by $13.5 million, compared to the previous year. Specifically, in fiscal year 2014, DOJ awarded $13.1 million through two grant programs and, in fiscal year 2015, $26.6 million through four grant programs. HHS officials reported that in fiscal year 2015, the agency increased funding by $1.54 million to support services specifically for human trafficking victims. Specifically, officials reported that this included a $1.44 million increase for domestic victims of trafficking and $0.1 million for foreign victims of trafficking compared to fiscal year 2014. Further, multiple states, including those within the scope of our review, as well as the District of Columbia, have enacted laws to facilitate the provision of services to victims of trafficking. Laws in these selected jurisdictions are designed to, for example, develop plans to identify and assist trafficking victims, establish a program to address the rehabilitation and treatment needs of juvenile victims of sex trafficking, or create funding mechanisms for victim services. Officials in 9 of the 32 interviews we conducted with law enforcement and prosecutors reported challenges with identifying and distinguishing human trafficking from other crimes, or even from legal activities. Further, officials from 3 of the 6 service providers we met with reported distinguishing human trafficking from prostitution as a challenge. On the surface, human trafficking may appear to be voluntary prostitution or an undocumented laborer working under his or her own volition. Therefore, in these instances, individuals who are actually victims may instead be treated as criminals—prostitutes or undocumented workers. For example, officials and service providers in one of our selected areas told us that human trafficking is common in the area, but that it is difficult for local law enforcement to distinguish this illicit activity from voluntary prostitution. Further, of the 9 officials who reported challenges identifying human trafficking, 7 told us that it is more difficult to identify and detect labor trafficking compared to sex trafficking. According to these officials, sex trafficking takes place out in the open and is often advertised online, making it easier for law enforcement to identify the crime. However, labor trafficking often occurs behind closed doors—including sweatshops, massage parlors, agriculture, restaurants, hotels and households— making it harder to identify. For example, officials told us about one 2015 labor trafficking case that involved a nanny from Nigeria. According to officials, the victim had a contract with her trafficker which stipulated $100 per month to take care of five children. However, she had not been paid since she moved to the United States and was being physically and psychologically abused. The victim fled and sought shelter with a neighbor. Federal agencies, and state and local agencies in the locations we visited, have several training and public awareness initiatives underway that are intended to help identify, investigate and prosecute human trafficking, including the following: Federal Agency Initiatives. Each of the federal law enforcement and prosecutorial agencies with whom we met provide training to their employees and other law enforcement officials on how to identify human trafficking, among other things. For example, ICE HSI provides a human trafficking training course that uses video scenarios and group discussions to teach its agents how to identify human trafficking, how to distinguish human trafficking from smuggling, and how to conduct victim-centered investigations, among other things. The FBI provides annual specialized training in the commercial sexual exploitation of children and dealing with victims of child sex trafficking. This course teaches law enforcement personnel investigative strategies to address the child sex trafficking threat, and methods in understanding the various types of victims in these cases, how to interact with them, and victim services available to them. The FBI also published a law enforcement sensitive investigative guide on sex trafficking of juveniles. The Attorney General has provided guidance to USAOs for developing strategic anti-trafficking plans, including recommended practices for identifying, investigating, prosecuting, and tracking human trafficking offenses. The Executive Office for U.S. Attorneys also provided USAOs with guidance for establishing and coordinating human trafficking task forces. The Federal Law Enforcement Training Center, in coordination with the Blue Campaign, offers a web-based human trafficking training course that teaches law enforcement officers at the federal, state, local, and tribal levels how to recognize human trafficking encountered during routine duties, how to protect victims, and how to initiate human trafficking investigations. In addition, the Federal Law Enforcement Training Center provides human trafficking training to federal officers and agents as part of its basic training program. In fiscal year 2015, 128 law enforcement officers took the training. Further, since July 2015, the Federal Law Enforcement Training Center has provided human trafficking awareness training by text or video to 3,007 students in basic training programs. In addition, federal agencies provide training to state and local agencies, as well as the public, regarding human trafficking, including the following: FBI field offices conducted approximately 672 human trafficking training sessions in fiscal year 2014 to various groups, including, but not limited to, state and local law enforcement, social workers, healthcare providers, hotel workers, faith based groups, non- governmental organizations, students and educators. HHS piloted the Stop. Observe. Ask. Respond (SOAR) to Health and Wellness program, a human trafficking training program to help health care providers identify potential victims and appropriately refer them for services, in fiscal year 2014. According to HHS officials, the department will expand the training to social workers, substance abuse and mental health providers, and public health professionals in fiscal year 2016. In addition, the officials said that in fiscal year 2015, 15,265 professionals and first responders likely to interact with victims of trafficking were trained through a network of several HHS-funded anti-trafficking grantees. The Blue Campaign, in collaboration with the ICE HSI Victim Assistance Program and other DHS components, provided human trafficking awareness training to government, nongovernment, and private industries, including those in hospitality, health care, and education. Other federal agencies, whose employees may come across human trafficking victims in their day-to-day operations—including U.S. Customs and Border Protection, TSA, USCIS, and the U.S. Coast Guard—also provide human trafficking training to their employees. Further, Labor’s Wage and Hour Division and the EEOC also look for human trafficking indicators when conducting their own investigative and enforcement work. According to officials, these agencies are to refer potential human trafficking cases to the appropriate law enforcement agencies for further investigation. For example, TSA officials we met with told us that from March 2015 to February 2016, they referred six reports of suspected human trafficking to ICE HSI. Figure 2 shows an example of a resource available to agencies and the public to help them identify human trafficking. Further, some federal agencies also have efforts related to public awareness of human trafficking. For example, in January 2016, OVC released resources to raise awareness and serve victims, including a video series called “The Faces of Human Trafficking” and posters to be used for outreach and education efforts of service providers, law enforcement, prosecutors, and others in the community. The series includes information about sex and labor trafficking, multidisciplinary approaches to serving victims of human trafficking, effective victim services, victims' legal needs, and voices of survivors. Since 2010, DHS, through the Blue Campaign, reported it has worked to raise public awareness about human trafficking, leveraging partnerships with select government and nongovernmental entities to educate the public to recognize human trafficking and report suspected instances. According to DHS officials, Blue Campaign posters are displayed in public locations including airports and bus stops. Figures 3 and 4 show examples of resources used as part of these initiatives, which are available online, or by request, for public distribution. In addition, HHS established the “Look Beneath the Surface” public awareness campaign through its Rescue and Restore Victims of Human Trafficking program. According to HHS officials, in fiscal year 2015, the department distributed over 883,000 pieces of material publicizing the NHTRC. These materials, which included posters, brochures, fact sheets, and cards with tips on identifying victims, were available in eight languages. According to HHS officials, in fiscal year 2016, the department is updating its public awareness campaign materials to be complementary to other federal resources. Figure 5 shows an example of resources used as part of this initiative. Federal Judicial Center Initiatives. In accordance with the JVTA, the Federal Judicial Center provided training to federal judges and judicial branch attorneys, including judicial law clerks, on human trafficking through a webinar in August 2015. The training walked participants through the provisions of the JVTA and addressed how child exploitation manifests in human trafficking cases, among other things. According to Federal Judicial Center officials we spoke with, 1,300 registered viewers participated in the webinar, which is now available for on-demand viewing on the Federal Judicial Center website. They also told us that, in April 2016, 198 district judges attended a workshop in which, among other topics, a human trafficking sentencing scenario was discussed. According to Federal Judicial Center officials, adjudicating human trafficking cases can be challenging for judges because they have to determine the role the victim played in the trafficking situation and it may be difficult to determine what kept the victims from escaping, and led them to instead obey the trafficker. State and Local Initiatives. The states and jurisdictions included in our review also provide for training of law enforcement personnel on human trafficking-related issues. Some of the states also have laws related to ensuring public awareness of human trafficking. For example: Virginia’s Department of Social Services is required to develop a plan providing for, among other things, preparation and dissemination of educational and training programs and materials to increase awareness of human trafficking and services available to victims among local departments of social services, public and private agencies and service providers, and the public; and North Dakota’s Department of Transportation is required to display in every transportation station, rest area, and welcome center, a public- awareness sign that contains state or local human trafficking resource information as well as the NHTRC Hotline number. Additional challenges reported by law enforcement officials and prosecutors we spoke with include the amount of time it may take for a USAO to decide whether federal charges will be pursued in certain human trafficking cases. USAOs would be expected to take the time that is needed to exercise prosecutorial discretion in a reasoned manner, considering the relevant laws and facts. However, one of the four state prosecutors we interviewed said that the length of time it takes the USAO to decide whether to accept or decline the case, which has taken over a year in certain instances, can make it difficult for them to obtain evidence once the case is referred to them. Human trafficking-related prosecutions can occur at both the federal and state level. Law enforcement officials told us that, in most instances, they refer cases to the state prosecutor when the USAO declines to prosecute the case. Based on our review of data provided by the Executive Office for U.S. Attorneys, the most common reasons that USAOs reported declining human trafficking cases were “insufficient evidence” and “matters being referred to another jurisdiction.”(See appendix II for additional information on declinations.) Two of the four state prosecutors we interviewed reported working with the USAO to make a joint decision on whether to prosecute the case at the federal or state level, which may help address this challenge. Additionally, officials from FBI, ICE HSI and Bureau of Diplomatic Security whose area of responsibility includes North Dakota identified challenges such as having to drive long distances, sometimes under hazardous driving conditions, to do their investigative work and meet with victims. These officials told us that there has been an increase in human trafficking and other criminal activity in the Bakken area—a relatively remote area—due to the oil boom. According to FBI and ICE HSI officials, the agencies are taking steps to address this challenge. FBI officials told us that the agency opened a field office in spring 2016 in western North Dakota, which is closer to the area where crime, in general, has increased. FBI and ICE HSI officials also told us that the agencies are working together to station some ICE HSI agents in the FBI’s new facility. We identified 42 grant programs for which the federal government awarded funding in 2014 and 2015 that may be used to combat human trafficking or to assist victims of human trafficking (see appendix IV for a list of the grant programs and their objectives). Fifteen grant programs administered by DOJ and HHS are intended solely to combat human trafficking or assist victims. In fiscal years 2014 and 2015, 123 organizations were awarded funds under these grant programs. These initiatives include programs that provide training and technical assistance to service providers and law enforcement agencies; support multi- disciplinary task forces to ensure victim-centered responses to human trafficking; and provide services directly to victims of human trafficking. Further, each grant program may be used for more than one of these purposes. More specifically, the 15 grant programs can be used for: Collaboration and partnerships. 12 of the grant programs allow funds to be used for collaboration between or within law enforcement and service providers through mechanisms such as task forces, coalitions, and partnerships. For example, the Enhanced Collaborative Model grant program, administered by OVC and BJA, supports the development and enhancement of multidisciplinary human trafficking task forces. These task forces implement collaborative approaches to involve both law enforcement and service providers in implementing a victim-centered approach to human trafficking investigations, prosecutions, and assistance. Data, research, and evaluation: 3 of the grant programs include an element of data collection on human trafficking cases, research on human trafficking, or evaluation of best practices. For instance, the Research and Evaluation on Trafficking in Persons grant program, administered by NIJ, has supported nine research projects evaluating, among other things, the prevalence of human trafficking in the United States, and victim experiences with law enforcement and service providers. Victim services: 9 of the grant programs can be used to provide services directly to victims of human trafficking, including provision of housing, health care, mental health and substance abuse services, and legal services. For example, HHS administers the Trafficking Victims Assistance grant program, which provides comprehensive services for foreign victims of human trafficking in the United States. Public awareness: 8 of the grants may be used to raise public awareness of trafficking, which is intended to help the public recognize human trafficking and report suspected cases. Training and technical assistance: 13 of the grant programs may be used to provide training and technical assistance to service providers or law enforcement stakeholders on elements of identifying and serving victims of human trafficking. For example, one grantee funded under HHS’s Rescue and Restore grant program provides peer-to-peer training in order to further develop coordinated, effective multidisciplinary coalitions to address human trafficking throughout its state. An additional twenty-seven grant programs are not specifically for human trafficking, but may be used to combat trafficking or assist victims. For instance, DOJ’s Vision 21 Innovation Grants support training, technical assistance, capacity building, assessment, or strategic planning for eight issue areas, one of which was related to human trafficking in the fiscal year 2015 solicitation. Similarly, HHS’s Refugee and Entrant Assistance grant programs are intended primarily for refugees in the United States, but individuals who have been certified as victims of human trafficking by HHS’s Office of Refugee Resettlement or the Office on Trafficking in Persons are also eligible for services through these programs. As shown in table 1 above, each of the 15 grant programs that are intended solely for human trafficking contains at least some potential overlap with other human trafficking grant programs in authorized uses. For instance, with the exception of the Research and Evaluation on Trafficking in Persons grant program, funding under each of the remaining 14 grant programs can be used for either collaboration or training purposes. Similarly, 9 of the 15 grant programs provide support for direct services to victims of human trafficking. As described earlier, according to our prior work addressing overlap and duplication, overlap among programs occurs when multiple programs engage in similar activities or strategies, as many of the human trafficking grants do. Of the 123 organizations that were awarded grants specific to human trafficking in fiscal years 2014 or 2015, 13 received multiple human trafficking grants for either victim services or for collaboration, training, and technical assistance from DOJ and HHS. HHS officials stated that additional overlap may exist among sub-grantees, although we did not include subgrantees in our duplication analysis. Of the 13, 7 had multiple grants that could be used for victim services, and 3 had multiple grants that could be used for collaboration, training, and technical assistance. For instance, two organizations received a grant for Services to Victims of Human Trafficking in 2014 and a grant for the Enhanced Collaborative Model in 2015, both from DOJ. Both grants can be used to provide direct services to victims of human trafficking. Another organization received similar grants for victim services from DOJ and HHS in 2014, and a third grant to establish a task force and provide services in 2015. HHS officials noted that they were comfortable with awarding multiple services grants to this organization because different populations were served under each grant application. DOJ officials noted that the same organization received the task force grant because they had submitted a strong application and they believed a task force would benefit the area in which the organization worked. DOJ officials noted that geographical distribution is an important factor when making award decisions, and that they would not generally award two grants in a location that may be duplicative, such as two Enhanced Collaborative Model awards in the same city. However, they noted that they may award funds under the same grant program to multiple service providers in cities that may have a high need for services or have a high number of identified trafficking victims. HHS officials told us that they do attempt to achieve geographic dispersion when awarding grants under the Rescue and Restore program, Trafficking Victim Assistance Program, and Demonstration Grants for Domestic Victims of Human Trafficking. Officials from both agencies said that they do not consider the locations of grants awarded by other agencies when awarding grants. Five cities have multiple organizations located in their cities that have been awarded the same DOJ grants as one another, but in those cases, each organization serves a different population or provides different services, according to DOJ officials. Based on our analysis of DOJ and HHS grant data, over half of all grants were awarded in the 9 states that are in the top one-third with respect to matters referred for federal prosecution and calls and tips related to human trafficking. Figure 6 shows the number of human trafficking grants awarded within the United States by city. Move mouse over city, county, or state names for grant information. For noninteractive version see appendix V. Grant awards are categorized by the main city in the area in which they are being implemented. The map does not include grants that provide services throughout the United States or that provide services in multiple states. DOJ and HHS each have intra-agency processes in place to prevent unnecessary duplication. According to DOJ and HHS officials, each agency operates an internal working group to allow the components administering human trafficking grants to communicate on a regular basis. HHS officials indicated that offices that administer human trafficking grant programs meet monthly to exchange information, which may include grant-related announcements and coordination of anti- trafficking activities. Similarly, DOJ officials told us that all DOJ components that address human trafficking meet on a quarterly basis with the goal of ensuring coordination in policy and grant-making. Further, DOJ has taken action to implement recommendations from a prior GAO report to identify overlapping grant programs and mitigate the risk of unnecessary grant award duplication in its programs. In response to these recommendations, DOJ also requires grant applicants to identify in their applications any federal grants they are currently operating under as well as federal grants for which they have applied. Finally, in response to recommendations in the same GAO report, DOJ has conducted two studies of overlap and duplication among fiscal year 2012 grant programs administered by the Office of Justice Programs, the Office on Violence against Women, and the Office of Community Oriented Policing Services. DOJ and HHS officials also reported that they routinely share grant announcements with one another in an informal manner. For instance, officials from both agencies said they coordinate on grant-related activities through the implementation of the Federal Strategic Action Plan on Services for Victims of Human Trafficking in the United States, a government-wide plan which lays out a 5-year path for further strengthening coordination, collaboration, and capacity across governmental and nongovernmental entities. DOJ and HHS officials told us that they conduct regular meetings to monitor progress in advancing the goals laid out in the strategic plan, one of which is to coordinate victim services effectively through collaboration across multiple service sectors to, among other things, reduce duplication of efforts. In addition, HHS officials noted that DOJ and HHS meet bi-weekly during co-chair meetings for the SPOG Victim Services Committee and both agencies participate in the SPOG Grantmaking Committee meetings, which provide additional opportunities to share information for the purposes of coordination and collaboration. According to HHS officials, this coordination prevents duplication because they are aware of the actions of all of the agencies involved in administering grants targeted at human trafficking. Officials from DOJ and HHS also told us that the agencies are working together to develop guidance for grantees that have been awarded human trafficking grants from both agencies so that grantees can avoid using grant funds for duplicative activities. HHS officials noted that the first set of guidance, for serving foreign victims of human trafficking, would be released in summer 2016. Finally, the officials noted that the community of individuals who administer human trafficking grants is small, and that there is frequent formal communication through respective agency grantee calls and informal communication over e-mail regarding the grants between the two agencies. In addition to HHS’s and DOJ’s internal and intra-agency processes for addressing potential duplication, since November 2006, the SPOG has provided a formal mechanism for all agencies administering human trafficking grants to communicate with one another. SPOG guidance was updated in March 2016, and according to officials who administer the SPOG Grantmaking Committee, the updated guidance encourages enhanced information sharing among participating agencies. Specifically, the updated guidance directs participating agencies to share information with members of the Grantmaking Committee prior to final decisions in at least one of the following ways: (1) share plans for programs containing anti-trafficking components during the grant program development process; (2) notify the SPOG of grant solicitations within a reasonable time after they are issued; or (3) notify SPOG partner agencies of proposed funding recipients prior to announcing the award. In each case, SPOG agencies are allotted 5 days for comment on the information. Further, agencies are also to share information with members of the Grantmaking Committee after final decisions are made. We provided a draft of this report for review and comment to the Departments of Defense, Health and Human Services, Homeland Security, Justice, Labor, and State; the Equal Employment Opportunity Commission; and the Administrative Office of the United States Courts. We received technical comments from the Departments of Defense, Health and Human Services, Homeland Security, Justice, and State; and the Administrative Office of the United States Courts, which we incorporated as appropriate. The Department of Labor and the Equal Employment Opportunity Commission did not provide comments. We are sending copies of this report to the appropriate congressional committees, the Attorney General; the Secretaries of Defense, Health and Human Services, Homeland Security, Labor and State; the Chair of the Equal Employment Opportunity Commission; and the Director of the Administrative Office of the United States Courts. 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) 512-8777 or [email protected] . 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 VI. The Justice for Victims of Trafficking Act (JVTA) of 2015 includes a provision for GAO to report on federal and selected state efforts to combat human trafficking in the United States, as well as identify federal grant programs that can be used to assist victims of trafficking. This report addresses the following questions: 1. What federal efforts have been made to determine the prevalence of human trafficking in the United States? 2. What challenges, if any, do federal and selected state law enforcement and prosecutorial agencies face when combating human trafficking in the United States, and what actions have they and others taken to address identified challenges? 3. What federal grant programs are intended to combat human trafficking and assist victims within the United States, and what steps have federal agencies taken, if any, to reduce the potential for duplication among grant programs? For purposes of this report, we focused on human trafficking within the United States, which includes U.S. citizens or nationals, or those with or without lawful immigration status who are trafficked within the United States, as well as foreign persons who are brought to the United States from abroad for the purpose of trafficking. To address the first objective, we reviewed prior GAO human trafficking reports, the Justice for Victims of Trafficking Act of 2015 and other federal laws related to human trafficking, and we interviewed Department of Justice (DOJ), the Department of Homeland Security (DHS), and the Department of Health and Human Services (HHS) officials, to learn whether their component agencies had efforts underway to collect human tracking data that could be used to determine the prevalence of human trafficking in the United States. We also reviewed documentation issued by the President’s Interagency Task Force to Monitor and Combat Trafficking to learn about additional federal efforts to collect information on the prevalence of human trafficking. We obtained and analyzed data from federal investigative and prosecutorial agencies and federally- funded entities that, while not specifically intended to do so, could give an indication of where human trafficking is occurring in the United States. We assessed the reliability of the data the agencies and other entities provided by questioning knowledgeable officials and reviewing the data for obvious errors and anomalies. We determined that the data were sufficiently reliable for the purposes of our reporting objectives. We identified potential sources of human trafficking information, including National Human Trafficking Resource Center (NHTRC) and the National Center for Missing and Exploited Children (NCMEC). We received data related to calls, tips, and reports received by NHTRC and NCMEC and interviewed officials to determine how the information was collected and what criteria were used to determine whether a call or report was categorized as related to human trafficking. We also obtained prosecution and investigations data from DOJ, DHS, Department of Labor (Labor), and Department of State (State). Further, we reviewed DOJ’s grants to identify studies funded to assess human trafficking in the United States. We also interviewed DOJ grantees to understand their ongoing research to quantify human trafficking. To identify challenges federal and selected state law enforcement and prosecutorial agencies face when combating human trafficking and efforts undertaken to address these challenges, we identified relevant federal law enforcement and prosecutorial agencies based on our previous work and review of legislation related to human trafficking. We then interviewed headquarters officials from the Department of Defense, DOJ, DHS, Labor, State, and the Equal Employment Opportunity Commission (EEOC) who are responsible for identifying or investigating human trafficking and other unlawful activities, or prosecuting or litigating cases involving human trafficking-related violations. At DOJ, we interviewed officials from the Office of the Deputy Attorney General, Federal Bureau of Investigation (FBI), Civil Rights Division/Criminal Section, Criminal Division/Child Exploitation and Obscenity Section, and the Executive Office for U.S. Attorneys. At DHS, we interviewed officials from the Office of the Deputy Secretary, U.S. Immigration and Customs Enforcement (ICE) Homeland Security Investigations (HSI), Transportation Security Administration, U.S. Customs and Border Protection, and U.S. Coast Guard. At Labor, we interviewed officials from the Wage and Hour Division and Office of the Inspector General, and at State we interviewed officials from the Bureau of Diplomatic Security. For the FBI, U.S. Attorney’s Office (USAO), ICE HSI, Bureau of Diplomatic Security, and EEOC, we interviewed investigators and prosecutors (or litigators) located in field offices that cover four jurisdictions—Washington, DC/ Northern Virginia; Houston, Texas; Los Angeles, California; and Bismarck, North Dakota. We selected these four jurisdictions because they are located in states that are among the top 10 in terms of human trafficking tips, per capita, that were sent to the NHTRC or to NCMEC. We also selected these jurisdictions because they reflect a variation in geography and receipt of federal funding to establish or continue a human trafficking task force through the Enhanced Collaborative Model to Combat Human Trafficking during fiscal year 2015. In addition, all of the jurisdictions we selected are within geographic priority areas identified by DHS through the Blue Campaign. The purpose of the Blue Campaign is to provide training and raise public awareness about human trafficking, among other things. The campaign has identified priority geographic areas and populations to focus its outreach efforts during fiscal year 2016. We conducted 32 interviews with federal, state and local law enforcement and prosecutorial agencies who were part of the identified task forces in these jurisdictions. During the interviews, we asked officials whether they experienced any challenges in carrying out their duties related to combating human trafficking and to identify any efforts that have been or could be taken to address challenges. Officials identified challenges when we explicitly asked them to identify them or during the course of our discussion. When we report the number of agencies that identified a particular challenge, this does not necessarily mean that the remaining agencies did not also experience the challenge. It means that those stakeholders did not raise the challenge during the course of our interviews. While these officials’ perspectives cannot be generalized to all jurisdictions, they provided insights into federal, state, and local efforts to combat human trafficking. We also interviewed representatives from six non-governmental organizations that provide services to human trafficking victims in the selected jurisdictions. In addition, we interviewed officials from the Federal Judicial Center and the federal judge who conducted the required training for federal judges as mandated by the Justice for Victims of Trafficking Act, and the National Association of Attorneys General to further understand challenges faced when combating human trafficking. To address our third objective, we asked the DHS, DOJ, HHS, Labor and State, which had been identified in a prior study as agencies administering grant programs related to human trafficking, to each provide us a list of grant programs that could be used to combat human trafficking in the United States or assist victims. We corroborated agencies’ lists with online resources, such as grants.gov, and also followed up with interviews at which we requested additional information and ensured that we were aware of all grant programs that could be used to address human trafficking. We identified a total of 42 grant programs that could be used to address human trafficking, although because services for human trafficking victims may be one of many allowable uses for some grant programs, it is possible that there are some programs that were not identified by granting agencies or by our analysis of public records. However, we limited our duplication analysis to the 15 that were intended solely for human trafficking purposes, because we determined that there would most likely be duplication across these grant programs as they were created to address the same issue. Using the established GAO framework for addressing overlap and duplication, we use the following definitions for purposes of assessing human trafficking grant programs: Overlap occurs when multiple granting agencies or grant programs have similar goals, engage in similar activities or strategies to achieve these goals, or target the same or similar beneficiaries. Overlap may result from statutory or other limitations beyond an agency’s control. Duplication occurs on multiple levels. It occurs when a single grantee uses grant funds from different federal sources to pay for the exact same expenditure. Duplication also occurs when two or more granting agencies or grant programs engage in the same or similar activities or provide funding to support the same or similar services to the same beneficiaries. Duplication thus stems from overlap. When granting agencies do not identify overlap, assess its impact, or coordinate their activities in acknowledgment of the overlap, there is a heightened risk of unnecessary duplication because one granting agency may not be knowledgeable of the ways in which its funding decision duplicates another’s. At times, federal funding is leveraged by design to achieve a single purpose through multiple federal funding streams. These funding arrangements are not characterized as unnecessary duplication for purposes of this review so long as federal agencies are aware of them or have deliberately planned for grant programs to be complementary. To assess the possibility for overlap among the 15 grant programs intended solely to address human trafficking, we reviewed grant solicitations from fiscal years 2014 and 2015, the most recent two years in which grants had been awarded, to identify similarities and differences between the allowable activities and target beneficiaries. We divided allowable activities into five categories to determine how many of the grant programs could be used for the same purpose. We then examined the grant awards for each program to assess whether any organizations that had been awarded human trafficking grants were or could be using the grants to provide the same services to the same or similar groups of beneficiaries. We identified 14 organizations that were awarded multiple human trafficking grants in 2014 or 2015. To determine whether duplication was actually occurring, we interviewed officials responsible for administering grant programs at the Bureau of Justice Assistance, the National Institute of Justice, the Office of Juvenile Justice and Delinquency Prevention, and the Office for Victims of Crime in DOJ and the Administration for Children and Families in HHS about the specific organizations that had received multiple grants. We also spoke with three of the organizations regarding how they ensure that funds from each grant are being used for the approved purposes. We selected the organizations based on the number and similarity of grants they were awarded and whether the grants were from both federal agencies. To evaluate what efforts, if any, have been made to prevent unnecessary duplication among human trafficking grants, we reviewed documentation on collaboration efforts, including the Attorney General’s Annual Report to Congress and Assessment of U.S. Government Activities to Combat Trafficking in Persons and guidance from the Senior Policy Operating Group’s (SPOG) Grantmaking Committee. We also interviewed federal agency officials, including members of the SPOG and officials responsible for administering grant programs from the Bureau of Justice Assistance, the National Institute of Justice, the Office of Juvenile Justice and Delinquency Prevention, and the Office for Victims of Crime in DOJ and the Administration for Children and Families in HHS regarding formal and informal mechanisms for coordinating with one another to prevent overlap among grants and duplication among grant awards. We conducted this performance audit from July 2015 to June 2016 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. Responsibility for addressing human trafficking crimes falls to multiple federal agencies. These agencies reported data on the investigations, prosecutions, indictments, and arrests related to trafficking crimes for fiscal years 2013 to 2015. These data are a general indicator of the level of agency effort on trafficking in persons, although they are limited by a number of factors. Because trafficking in persons is a hidden crime and victims are hesitant to come forward, it is difficult to estimate the extent of trafficking in persons crimes. Moreover, because prosecutors may charge traffickers with other crimes (e.g., kidnapping, the Mann Act, immigration violations, or money laundering) for strategic or tactical reasons, data on the number of trafficking in persons investigations and prosecutions do not provide a complete picture of the number of traffickers who have been thwarted. The data systems agencies use are primarily case management systems, which may not be able to extract trafficking data if trafficking was not listed as a charge. Additionally, if an investigation on smuggling later reveals a trafficking violation, some data systems will continue to store investigative data under the smuggling classification. The complexity of the investigations and the limitations of data systems make providing data on human trafficking a labor-intensive effort for agencies. Therefore, these data are not comparable across the agencies and it is not possible to associate arrest and indictment data with a particular case because of differences in agency data systems. Moreover, agency officials noted that investigations do not always lead to prosecutions, because situations that appear to be trafficking may prove to be alien smuggling or prostitution accompanied by abuse and, therefore, do not meet the criteria to be prosecuted as trafficking cases. This appendix provides data on federal agencies’ investigations and prosecutions of human trafficking during fiscal years 2013 to 2015. Within the Department of Justice, the Federal Bureau of Investigation (FBI) has jurisdiction to investigate a broad range of violations of federal law including human trafficking. Within the Department of Homeland Security, U.S. Immigration and Customs Enforcement (ICE) Homeland Security Investigations (HSI) investigates human trafficking as well as a range of cross-border and immigration-related criminal activity. Other agencies, also conduct human trafficking investigations as they relate to their statutory authority. Department of State’s Bureau of Diplomatic Security examines trafficking cases involving visa and passport fraud. Department of Labor’s Inspector General investigates human trafficking offenses that are discovered during investigations involving the Department of Labor’s Foreign Labor Certification programs. Department of Defense’s Defense Criminal Investigative Service, Army Criminal Investigation Command, Naval Criminal Investigative Service, and Air Force Office of Special Investigations investigate allegations of sex and labor trafficking involving service members, departmental contractors and civilians. The data for fiscal years 2013 through 2015 related to investigations, indictments, arrests, and convictions of human trafficking offenses provided by the ICE HSI and the FBI are shown in tables 2, 3, and 4. The arrests, indictments, and convictions associated with ICE HSI and the FBI investigations could have occurred at either the federal, state, or local level. The data related to investigations of human trafficking conducted by the Bureau of Diplomatic Security, the Department of Labor Inspector General, and the Department of Defense during fiscal years 2013-2015 are shown in tables 5, 6, and 7. Within the Department of Justice, the U.S. Attorney’s Offices, along with the Criminal Division and Civil Rights Division, prosecute human trafficking crimes. The Human Trafficking Prosecution Unit (HTPU) in the Civil Rights Division prosecutes labor trafficking and sex trafficking of adults. Within the Criminal Division, the Child Exploitation and Obscenity Section, prosecutes child sex trafficking cases. The data for fiscal years 2013 through 2015 related to matters initiated, cases prosecuted, defendants charged, and defendants convicted of human trafficking offenses provided by the Criminal Division, Civil Rights Division and U.S Attorney’s Offices are shown in tables 8, 9, and 10. Prosecutorial agencies may decline a matter for prosecution for many reasons. For fiscal years 2014 and 2015 the main reason for the U.S. Attorney’s Offices to decline to prosecute a case was insufficient evidence. Table 11 presents the declination statistics and reasons for the U.S. Attorney’s Office for years 2014 and 2015. U.S. Citizenship and Immigration Services (USCIS) within the Department of Homeland Security (DHS) provides immigration relief to foreign victims of human trafficking and other crimes by adjudicating applications for T nonimmigrant status (T visa) for victims of a severe form of trafficking who meet certain criteria and petitions for U nonimmigrant status (U visa) for victims of qualifying criminal activity, including human trafficking and fraud in foreign labor contracting, who satisfy U visa-specific criteria. The T visa and U visa allow the victims to remain in the country, for up to a 4 year period, which may be extended under certain circumstances, so they can assist with the investigation or prosecution of human trafficking or qualifying crimes, respectively. Further, Immigration and Customs Enforcement (ICE) can grant Continued Presence, which is a temporary form of protection available to foreign national victims of human trafficking without lawful immigration status if they are potential witnesses to that trafficking, and upon the application by federal law enforcement officials to DHS. Continued Presence allows victims to remain and work in the country temporarily, for 1 year and may be renewed in 1 year increments, during the ongoing investigation into the human trafficking-related crimes committed against them. T nonimmigrant status may be available for victims of severe forms of trafficking who meet the following criteria: physical presence in the United States on account of such trafficking; compliance with any reasonable request for assistance by law enforcement in the investigation or prosecution of the trafficking (unless the victim is unable to cooperate due to physical or psychological trauma, or is under 18 years of age); and would suffer extreme hardship involving unusual and severe harm if removed from the United States.The number of T visas that may be granted each fiscal year is limited by statute to 5,000 for victims. To obtain a T visa a victim must submit an application, which may include law enforcement certification that the applicant has been a victim of trafficking, to USCIS for review. Victims may also request a derivative T visas for family members, such as the spouse, children or other eligible family members. Derivative family members do not count towards the 5,000 statutory cap. Tables 12 and 13 present the number of T visa applications filed with USCIS for victims and their families for fiscal years 2013-2015. U nonimmigrant status may be available for victims of qualifying criminal activity who have suffered substantial physical or mental abuse as a result of being a victim of the qualifying crime, possess information about the qualifying crime, and have been, are being, or are likely to be helpful to law enforcement or government officials in the investigation or prosecution of the qualifying criminal activity, including trafficking and fraud in foreign labor contracting. The number of U visas that may be granted to principal petitioners each fiscal year is limited by law to 10,000. However, derivative family members do not count towards the 10,000 statutory cap. To obtain a U visa a victim must submit a petition, including a law enforcement certification that the petitioner has been a victim of a qualifying crime, to USCIS for review. See table 14 for the number of U visa petitions filed with USCIS for victims in human trafficking related cases. Continued Presence allows victims of human trafficking to remain in the United States temporarily during the ongoing investigation into the human trafficking-related crimes committed against them. For a victim to obtain Continued Presence federal law enforcement officials or prosecutors must submit an application to ICE for review. Continued Presence is initially granted for 1 year and may be renewed in 1-year increments. Table 15 present the number of Continued Presence applications filed with ICE for fiscal years 2013-2015. We identified 42 federal grant programs that can be used for the purpose of combating human trafficking or assisting victims of human trafficking in the United States. Fifteen are intended solely for these purposes. Each of the grant programs is administered by a component of the Departments of Health and Human Services, Homeland Security, or Justice. This appendix contains the data used in figure 5 of this report, Human Trafficking Grants Awarded within the United States, Fiscal Years 2014- 2015. As in the map, each grant program may have multiple purposes, but their main purpose is identified in the table. In addition, grant awards are categorized by the main city or area in which they are being implemented. The table does not include grants that provide services throughout the United States or that provide services in multiple states, or information on sub-recipients of Department of Justice (DOJ) and Department of Health and Human Services (HHS) grantees. In addition to the contact named above, Kristy Love, Assistant Director; Kisha Clark, Analyst-in Charge; Marycella Mierez; Miriam Hill; Jon Najmi and Michele Fejfar made significant contributions to the work. | Human trafficking—the exploitation of a person typically through force, fraud, or coercion for such purposes as forced labor, involuntary servitude or commercial sex—is occurring in the United States. Congress has passed multiple laws to help ensure punishment of traffickers and protection of victims. DOJ and the Department of Homeland Security lead federal investigations and prosecutions of trafficking crimes. The Departments of Defense, Labor, and State, and the Equal Employment Opportunity Commission investigate trafficking related offenses under certain circumstances, and take further action, as appropriate. DOJ and HHS award grants to fund victim service programs. The Justice for Victims of Trafficking Act of 2015 includes a provision for GAO to review law enforcement efforts and grant programs to combat human trafficking and assist victims in the United States. This report discusses (1) federal efforts to assess prevalence of human trafficking (2) challenges agencies face in investigating and prosecuting human trafficking cases, and 3) federal grants and steps taken to prevent duplication. GAO reviewed trafficking data and agency documents, and conducted 32 interviews with federal, state and local law enforcement officials and prosecutors in four jurisdictions. We selected these jurisdictions based on the number of human trafficking tips they received, receipt of human trafficking task force funding and geographic variation. These officials' perspectives cannot be generalized to all jurisdictions but they provide insights into anti-trafficking efforts. Federal agencies have begun efforts to assess the prevalence of human trafficking in the United States and develop data standards and definitions to help facilitate prevalence studies. For example, the Department of Health and Human Services (HHS) is sponsoring the Human Trafficking Data Collection Project, which seeks to inform the development of an integrated data collection platform regarding human trafficking victimization, establish baseline knowledge of human trafficking and victim needs, and support effective prevention and intervention responses. HHS, in consultation with key stakeholders, has developed draft data fields and definitions for human trafficking and expects to begin piloting the data collection effort in fall 2016. Further, the National Institute of Justice, within the Department of Justice (DOJ), has awarded grants for the development and testing of methodologies that could be used to estimate the prevalence of human trafficking. Federal, state and local law enforcement officials and prosecutors GAO interviewed reported that investigating and prosecuting human trafficking cases is challenging for multiple reasons, including a lack of victim cooperation, limited availability of services for victims, and difficulty identifying human trafficking. Officials told us that obtaining the victim's cooperation is important because the victim is generally the primary witness and source of evidence; however, obtaining and securing victims' cooperation is difficult, as victims may be unable or unwilling to testify due to distrust of law enforcement or fear of retaliation by the trafficker. According to these officials, victim service programs, such as those that provide mental health and substance abuse services, have helped improve victim cooperation; however, the availability of services is limited. Further, officials reported that identifying and distinguishing human trafficking from other crimes such as prostitution can be challenging. Federal, state, and local agencies have taken or are taking actions to address these challenges, such as increasing the availability of victim services through grants and implementing training and public awareness initiatives. GAO identified 42 grant programs with awards made in 2014 and 2015 that may be used to combat human trafficking or to assist victims of human trafficking, 15 of which are intended solely for these purposes. Although some overlap exists among these human trafficking grant programs, federal agencies have established processes to help prevent unnecessary duplication. For instance, in response to recommendations in a prior GAO report, DOJ requires grant applicants to identify any federal grants they are currently operating under as well as federal grants for which they have applied. In addition, agencies that participate in the Grantmaking Committee of the Senior Policy Operating Group are encouraged to share grant solicitations and information on proposed grant awards, allowing other agencies to comment on proposed grant awards and determine whether they plan to award funding to the same organization. |
As I mentioned earlier, as has been the case for the past 4 fiscal years, a significant number of material weaknesses related to financial systems, fundamental recordkeeping and financial reporting, and incomplete documentation continued to (1) hamper the government’s ability to accurately report a significant portion of its assets, liabilities, and costs, (2) affect the government’s ability to accurately measure the full cost and financial performance of certain programs and effectively manage related operations, and (3) significantly impair the government’s ability to adequately safeguard significant assets and properly record various transactions. Several of these material weaknesses (referred to hereafter as material deficiencies) resulted in conditions that continued to prevent us from expressing an opinion on the U.S. government’s consolidated financial statements for the fiscal years ended September 30, 2001 and 2000. There may also be additional issues that could affect the consolidated financial statements that have not been identified. Major challenges include the federal government’s inability to properly account for and report property, plant, and equipment and inventories and related property, primarily at DOD; use effective processes and procedures to estimate the cost of certain major federal credit programs and the related loans receivable and loan guarantee liabilities; support amounts reported for certain liabilities, such as environmental and disposal liabilities and related costs at DOD, and ensure complete and proper reporting for commitments and contingences; support major portions of the total net cost of government operations, most notably related to DOD and USDA, and ensure that all disbursements are properly recorded; fully account for and reconcile intragovernmental activity and balances; properly prepare the federal government’s financial statements, including balancing the statements, eliminating substantial amounts of transactions between governmental entities, fully ensuring that the information in the consolidated financial statements is consistent with the underlying agency financial statements, and adequately reconciling the results of operations to budget results. In addition, we identified material weaknesses in internal control related to improper payments, tax collection activities, and computer security. Further, the financial management systems of most CFO Act agencies were again reported by their auditors not to be in substantial compliance with certain FFMIA requirements. For the fiscal year 2001 Financial Report of the United States Government, the government has for the first time presented: (1) comparative financial statements; (2) two new financial statements, namely, the Reconciliations of Net Operating Revenue/(Cost) to the Budget Surplus (Unaudited), and the Dispositions of the Budget Surplus (Unaudited); and (3) a Statement of Net Cost that arrays information classified by agency rather than by function, as was shown in prior years. I would now like to discuss in more detail the material deficiencies identified by our work. In addition to the material deficiencies noted above, we found that (1) most agencies have not estimated the magnitude of improper payments in their programs, (2) material internal control weaknesses and systems deficiencies continue to affect the government’s ability to effectively manage its tax collection activities, and (3) widespread and serious computer control weaknesses affect virtually all federal agencies. Across government, improper payments occur in a variety of programs and activities, including those related to health care, contract management, federal financial assistance, and tax refunds, and include payments made for unauthorized purposes and for excessive amounts, such as overpayments to program recipients or contractors and vendors. The reasons for improper payments range from program design issues, to inadvertent errors, to fraud and abuse. While reported estimates of improper payments totaled approximately $19 billion for both fiscal years 2001 and 2000, the government did not estimate the full extent of improper payments. The Department of Health and Human Services (HHS) has been reporting a national estimate of improper Medicare Fee-for-Service payments as part of its annual financial statements since fiscal year 1996. In fiscal year 2001, HHS reported estimated improper Medicare Fee-for-Service payments of $12.1 billion, or about 6.3 percent of such benefits—up from $11.9 billion, or 7 percent, a year earlier and down from $23.2 billion, or 14 percent, for fiscal year 1996. HHS’s reporting and analysis of improper Medicare payments has helped lead to the implementation of several initiatives to identify and reduce such payments. Annual estimates of improper payments in future audited financial statements will provide information on the progress of these initiatives. However, most agencies have not estimated the magnitude of improper payments in their programs and comprehensively addressed this issue in their annual performance plans under the Government Performance and Results Act (GPRA) of 1993. For example, the Internal Revenue Service (IRS) follows up on only a portion of the suspicious Earned Income Tax Credit (EITC) claims it identifies, although the EITC has historically been vulnerable to high rates of invalid claims. During fiscal year 2000, IRS released the results of its study of EITC compliance for tax year 1997. In this study, which is not performed annually, IRS estimated that taxpayers filed returns claiming about $9.3 billion in invalid EITCs, of which $1.5 billion (16 percent) either was recovered or was expected to be recovered through compliance efforts. Although the full extent of refunds resulting from invalid EITCs is unknown, the IRS has not routinely estimated the potential magnitude of invalid refunds and has not disclosed an annual estimate of improper payments in its financial reports. As a result, the amount of improper payments included in the almost $26 billion IRS disbursed for EITC in fiscal year 2001 is unknown. Without a systematic measurement of the extent of improper payments, agency management cannot determine (1) if the problem is significant enough to require corrective action, (2) how much to invest in preventative internal control, (3) the success of efforts implemented to reduce improper payments, or (4) the magnitude or trends of improper payments, which limits the ability to pinpoint or target mitigation strategies. To help in making such determinations, OMB now requires agencies to provide information on erroneous payment rates for benefit and assistance programs expending over $2 billion annually. Material internal control weaknesses and systems deficiencies continue to affect the government’s ability to effectively manage its tax collection activities. This situation continues to result in the need for extensive, costly, and time-consuming ad hoc programming and analyses, as well as material audit adjustments, to prepare basic financial information. As further discussed later in this testimony, this approach cannot be used to prepare such information on a timely, routine basis to assist in ongoing decision-making. Additionally, the severity of the system deficiencies that give rise to the need to resort to such procedures for financial reporting purposes, as well as deficient physical safeguards, result in burden on taxpayers and lost revenue. The lack of appropriate subsidiary systems to track the status of taxpayer accounts and material weaknesses in financial reporting affect the government’s ability to make informed decisions about collection efforts. Due to errors and delays in recording activity in taxpayer accounts, taxpayers were not always being credited for payments made on their tax liabilities. In addition, the government did not always follow up on potential unreported or underreported taxes and did not always pursue collection efforts against taxpayers owing taxes to the federal government. This could result in billions of dollars not being collected and adversely affect future compliance. The federal government continues to be vulnerable to lost tax revenue due to weaknesses in controls intended to maximize the government’s ability to collect what is owed and to minimize the risk of payment of improper refunds. The government identifies billions of dollars of potentially underreported taxes and improper refunds each year. However, due in large part to perceived resource constraints, the federal government selects only a portion of the questionable cases it identifies for follow-up investigation and action. In addition, the federal government often does not initiate follow-up on the cases it selects until months after the related tax returns have been filed and any related refunds disbursed, affecting its chances of collecting amounts due on these cases. Consequently, the federal government is exposed to potentially significant losses from reduced revenue and disbursements of improper refunds. Finally, continued weaknesses in physical controls over cash, checks, and sensitive data received from taxpayers increase both the government’s and the taxpayers’ exposure to losses and increases the risk of taxpayers becoming victims of crimes committed through identity fraud. IRS senior management continues to be committed to addressing many of these operational and financial management issues and has made a number of improvements to address some of these weaknesses. Successful implementation of long-term efforts to resolve these serious problems will require the continued commitment of IRS management as well as substantial resources and expertise. GAO has reported computer security as a governmentwide high-risk area since February 1997. Computer security weaknesses are placing enormous amounts of government 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. The government is not in a position to estimate the full magnitude of actual damage and loss resulting from federal computer security weaknesses because it is likely that many such incidents are either not detected or not reported. Agencies have not yet established comprehensive security management programs that would provide the government with a framework for resolving computer security problems and managing computer security risk on an ongoing basis. The computer security weaknesses continue to cover the full range of computer security controls. For example, access controls were not effective in limiting or detecting inappropriate access to computer resources, such as ensuring that only authorized individuals can read, alter, or delete data. In addition, software change controls were ineffective in ensuring that only properly authorized and tested software programs were implemented. Further, duties were not appropriately segregated to reduce the risk that one individual could conduct unauthorized transactions without being detected. Finally, sensitive operating system software was not controlled, and adequate steps had not been taken to ensure continuity of operations. As we recently testified, the initial implementation of government information security reform provisions contained in the National Defense Authorization Act for fiscal year 2001 is a significant step in improving federal agencies’ information security programs and addressing their serious, pervasive information security weaknesses. In its first report on the reform provisions, OMB commended agencies’ improvement efforts but noted that many agencies have significant deficiencies in every important area of security. Agencies have noted benefits of this first-year implementation, including increased management attention to and accountability for information security. In addition, the administration has taken important actions to address information security, such as (1) development of plans to integrate information security into the Executive Branch Management Scorecard, which is discussed later in this testimony, (2) appointment of a Special Advisor for Cyberspace Security to coordinate interagency efforts to secure information systems, and (3) creation of the President’s Critical Infrastructure Protection Board to recommend policies and coordinate programs, including government and industry’s working closely together to address increasing interconnections and shared risks. Our work to determine compliance with selected provisions of applicable laws and regulations related to financial reporting was limited by the material weaknesses discussed above. Instances of noncompliance, some of which the agency auditors reported were material to individual agency financial statements, are included in individual agency audit reports. However, none of these instances were material to the U.S. government’s consolidated financial statements. Additionally, as further discussed later in this testimony, for most CFO Act agencies, the auditors reported that agencies’ financial management systems did not substantially comply with certain FFMIA requirements. A year ago, in testimony before this subcommittee on the U.S. government’s consolidated financial statements, I said that Treasury Secretary O’Neill, OMB Director Daniels, and I (who, as I mentioned earlier, along with OPM Director James, are the JFMIP Principals) had agreed on the need for aggressive action to accelerate progress in financial management reform. This has sparked our personal commitment to provide the leadership necessary to address pressing governmentwide financial management issues. Also since that time, President Bush has launched a promising new initiative, The President’s Management Agenda Fiscal Year 2002, to provide direction to, and to closely monitor, management reform across government, which will encompass improved financial performance. Actions such as these are important elements of ensuring the government’s full and effective implementation of the federal financial management reforms enacted by the Congress. Over the past year, the JFMIP Principals have established an excellent working relationship, a basis for action, and a new sense of urgency through which significant and meaningful progress can be achieved. In August 2001, the JFMIP Principals began a series of periodic meetings that marked the first time all four of the Principals had gathered together in over 10 years. To date, these sessions have resulted in substantive deliberations and agreements focused on key issues such as Defining success measures for financial management performance that go far beyond an unqualified audit opinion on financial statements and include measures such as financial management systems that routinely provide timely, reliable, and useful financial information and no material internal control weaknesses or material noncompliance with laws and regulations and FFMIA requirements; Restructuring the Federal Accounting Standards Advisory Board’s (FASAB) composition to enhance the independence of the Board and increase public involvement in setting standards for federal financial accounting and reporting; Significantly accelerating financial statement reporting so that the government financial statements are timely and to discourage costly efforts designed to obtain unqualified opinions on financial statements without addressing underlying systems challenges; Establishing audit committees for the major federal agencies; Addressing the impediments to an audit opinion on the U.S. government's consolidated financial statements; and Reporting social insurance financial information in the U.S. government’s consolidated financial statements that includes information from the most recent reports issued by the Social Security and Medicare Trustees. Various aspects of the matters outlined above are further discussed in applicable sections later in this testimony. Future meetings, with the next meeting planned for May 2002, will enable the JFMIP Principals to reach agreements and monitor progress on strategies critical to the full and successful implementation of federal financial management reform and to provide greater transparency and accountability in managing federal programs and financial resources. President Bush has established an agenda for improving the management and performance of the federal government that targets the most apparent deficiencies where the opportunity to improve performance is the greatest. It is no accident that the President’s Management Agenda has a strong correlation to GAO’s high-risk list. This is just one example of how GAO and OMB have worked constructively to identify key issues deserving increased attention throughout government. As stated in the President’s Management Agenda—and we wholeheartedly agree—there are few items more urgent than ensuring that the federal government is well run and results-oriented. The President’s Management Agenda, which is a starting point for management reform, includes improved financial management performance as one of his five governmentwide management goals. Other governmentwide initiatives include strategic management of human capital, competitive sourcing, expanded electronic government, and budget and performance integration. The results of our audits of the U.S. government’s consolidated financial statements helped to lay the foundation for the President’s Management Agenda financial management performance initiative. The President’s Management Agenda frames the problem this way: “A clean financial audit is a basic prescription for any well-managed organization, yet the federal government has failed all four audits since 1997. Moreover, most federal agencies that obtain clean audits only do so after making extraordinary labor-intensive assaults on financial records. Without accurate and timely financial information, it is not possible to accomplish the president’s agenda to secure the best performance and high measure of accountability for the American people.” In particular, the improved financial performance initiative is aimed at ensuring that federal financial systems produce accurate and timely information to support operating, budget, and policy decisions. Also, this initiative focuses special attention on addressing erroneous payments, which as discussed earlier, is another problem our audit identified. Under this governmentwide initiative, OMB will work with agencies to improve the timeliness, enhance the usefulness, and ensure the reliability of financial information. The expected result is financial management systems that routinely produce information that is (1) timely, to measure and effect performance immediately, (2) useful, to make more informed operational and investing decisions, and (3) reliable, to ensure consistent and comparable trend analysis over time and to facilitate better performance measurement and decisionmaking. This result is a key to successfully achieving the goals set out by the Congress in the CFO Act and other federal financial management reform legislation. As we recently testified before this subcommittee, the administration plans to use the Executive Branch Management Scorecard to highlight agencies’ progress in achieving management and performance improvements embodied in the President’s Management Agenda. The Executive Branch Management Scorecard grades agencies’ performance regarding the five governmentwide initiatives by using broad standards and a red-yellow-green coding system to indicate the level at which agencies are meeting the standards. In the financial management area, while recognizing the importance of achieving a clean opinion from auditors on financial statements, the scorecard focuses on the fundamental and systemic issues that must be addressed in order to generate timely, accurate, and useful financial information, sound internal structures, and effective compliance systems. The first scorecard’s results show dramatically the extent of work remaining across government to improve financial and other management areas. For financial management, most agencies were scored in the red category. This is not surprising, considering the well-recognized need to transform financial management and other business processes at agencies such as DOD, the results of our analyses under FFMIA, and the various financial management operations we have designated as high risk. Also, central to effectively addressing the federal government’s management problems is recognition that the five governmentwide initiatives cannot be addressed in an isolated or piecemeal fashion. As stated in the President’s Management Agenda, they are mutually reinforcing. More generally, the initiatives must be addressed in an integrated way to ensure that they drive a broader transformation of the cultures of federal agencies. Improved financial management, for example, is also a key to successfully achieving other governmentwide initiatives set out in the President’s Management Agenda: Strategic management of human capital: Financial management reform will require having the right people in CFO leadership positions and enough people with the right skills and knowledge to perform important financial operations. Competitive sourcing: For example, accurately knowing the cost for providing goods and services in-house for comparison with private sector performance will be important in making sound sourcing decisions. Expanded electronic government: Many e-government applications will likely be financial in nature, interact with financial systems and reporting, and greatly change the internal control environment. Budget and performance integration: It is critical to focus on integrating accounting, budget, and performance information, which the CFO Act requires; reporting the cost of performance, which is essential to successfully implementing GPRA; and providing useful information for setting priorities and making informed budget decisions. The focus that the administration’s scorecard approach brings to improving management and performance, including financial performance, is certainly a step in the right direction. The value of the scorecards is not in the scoring, but in the degree to which scores lead to sustained focus and demonstrable improvement over time. This will depend on continued efforts to assess progress and maintain accountability to ensure that agencies are able to, in fact, improve their performance. It will be important that there be continuous rigor in the scoring process in order for this approach to be credible and effective. Also, it is important to recognize that many of the challenges the federal government faces, such as improving financial management, are long-standing and complex, and will require sustained attention. Across government, there are financial management improvement initiatives that could ultimately lead to an unqualified opinion on the U.S. government’s consolidated financial statements. However, accelerating the pace of completing ongoing and planned efforts to implement financial management reform is essential, as shown by reports of inspectors general and their contract auditors indicating that only 3 of the 24 CFO Act agencies had neither a material control weakness, an issue involving compliance with applicable laws and regulations, nor an instance of lack of substantial compliance with FFMIA requirements. While many of the pervasive and generally long-standing material weaknesses we have reported for the past 4 years remain to be fully resolved, some progress continues to be made in addressing the underlying causes of these problems—significant financial systems weaknesses, problems with fundamental recordkeeping and financial reporting, incomplete documentation, and weak internal control. For fiscal year 2001, 18 of the 24 CFO Act agencies were able to attain unqualified audit opinions on their financial statements, which is the same number of agencies as last year and up from 6 agencies for fiscal year 1996. Also, OMB reported that, for the second consecutive year, all 24 CFO Act agencies met the statutory reporting deadline. Further, two agencies that did not receive unqualified opinions from their auditor last year were able to do so this year, including the Department of Transportation (DOT) and the Department of Justice, which received an unqualified opinion for the first time. However, two other agencies, the National Aeronautics and Space Administration (NASA) and the Federal Emergency Management Agency, were unable to sustain the unqualified opinions received from their auditor last year. In the case of NASA, as we recently testified before this subcommittee, after 5 years of receiving unqualified opinions on financial statements from its previous independent auditor, the new independent auditor disclaimed an opinion on the agency’s fiscal year 2001 financial statements. The fiscal year 2001 audit report also identified a number of significant internal control weaknesses related to accounting for space station material and equipment and to computer security. Finally, the auditor concluded that NASA’s financial management systems do not substantially comply with federal financial management systems requirements and applicable federal accounting standards, as required by FFMIA. NASA’s financial management difficulties are not new. The weaknesses discussed in the auditor’s report are consistent with the findings discussed in our previous reports. Since 1990, we have designated NASA’s contract management problems as a high-risk area, due in part to financial management systems problems that make it difficult for NASA to assure contracts are being efficiently and effectively implemented. We have also reported on NASA’s misstatement of its Statement of Budgetary Resources, lack of detailed support for amounts reported against certain cost limits, and lack of historical cost data for accurately projecting future cost. Irrespective of the unqualified opinions on their financial statements, many agencies do not have timely, accurate, and useful financial information and sound controls with which to make informed decisions and to ensure accountability on an ongoing basis. While agencies are making some progress in obtaining unqualified audit opinions on annual financial statements, many of these opinions were obtained by expending significant resources on extensive ad hoc procedures and making billions of dollars in adjustments to derive financial statements months after the end of a fiscal year. Several examples follow. The need for such time-consuming procedures primarily results from inadequate financial management systems. Our unqualified opinions on IRS’s fiscal years 2001 and 2000 financial statements were made possible by the extraordinary efforts of IRS senior management and staff to develop processes to compensate for serious internal control and systems deficiencies. IRS was again compelled to rely extensively on costly, time-consuming processes; statistical projections; external contractors; substantial adjustments; and monumental human efforts that extended nearly four months after the September 30, 2001, fiscal year-end to derive reliable year-end balances for its financial statements. For example, IRS does not have a detailed record, or subsidiary ledger, for taxes receivable to allow it to track and manage amounts due from taxpayers. To enable it to report a reliable taxes receivable balance in the absence of a subsidiary ledger, IRS has, for the last five years, relied on a complex statistical sampling approach that requires substantial human and financial resources to conduct, takes months to complete, and yields tens of billions of dollars of adjustments. Similarly, IRS does not have an integrated property management system that appropriately records property and equipment additions and disposals as they occur and links costs on the accounting records to the property records. During fiscal year 2001, IRS expensed property additions during the year and then capitalized them at year-end based on analysis of expense records conducted by a contractor. DOT’s major agencies use the Departmental Accounting and Financial Information System (DAFIS), which cannot produce financial statements based on the information included within the system. As a result, DOT made about 850 adjustments, totaling about $41 billion, outside DAFIS to prepare the financial statements. These adjustments were recorded in a financial statement module, a tool used to process the adjustments. However, all DOT agencies did not use the financial statement module to prepare the financial statements, and the adjustments were not recorded in DAFIS. The DOT inspector general reported that DOT plans to have a new accounting system fully operational and compliant with accounting standards by January 2003. Again, in fiscal year 2001, HHS attained an unqualified opinion on its financial statements. However, system and internal control weaknesses, such as lack of an integrated financial management system, continued to make it difficult for certain HHS components to prepare timely and reliable financial statements. For example, the National Institutes of Health used a manual year-end process to create and post correct Standard General Ledger accounts, generating about 19,000 nonstandard accounting entries with an absolute value of approximately $348 billion. Also, the Centers for Medicare and Medicaid Services, continued to contract with independent public accounting firms, as it has since FY 1999, to validate contractor receivables. Further, the Administration for Children and Families and the Centers for Disease Control, produced their financial statements using a manually intensive process that required adjusting entries to their general ledgers with an absolute value of approximately $51 billion and $2 billion, respectively. The Department of Education’s auditor expressed a qualified opinion on the department’s fiscal year 2001 financial statements, primarily because of weaknesses in the department’s financial reporting process. Consistent with prior years, Education relied on work-around procedures to prepare its financial statements, including significant manual adjustments, due to deficiencies in the current general ledger system and the lack of a fully integrated financial management system. Because of errors that existed in prior years, the department performed extensive analysis of certain general ledger account balances during fiscal year 2001, which resulted in manual adjustments to correct certain general ledger balances. However, the auditor noted that there were errors in certain manual adjustments that had been processed and approved by the department, resulting in additional manual adjustments being posted to the financial statements. The Department of Veterans Affairs (VA) received unqualified audit opinions on its financial statements for fiscal years 2000 and 2001, but producing them required significant efforts to assemble, compile, and review the necessary financial information. In many cases, significant manual work-around procedures and “cuff” or out-of-date feeder systems are used, as VA has not yet completed its transition to a fully integrated financial management system. According to VA’s auditors, timely account reconciliations were not consistently prepared at the department’s medical centers and assets were not timely capitalized. Also, a significant number of manual adjustments were made during the year-end closing process. Situations such as these demonstrate the tremendous efforts, lasting 5 months or more, that many agencies use to produce annual financial statements. These agencies undertake far more work to prepare financial statements, beginning at the close of a fiscal year, than would be necessary if they had financial systems in place to routinely provide the data. Information to compile agency financial statements should flow from their financial management systems. (The need for agencies to improve financial management systems is further discussed later in this testimony.) At the same time and as agreed to by the JFMIP Principals, there is a need to accelerate the timeliness of providing audited financial statements. March 1 is the current statutory deadline for the 24 CFO Act agencies to submit audited financial statements, 5 months after the close of the fiscal year. For fiscal year 2001 reporting, OMB pushed this time frame ahead to February 27. Beginning with fiscal year 2004, OMB will require these agencies to issue audited financial statements by November 15, 6 weeks after the fiscal year end. While this is important for timely financial reporting, it will be difficult for some agencies to sustain unqualified audit opinions and still meet the accelerated time frame for submitting audited financial statements. IRS is a case in point. With the extraordinary efforts described above, IRS found it extremely difficult to meet the February 27 reporting timeline required by OMB for fiscal year 2001. If IRS is to meet the November 15 deadline and sustain an unqualified opinion on its financial statements, the tremendous amount of hard work and commitment that IRS has demonstrated in recent years will no longer be sufficient to achieve this goal unless accompanied by systemic changes in how IRS processes transactions, maintains its financial records, and reports its financial results. It will be difficult for agencies to continue to rely on significant costly and time-intensive manual efforts to achieve or maintain unqualified opinions until automated, integrated processes and systems are implemented that readily produce the necessary information. As a result, many agencies must accelerate their efforts to improve underlying financial management systems and controls, which is consistent with reaching the financial management success measures envisioned by the JFMIP Principals and called for by the President’s Management Agenda. If agencies continue year after year to rely on significant costly and time-intensive manual efforts to achieve or maintain unqualified opinions without such improvements, this practice can serve to mislead the public as to the true status of the agency’s financial management capabilities. An unqualified opinion will become an accomplishment without much substance. As I mentioned earlier, for the past 5 fiscal years, the federal government has been required to prepare, and have audited, consolidated financial statements. Successfully meeting this requirement is tightly linked to the requirement for the 24 CFO Act agencies to also have audited financial statements. This has stimulated extensive cooperative efforts and considerable attention by agency chief financial officers, inspectors general, Treasury and OMB officials, and the General Accounting Office. With the benefit of several years’ experience by the government in having the required financial statements subjected to audit, the time has come to focus even more intensified attention on the most serious obstacles to achieving an unqualified opinion on the U.S. government’s consolidated financial statements. In this regard, the JFMIP Principals have discussed plans and strategies for addressing impediments to an unqualified opinion on the U.S. government’s consolidated financial statements. This year, upon early implementation of certain provisions of the National Defense Authorization Act for fiscal year 2002, DOD reported that the department’s financial management systems are not able to provide adequate evidence supporting material amounts in its financial statements. DOD asserted that it is unable to comply with applicable financial reporting requirements for (1) property, plant, and equipment, (2) inventory and operating materials and supplies, (3) military retirement health care actuarial liability, (4) environmental liabilities, (5) intragovernmental eliminations and related accounting adjustments, and (6) cost accounting by suborganization/responsibility segment and major program. Based largely on DOD’s assertion, the DOD inspector general disclaimed an opinion on DOD’s financial statements for fiscal year 2001 as it had for the previous 5 fiscal years. DOD’s financial management deficiencies and reporting weaknesses substantially impair our ability to determine the reliability of the financial information reported in the government’s overall financial reports. Until DOD corrects these material weaknesses, our ability to express an unqualified opinion on the U.S. government’s consolidated financial statements will be impeded. As I previously stated, to date, none of the military services or major DOD components has passed the test of an independent financial audit because of pervasive weaknesses in DOD’s financial management systems, operations, and internal control, including an inability to compile financial statements that comply with U.S. generally accepted accounting principles. The department has made progress in a number of areas, but is far from solving a range of serious financial management problems. Their resolution, however, is key to having auditable consolidated financial statements because DOD had budget authority of $352 billion for fiscal year 2001, or about 18 percent of the entire federal budget, and is accountable for a vast amount of government assets worldwide. Despite progress, ineffective asset accountability and lack of effective internal controls continue to adversely affect visibility over DOD’s estimated $1 trillion investment in weapon systems and inventories. These weaknesses can affect the department’s ability to ensure that materials are on hand when needed and its ability to prevent the purchase of assets already on hand. Further, unreliable cost and budget information related to a reported over $1.4 trillion of reported liabilities and about $735 billion of net costs negatively affects DOD’s ability to effectively measure performance, reduce costs, and maintain adequate fund control. As part of our constructive engagement approach with DOD, I met with Secretary Rumsfeld last summer to provide our perspectives on the underlying causes of the problems that have impeded past reform efforts at the department and to discuss options for addressing these challenges. The underlying causes discussed were a lack of sustained top-level leadership and management accountability deeply embedded cultural resistance to change, including military service parochialism and stovepiped operations; a lack of results-oriented goals and performance measures and inadequate incentives for seeking change. In this regard, I also attended the initial March 15, 2002, meeting of DOD’s Business Practices Implementation Board, which is composed of outside experts to advise the department on its effort to address these underlying causes. As we testified before this subcommittee last month and in May 2001, our experience has shown there are several key elements that collectively would enable the department to effectively address the underlying causes of its inability to resolve its long-standing financial management problems. These elements, which are key to any successful approach to financial management reform, include addressing the department’s financial management challenges as part of a comprehensive, integrated, DOD-wide business process reform; providing for sustained leadership by the Secretary of Defense and resource control to implement needed financial management reforms; establishing clear lines of responsibility, authority, and accountability for such reform tied to the Secretary; incorporating results-oriented performance measures and monitoring tied to financial management reforms; providing appropriate incentives or consequences for action or inaction; establishing an enterprisewide system architecture to guide and direct financial management modernization investments; and ensuring effective oversight and monitoring. The department has acknowledged the need for fundamental reform of its business practices. Specifically, the department’s September 30, 2001, Quadrennial Defense Review reported that: “While America’s businesses have streamlined and adopted new business models to react to fast-moving changes in markets and technologies, the Defense Department has lagged behind without an overarching strategy to improve its business practices.” Action on many of the key areas central to successfully achieving desired financial management and related business process transformation goals— particularly those that rely on longer term systems improvements—will take a number of years to fully implement. Secretary Rumsfeld has estimated that his envisioned transformation may take 8 or more years to complete. Consequently, both long-term actions focused on the Secretary’s envisioned business transformation and short-term actions focused on improvements within existing systems and processes will be critical going forward. Short-term actions in particular will be critical if the department is to achieve the greatest possible accountability over existing resources and more reliable data for day-to-day decisionmaking while longer-term systems and business process reengineering efforts are under way. Beginning with the Secretary’s recognition of the need for a fundamental transformation of the department’s business processes, and building on some of the work begun under past administrations, DOD has taken a number of positive steps in many of these key areas. For example, DOD has taken action to set aside $100 million for financial modernization and, as discussed previously, established a number of top-level committees, councils and boards to help guide its financial transformation efforts. At the same time, the challenges remaining in each of these key areas are daunting. The JFMIP Principals have invited DOD Comptroller Zakheim to their planned May 2002 meeting to discuss the department’s transformation effort and to begin a constructive engagement with DOD on this important initiative. For several years, OMB and Treasury have required the CFO Act agencies to reconcile selected intragovernmental activity and balances with their trading partners. However, numerous agencies did not fully perform such reconciliations for fiscal year 2000. Beginning with fiscal year 2001, OMB and Treasury required agency chief financial officers to report on the extent and results of intragovernmental activity and balances reconciliation efforts. The inspectors general reviewed these reports and communicated the results of their reviews to OMB, Treasury, and GAO. A substantial number of the CFO Act agencies did not fully perform the required reconciliations for fiscal year 2001, citing reasons such as (1) trading partners’ not providing needed data, (2) limitations and incompatibility of agency and trading partner systems, and (3) human resource issues. For fiscal years 2001 and 2000, amounts reported for agency trading partners for certain intragovernmental accounts were significantly out of balance. In addition, solutions will be required to resolve significant differences reported in other intragovernmental accounts, primarily related to appropriations. To help address certain issues that contributed to the out-of-balance condition for intragovernmental activity and balances, OMB has stated that it is implementing the recommendations included in a study conducted for the JFMIP in fiscal year 2001. OMB is also pursuing other changes to address core problems in this area, such as enhancing governmentwide business rules for transactions among trading partners, requiring quarterly reconciliations of intragovernmental activity and balances, and modifying certain standard general ledger accounts required to be used by federal agencies. Resolving this problem remains a difficult challenge and will require commitment by the CFO Act agencies and continued strong leadership by OMB. The government did not have adequate systems, controls, and procedures to properly prepare its consolidated financial statements. Also, disclosure of certain financial information was not presented in the consolidated financial statements in conformity with U.S. generally accepted accounting principles. Consolidated financial statements are intended to present the results of operations and financial position of the components that comprise a reporting entity as if the entity were a single enterprise. When preparing the consolidated financial statements, the preparer must eliminate intragovernmental activity and balances between the agencies. Because of agencies’ problems in handling their intragovernmental transactions, Treasury’s ability to eliminate these transactions is impaired. Significant differences reported in intragovernmental accounts as noted above have been identified. Intragovernmental activity and balances are “dropped” or “offset” in the preparation of the consolidated financial statements rather than eliminated through balanced accounting entries. This contributes to the government’s inability to determine the impact of these differences on amounts reported in the consolidated financial statements. The government did not have a process to effectively identify and report items needed to reconcile adequately the operating results, which for fiscal year 2001 showed a net operating cost of $514.8 billion, to the budget results, which for the same period showed a unified surplus of $127 billion. The government could not adequately ensure that the information for each agency that was included in the consolidated financial statements was consistent with the underlying agency financial statements. This problem is compounded by the need for broad changes in the structure of the government’s Standard General Ledger (SGL) accounts and the process for maintaining the SGL. For example, changes are needed that will result in direct alignment by SGL account from agencies’ financial statement line items to like items reported in the consolidated financial statements. To make the fiscal year 2001 consolidated financial statements balance, Treasury recorded a net $17.3 billion decrease to net operating cost on the Statement of Operations and Changes in Net Position, which it labeled unreconciled transactions. For the prior fiscal year, a net $4.8 billion in unreconciled transactions was recorded as a decrease to net operating revenue in the accompanying consolidated financial statements. An additional net $3.9 billion and $.2 billion of unreconciled transactions were improperly recorded in net cost for fiscal years 2001 and 2000, respectively. Treasury attributes these net unreconciled transaction amounts primarily to the government’s inability to properly identify and eliminate transactions between governmental entities, agency adjustments that affected net position, and other errors. However, Treasury was unable to adequately identify and explain the gross components of such amounts. Unreconciled transactions also may exist because the government does not have effective controls over reconciling net position. The net position reported in the consolidated financial statements is derived by subtracting liabilities from assets, rather than through balanced accounting entries. Further, the process used to prepare the consolidated financial statements requires significant human and financial resources and does not adequately leverage the existing work and work products resulting from federal agencies’ audited financial statements. Treasury plans to develop a new system and procedures to prepare the consolidated financial statements. These actions are intended to, among other things, directly link information from agencies’ financial statements to amounts reported in the consolidated financial statements and facilitate the reconciliation of net position. The inability to produce the data needed to efficiently and effectively manage the day-to-day operations of the federal government and provide accountability to taxpayers and the Congress has been a long-standing weakness at most federal agencies. The President’s Management Agenda recognizes that the central challenge to producing reliable, useful, and timely data throughout the year and at year-end is overhauling the government’s financial management information systems. The CFO Act calls for the modernization of financial management systems, including the systematic measurement of performance, the development of cost information, and the integration of program, budget, and financial information. FFMIA builds on the CFO Act by emphasizing the need for agencies to have systems that can generate timely, accurate, and useful information with which to make informed decisions and to ensure accountability on an ongoing basis. FFMIA requires the 24 departments and agencies covered by the CFO Act to implement and maintain financial management systems that comply substantially with (1) federal financial management systems requirements, (2) applicable federal accounting standards, and (3) the U.S. Standard General Ledger (SGL) at the transaction level. These requirements are at the center of the financial management success measures expressed by the JFMIP Principals and are key elements for scoring agencies’ financial management performance using the Executive Branch Management Scorecard. For fiscal year 2001, auditors for 20 of the 24 CFO Act agencies reported that agencies’ financial management systems did not substantially comply with one or more of FFMIA’s three requirements. For the remaining four CFO Act agencies (the Departments of Energy and Labor, GSA, and SSA), auditors provided negative assurance, meaning that nothing came to their attention indicating these agencies’ financial management systems do not meet FFMIA requirements. The auditors for these four agencies did not definitively state whether these agencies’ systems substantially complied with FFMIA’s requirements. In this regard, OMB Bulletin 01-02, Audit Requirements for Federal Financial Statements, does not require auditors to make an affirmative statement regarding an agency’s financial management system’s substantial compliance with FFMIA, but rather permits auditors to report negative assurance, meaning that their report can be based on limited audit testing that disclosed no substantial instances of FFMIA noncompliance. If readers of the audit report do not understand this distinction, which is important in terms of how much audit testing is required, they may have a false impression that the auditor is stating that they found the systems to be substantially compliant. To provide positive assurance, or an opinion, which is what we believe the law requires, auditors need to perform sufficient testing to determine whether the system is in substantial compliance. Noncompliance with FFMIA is indicative of the overall continuing poor condition of many financial management systems across government. We have consistently reported over the past few years that the reasons for systems noncompliance included nonintegrated financial management systems, inadequate reconciliation procedures, untimely recording of financial information, noncompliance with the SGL, lack of adherence to the accounting standards, and weak security controls over information systems. We have also reported that agency remediation plans, required by FFMIA, may not adequately address the system deficiencies. While agencies continue to make some progress in addressing their financial management systems weaknesses, the serious shortcomings reported for these systems result in the lack of reliable financial information needed for managing day-to-day operations effectively, efficiently, and economically; measuring program performance; executing the budget; maintaining accountability; and preparing financial statements. Having such financial information is the goal of FFMIA and the CFO Act, necessary for implementing GPRA, and critical to the transition to a more results-oriented federal government as envisioned in the President’s Management Agenda. For example, agency financial management systems are required to produce information on the full cost of programs and projects. This is not a new expectation—the requirement for managerial cost information has been in place for more than a decade, since 1990, under the CFO Act, and since 1998 stemming from applicable accounting standards. Yet, some agencies are only able to provide cost accounting information at the end of the fiscal year through periodic cost surveys. The lack of timely information on the full cost of operations precludes meaningful data that is needed to make resource allocation choices, reach contracting-out decisions, determine program efficiencies, assess user fees, and report performance. To remedy these deficiencies and carry out the President’s Management Agenda for improving financial management, OMB and the CFO Act agencies will need to aggressively and rigorously collaborate. This will be critical, since overhauling agency financial management systems is a difficult challenge. Our work to identify financial management best practices in world-class organizations has identified key factors for successfully modernizing financial systems, including (1) reengineering business processes in conjunction with implementing new technology, (2) developing systems that support the partnership between finance and operations, and (3) translating financial data into meaningful data. We identified other financial management best practices as well, such as (1) providing clear strong executive leadership, (2) making financial management an entitywide priority, and (3) building a culture of control and accountability. The size and complexity of many federal agencies and the discipline needed to overhaul or replace their financial management systems present a significant challenge—not simply a challenge to overcome a technical glitch, but a demanding management challenge that requires attention from the highest levels of government along with sufficient human capital resources to effect lasting change. We recognize that it will take time, investment, and sustained emphasis on correcting deficiencies to improve federal financial management systems to the level required by FFMIA. The JFMIP Principals’ leadership, commitment, and oversight will be important to provide the needed impetus to meet this challenge. Two audit matters have recently come to the fore and are key to protecting the public interest. One matter involves auditors’ responsibility for reporting on internal control, and the other concerns auditor independence. We have long believed that auditors have an important responsibility to provide an opinion on the effectiveness of internal control over financial reporting and compliance with applicable laws and regulations. Currently, this is not required by American Institute of Certified Public Accountants (AICPA) auditing standards or by OMB in its guidance to auditors conducting federal agency financial statement audits. For financial statements audits that we conduct—which include the U.S. government’s consolidated financial statements, the financial statements of the IRS, the Schedules of Federal Debt managed by the Bureau of Public Debt, and the financial statements of the Federal Deposit Insurance Corporation and numerous small entities’ operations and funds—we issue a separate opinion on the effectiveness of internal control over financial reporting and compliance with applicable laws and regulations. For years we have provided opinions on internal control effectiveness because of the importance of internal control to protecting the public’s interest. Our reports have engendered major improvements in internal control. As you might expect, as part of the annual audit of our own financial statements, we practice what we recommend to others and contract with a CPA firm for both an opinion on our financial statements and an opinion on the effectiveness of our internal control over financial reporting and compliance with applicable laws and regulations. Recently, GAO and the President’s Council on Integrity and Efficiency jointly issued the Financial Audit Manual to provide guidance to auditors conducting federal agency financial statement audits. This manual calls for these auditors to test internal control over financial reporting and compliance with applicable laws and regulations, and thus provides a foundation for issuing a separate opinion on the effectiveness of internal control. Although OMB requires testing of these internal controls, auditors are not required to provide an opinion on internal control effectiveness. However, we found that 3 of the 24 CFO Act agency auditors (those for GSA, SSA, and the Nuclear Regulatory Commission) provided an opinion on the effectiveness of internal control as of September 30, 2001. Also, the JFMIP Principals have agreed that a measure of financial management success is for an agency to have no material control weaknesses. By giving assurance about internal control, auditors of federal financial statements can better serve their clients and other financial statements users and protect the public interest by having a greater role in providing assurances of the effectiveness of internal control in deterring fraudulent financial reporting, protecting assets, and providing an early warning of internal control weaknesses. The independence of auditors—both in fact and appearance—is critical to the credibility of financial reporting. Auditors have the capability of performing a range of valuable services for their clients, and providing certain nonaudit services can ultimately be beneficial to federal entities. However, in some circumstances, it is not appropriate for auditors to perform both audit and certain nonaudit services for the same client. In these circumstances, the auditor, the client, or both will have to make a choice as to which of these services the auditor will provide. These concepts, which I strongly believe are in the public interest, are reflected in the revisions to auditor independence requirements for government audits, which GAO recently issued as part of Government Auditing Standards. The new independence standard has gone through an extensive deliberative process over several years, including extensive public comments and input from my Advisory Council on Government Auditing Standards. The standard, among other things, toughens the rules associated with providing nonaudit services and includes a principle-based approach to addressing this issue, supplemented with certain safeguards. The two overarching principles in the standard for nonaudit services are that auditors should not perform management functions or make auditors should not audit their own work or provide nonaudit services in situations where the amounts or services involved are significant or material to the subject matter of the audit. Both of these principles should be applied using a substance-over-form determination. Under the revised standard, auditors are allowed to perform certain nonaudit services provided the services do not violate these principles; however, in most circumstances certain additional safeguards would have to be met. For example: (1) personnel who perform allowable nonaudit services would be precluded from performing any related audit work, (2) the auditor’s work could not be reduced beyond the level that would be appropriate if the nonaudit work were performed by another unrelated party, and (3) certain documentation and quality assurance requirements must be met. The new standard includes an express prohibition regarding auditors’ providing certain bookkeeping or record keeping services and limits payroll processing and certain other services, all of which are presently permitted under current independence rules of the AICPA. The focus of these changes to the government auditing standards is to better serve the public interest and to maintain a high degree of integrity, objectivity, and independence for audits of government entities and entities that receive federal funding. However, these standards apply only to audits of federal entities and those organizations receiving federal funds, and not to auditors of public companies. In the transmittal letter issuing the new independence standard, we expressed our hope that the AICPA will raise its independence standards to those contained in the new standard in order to eliminate any inconsistency between this standard and their current standards. The new independence standard is the first of several steps GAO has planned in connection with nonaudit services covered by government auditing standards. In May 2002, we plan to issue a question and answer document concerning our independence standard, and I will ask my Advisory Council on Government Auditing Standards to review and monitor this area to determine what, if any, additional steps may be appropriate. In addition, the JFMIP Principals have agreed that the 24 major federal departments and agencies covered by the CFO Act should have audit committees. The scope, structure, and timing of this new requirement will be determined over the next several months. This will include determining what role these audit committees might play in connection with nonaudit services. Several of the matters I previously discussed related to preparing to meet tomorrow’s fiscal needs warrant repeating. The requirement for timely, accurate, and useful financial and performance management information is greater than ever. Both the long-term fiscal pressures created by the retirement of the baby boom generation and the new commitments undertaken in the aftermath of September 11 sharpen the need to look at competing claims on federal budgetary resources and new priorities. In previous testimony, I noted that it should be the norm to reconsider the relevance or “fit” of any federal program or activity in today’s world and for the future. Such a fundamental review is necessary both to increase fiscal flexibility and to make government fit the modern world. Stated differently, there is a need to consider what the proper role of the federal government should be in the 21st century and how the government should do business in the future. As we look ahead we face an unprecedented demographic challenge. A nation that has prided itself on its youth will become older. Between now and 2035, the number of people who are 65 or over will double. As the share of the population over 65 climbs, federal spending on the elderly will absorb larger and ultimately unsustainable shares of the federal budget. Federal health and retirement spending are expected to surge as people live longer and spend more time in retirement. In addition, advances in medical technology are likely to keep pushing up the cost of providing health care. Moreover, the baby boomers will have left behind fewer workers to support them in retirement, prompting a slower rate of economic growth from which to finance these higher costs. Absent substantive change in related entitlement programs, large deficits will return, requiring a combination of unprecedented spending cuts in other areas, and/or unprecedented tax increases, and/or substantially increased borrowing from the public (or correspondingly less debt reduction than would otherwise have been the case). These trends have widespread implications for our society, our economy, and the federal budget. On March 26, 2002, the Trustees of the Social Security and Medicare trust funds reported on the current and projected status of these programs over the next 75 years. The Trustees’ reports highlight the need to address the long-term fiscal challenges facing the nation. The Trustees state that, while the near-term financial conditions have improved slightly since last year’s reports, the programs continue to face substantial financial challenges in the not-too-distant future that need to be addressed soon. Once again, the Trustees underscored the fact that the most significant implication of these findings is that both Social Security and Medicare need to be reformed and strengthened at the earliest opportunity. The Trustees also stated that Medicare faces financial difficulties that in many ways are more severe than those confronting Social Security. Early action to change these programs would yield the highest fiscal dividends for the federal budget and would provide a longer period for prospective beneficiaries to make adjustments in their own planning. Waiting to take action entails risks. First, we lose an important window where today’s relatively large workforce can increase saving and enhance productivity, two elements critical to growing the future economy. Second, we lose the opportunity to reduce the burden of interest in the federal budget, thereby creating a legacy of higher debt as well as elderly entitlement spending for the relatively smaller workforce of the future. Third, and most critically, we risk losing the opportunity to phase in changes gradually so that all can make the adjustments needed in private and public plans to accommodate this historic shift. In a closely related matter, I have previously testified before this subcommittee on the need to synchronize the timing of the Trustees’ reports with agency and consolidated financial statements. Once again, the U.S. government’s consolidated financial statements reported an update of key indicators of the financial status of the Social Security and Medicare trust funds from the Trustees’ reports. The Trustees issued their reports the same week as the consolidated financial statements. Without this update, the government would have provided two different reports on the sustainability of these important programs, which could cause confusion and reduce confidence in the credibility of the U.S. government’s consolidated financial statements. This updated information will not be available when the U.S. government’s consolidated financial statements are issued on an accelerated basis, beginning with fiscal year 2004. The JFMIP Principals are considering ways to ensure that reports issued by the Social Security and Medicare Trustees, agency financial statements, and the U.S. government’s consolidated financial statements present social insurance financial information that is consistent and more timely. In our view, the Congress may need to enact legislation that will require earlier reporting and issuance of the Trustees’ reports in order to allow for timely social insurance information to be included in agencies’ and the U.S. government’s consolidated financial statements. While addressing the challenges of Social Security and Medicare is key to ensuring future fiscal flexibility, a fundamental review of all programs and operations can create much-needed fiscal flexibility to address emerging needs. As I have stated previously, it is healthy for the nation periodically to review and update its programs, activities, and priorities. Many programs were designed years ago to respond to earlier challenges. Ultimately, we should strive to hand to the next generations the legacy of a government that is effective and relevant to a changing society—a government as free as possible of outmoded commitments and operations that can inappropriately encumber the future. A reexamination of existing programs and activities could help weed out programs that have proven to be outdated or persistently ineffective or alternatively could prompt us to update and modernize activities through such actions as improving program targeting and efficiency, consolidation, or reengineering of processes and operations. Such a review should not be limited to only spending programs but should include the full range of tools of governance that the federal government uses to address national objectives such as loans, guarantees, tax expenditures, and regulations. In the last decade the Congress put in place a series of laws designed to improve information about cost and performance. This framework and the information it provides can help structure and inform the debate about what the federal government should do. In addition, GAO has identified a number of areas warranting reconsideration based on program performance, targeting, and costs. Every year, we issue a report identifying specific options, many scored by the Congressional Budget Office, for congressional consideration stemming from our audit and evaluation work. This report provides opportunities for (1) reassessing objectives of specific federal programs, (2) improved targeting of benefits, and (3) improving the efficiency and management of federal initiatives. Today the Congress and President Bush face the challenge of sorting out these many claims on the federal budget without the fiscal benchmarks that guided us through the years of deficit reduction into surplus. However, it is still the case that the federal government needs a decision-making framework that permits it to evaluate choices against both today’s needs and the longer-term fiscal future that will be handed to future generations. As a way to frame the debate, targets can remind us that today’s decisions are not only about current needs but also about how fiscal policy affects the choices over the longer-term. Other nations have found it useful to embrace broader targets such as debt-to-GDP ratios, or surpluses equal to a percent of GDP over the business cycle. To work over time targets should not be rigid—it is in the nature of things that they will sometimes be missed. Reaching a target is not a straight line but an iterative process. The other nations we have studied have found that targets prompted them to take advantage of windows of opportunity to save for the future and that decisionmakers must have flexibility each year to weigh pressing short- term needs and adjust the fiscal path without abandoning the longer-term framework. The events of the past year have served to highlight the benefits of fiscal flexibility. Addressing the long-term drivers in the budget is essential to preserving any flexibility in the long term. In the nearer term a fundamental review of existing programs and operations can also create much-needed fiscal flexibility. In this regard, we must determine how best to address the necessary structural challenges in a reasonably timely manner in order to identify specific actions that need to be taken. As stewards of our nation’s future, we must begin to prepare for tomorrow. Our report on the U.S. government’s consolidated financial statements for fiscal years 2001 and 2000 highlights the need to continue addressing the government’s serious financial management weaknesses. Looking beyond current progress by agencies in attaining unqualified opinions on financial statements, it will be essential for the government to begin moving away from the extraordinary efforts many agencies now use to prepare financial statements and toward giving prominence to strengthening the government’s financial systems, reporting, and controls. This approach becomes even more critical as the government progresses to an accelerated financial statement reporting time frame, and it is the only way the government can meet the end goal of making timely, accurate, and useful financial information routinely available to the Congress, other policymakers, and the American public. The requirement for timely, accurate, and useful financial and performance management information is greater than ever, as the Congress and the administration prepare to meet tomorrow’s fiscal challenges. This type of financial information is central to managing the government’s operations more efficiently, effectively, and economically and in supporting GPRA. Moreover, meaningful financial and performance information can form the basis for reconsidering the relevance or “fit” of any federal program or activity in today’s world and for the future. In closing Mr. Chairman, I want to underscore the importance of the additional impetus provided by President Bush through his President’s Management Agenda and the Executive Branch Management Scorecard for coming to grips with federal financial management problems, indeed management problems across the board. Regarding DOD in particular, Secretary of Defense Rumsfeld’s vision and approach for transforming the department’s full range of business processes is serious and encouraging. These efforts will be key to fulfilling the President’s Management Agenda and addressing the largest obstacle to an unqualified opinion on the U.S. government’s consolidated financial statements. The cooperative efforts spearheaded by the JFMIP Principals have been most encouraging in developing the short- and long-term strategies and plans necessary to address many of the problems I have discussed this morning. In addition, GAO has probably never had a better working relationship with OMB and cabinet level and other key officials on a range of “good government issues” | As in the past four years, GAO was unable to express an opinion on the federal government's consolidated financial statements for fiscal years 2000 and 2001 because of material weaknesses in internal control and accounting and reporting issues. These conditions prevented GAO from providing Congress and American citizens with an opinion as to whether the consolidated financial statements are fairly stated in conformity with U.S. generally accepted accounting principles. Until these problems are adequately addressed, the government will continue to have difficulty (1) reporting its assets, liabilities, and costs; (2) adequately measuring the full cost and financial performance of programs and effectively manage related operations; and (3) adequately safeguarding significant assets and and properly recording transactions. |
The United States, along with its coalition partners and various international organizations and donors, have committed billions of dollars to the reconstruction of Iraq in the face of an unstable security situation and other challenges. These funds have come from multiple and diverse sources, the effective use of which requires significant oversight and cooperation. The Coalition Provisional Authority (CPA) has been responsible for the allocation of U.S. and Iraqi funds. The Departments of Defense and State, and the U.S. Agency for International Development, among others, have played play a primary role in U.S. efforts to fund and execute the reconstruction effort. To a large extent, these agencies have used contracts and personal services contractors to implement their programs. Agency inspectors general, the CPA inspector general, and other auditing authorities are responsible for auditing aspects of the reconstruction effort. This enclosure describes (1) the sources and amounts of funds that have been made available for the reconstruction of Iraq, and (2) the amounts of U.S. and Iraqi funds that have been obligated and disbursed as of April 30, 2004,and the uses to which those funds have been applied. Funds for U.S. military operations are not described in this enclosure. Data for U.S. appropriated funds are as of April 30, 2004, with the exception of some CPA Program Management Office obligations and disbursements, which are as of May 25 and June 16, respectively. Iraqi funds data are as of May 6, 2004. CPA established the Development Fund for Iraq to accommodate Iraqi funds that would be used to benefit the Iraqi people and facilitate the reconstruction of their country. from the deposed regime. Of the funding available for the reconstruction effort, about $24 billion had been obligated as of the end of April 2004. Of this amount, about $13 billion came from the Development Fund for Iraq and about $8 billion from U.S. appropriated funds. About $4 billion of the $4.5 billion in U.S. funds appropriated in 2003 and about $4.2 billion of the $19.6 billion in U.S. funds appropriated in 2004 have been obligated. The remaining $2.5 billion in obligated funds came from vested and seized assets. Obligations to date have primarily been applied to the operating expenses of the Iraqi ministries; restoration of essential services such as oil, water, and power; and humanitarian and human services, including the procurement of food and liquid petroleum gas for domestic consumption. Figure I.1: Total Funds Available, Obligated, and Disbursed for Iraq Reconstruction by Source, as of April 2004 Of the $13.6 billion pledged, donors have committed about $1 billion to the International Reconstruction Fund Facility for Iraq. “Vested assets” refers to former Iraqi regime assets held in U.S. financial institutions that the President confiscated in March 2003 and vested in the U.S. Treasury. The United States froze these assets shortly before the first Gulf War. The U.S.A. PATRIOT Act of 2001 amended the International Emergency Economic Powers Act to empower the President to confiscate, or take ownership of, certain property of designated entities, including these assets, and vest ownership in an agency or individual. The President has the authority to use the assets in the interests of the United States. In this case, the President vested the assets in March 2003 and made these funds available for the reconstruction of Iraq in May 2003. Seized assets refer to former regime assets seized within Iraq. An obligation is a binding agreement that will result in immediate or future outlays of funds. The reconstruction of Iraq has been supported from multiple sources of funds. The largest share of these funds has come from U.S. appropriations. The other sources, in descending order of amounts, are the DFI, vested assets, and seized assets (see fig. I.2). In addition, international donors have pledged about $14 billion to the reconstruction effort. Congress has appropriated about $24 billion of the approximately $58 billion provided to date for the relief and reconstruction of Iraq. The funds appropriated in fiscal year 2003 were made available until September 30, 2004; those appropriated in fiscal year 2004 were made available until September 30, 2006. In April 2003, Congress enacted the Emergency Wartime Supplemental Appropriations Act, which, when combined with previously appropriated funds, provided about $4.5 billion for the reconstruction of Iraq. Of this $4.5 billion, the act provided $2.475 billion for an Iraq Relief and Reconstruction Fund (IRRF). The act also included a provision for the Iraq Freedom Fund (IFF) to support ongoing military operations in Iraq, among other things, and for a Natural Resources Risk Remediation Fund to finance emergency firefighting, repair damaged oil facilities, and preserve oil distribution capability. In addition, some funds were transferred from the IFF to support the new Iraqi Army (about $50 million) and for CPA operating expenses (about $600 million). The Natural Resources fund provided about $800 million to the reconstruction effort. In addition, agencies have also been reimbursed about $575 million for expenses incurred before the passage of the supplemental appropriations act. In November 2003, Congress enacted another emergency wartime supplemental appropriation, of which $18.4 billion was provided for Iraq relief and reconstruction. In addition, under the same act, the CPA received its own funding authority of $983 million for operating expenses. Further, $140 million was transferred from the IFF to support regional emergency response programs. As of May 6, 2004, the DFI had received deposits of about $18 billion. This fund, established by the CPA in May 2003 and noted by U.N. Security Council Resolution 1483, was created to benefit the Iraqi people and facilitate the reconstruction of their country. The U.N. resolution provided for an initial deposit of $1 billion from unencumbered Oil for Food program funds. The resolution further authorized the subsequent deposits of (1) proceeds from the sale of Iraqi oil, natural gas, and petroleum products; (2) U.N. funds such as unused Oil for Food program funds; and (3) transferred assets from the former Iraqi regime that U.N. member states had frozen in the 1990. The DFI does not include U.S. appropriated funds. See enclosure III for more detailed information on the DFI. Vested Assets and Assets Seized in Iraq Approximately $2.7 billion in assets the United States confiscated and seized from the former regime have been made available for use in Iraq’s reconstruction. In March 2003, the U.S. government confiscated more than $1.7 billion in Iraqi assets located in U.S. financial institutions and vested them in the U.S. Treasury. These funds were Iraqi government funds originally frozen in 1990 consistent with a U.N. Security Council Resolution and held in U.S financial institutions from 1990 to 2003. From May to September 2003, the United States transferred these funds to Iraq. As of May 2004, coalition forces seized more than $900 million of regime assets in Iraq. The Oil for Food program was established by the United Nations and Iraq in 1996 to address concerns about the humanitarian situation in Iraq after the imposition of international sanctions in 1990. The program allowed the Iraqi government to use the proceeds of its oil sales to pay for food, medicine, and humanitarian goods for the benefit of the Iraqi people. U.N. Security Council Resolution 1483 provides for the deposit of oil revenues and some Oil for Food program funds in the DFI until an internationally recognized, representative government of Iraq has been constituted. See U.S. General Accounting Office, United Nations: Observations on the Management and Oversight of the Oil for Food Program, GAO-04-730T (Washington D.C.: Apr. 28, 2004). The international donors described in this enclosure include individual nations, the European Commission, and international financial institutions. International donors, exclusive of the United States, have pledged or committed nearly $14 billion to the reconstruction of Iraq through 2007. These contributions will be made either bilaterally or through a newly established multilateral mechanism known as the International Reconstruction Fund Facility for Iraq. For detailed information on international donors, see enclosure II. Overall, about $24 billion in U.S. and Iraqi funds has been obligated for the reconstruction effort in Iraq as of April 30, 2004. About $13 billion in obligations has come from the DFI, and about $8 billion from U.S. appropriated funds. The remaining $2.5 billion in obligations has come from vested assets and seized assets. Reliable information on the international donors’ obligations and expenditures is not available. Table 1.1 provides a detailed breakdown of obligations by sources of funding for the broad range of activities associated with the reconstruction of Iraq, not solely for infrastructure. The World Bank Group defines a pledge as an indication of intent to mobilize funds for which an approximate sum of contribution is specified. International donor pledges range from $13.6 billion to $17.3 billion, reflecting the range of loans pledged by the World Bank and International Monetary Fund (IMF). Given the uncertainty of the ultimate amount of loans provided by the World Bank and IMF, we have used the lower pledge amount in this report. Table I.1: U.S., DFI, Vested and Seized Funds Obligated by Activity, as of April 2004 U.S. oversight of the U.S., Iraqi, and international funds used to rebuild Iraq? 2. To what extent are existing accounting and management information systems adequate to provide complete and reliable reporting on the implementation of the reconstruction effort? 3. What are the roles and responsibilities of the CPA Inspector General with the transfer of power to the Iraqis? What is the relationship between the CPA Inspector General, the State Department Inspector General, and U.S. ambassador to Iraq? 4. To what extent has the unstable security environment affected the U.S. government’s ability to provide adequate oversight of the reconstruction effort, including the auditing of contracts and funding expended? 5. What effect does the transfer of authority to the Iraqis have on the U.S. agencies’ ability to monitor and audit the reconstruction investment made with these funds? The size and scope of Iraq’s reconstruction needs through 2007 have been estimated to total about $56 billion. The United Nations Development Group and the World Bank Group prepared a needs assessment from June 2003 through August 2003 to define Iraq reconstruction requirements. According to the October 2003 assessment, Iraq needs an estimated $36 billion from 2004 through 2007. Sectors covered by this assessment include education, health, electricity, transportation, agriculture, and cross-cutting areas such as human rights and the environment. The assessment also notes that the Coalition Provisional Authority (CPA) estimates that an additional $20 billion will be needed from 2004 through 2007 to rebuild other critical sectors (e.g., security and oil) outside the scope of the U.N./World Bank assessment. The World Bank Group defines a pledge as an indication of intent to mobilize funds for which an approximate sum of contribution is specified. reconstruction projects in 2004. An Iraqi-led process, endorsed by the Iraqi Governing Council and put into effect by the Administrator of the Coalition Provisional Authority, is responsible for coordinating all international assistance for rebuilding and reforming institutions in Iraq. However, this process has not had the capability to track the total amounts of bilateral assistance flowing into Iraq. The ability to track all international contributions made to support Iraq’s reconstruction, including bilateral assistance, is an important element for identifying the sectors receiving assistance, identifying any gaps in assistance, and ensuring that assistance is coordinated. As of May 26, 2004, the European Commission and 18 donor countries had committed The World Bank and the U.N. Development Program administer the IRFFI in coordination with international donors and Iraqi authorities. The Donor Committee, with members from 14 countries and the European Commission, is to oversee the activities of the IRFFI and endorse its priorities. At a February 2004 international donors meeting held in Abu Dhabi, participants focused on IRFFI’s operation and funding. Specifically, information was shared with donors on Iraq’s reconstruction plans and project priorities, U.S. assistance spending plans, and the IRFFI’s preferred spending and project plans. Table II.2 presents a summary of the donors’ commitments and deposits made to the IRFFI as of May 26, 2004. According to State Department officials, commitments refer to a firmer declaration of the amount that a country has pledged to provide. $1.86 billion was allocated for imports of liquid petroleum gas for domestic heating and cooking; about $1.07 billion was disbursed. $272 million was allocated for food procurement, transport, security, and production; about $204 million was disbursed. $22 million was allocated for agriculture; nearly $12 million was disbursed. $972 million was allocated for power infrastructure; about $157 million was disbursed. $437 million was allocated for oil infrastructure; about $150 million was disbursed. $30 million was allocated for transportation and telecommunications; about $10 million was disbursed. $842 million was allocated in late April and early May 2004 to address increased security needs, including resources for the Iraq security forces; about $2 million was disbursed. $52 million was previously allocated for police and security equipment; $20 million was disbursed. $197 million was allocated for the currency exchange; about $180 million was disbursed. $27 million was allocated for microloans and employment programs; about $2 million was disbursed. $21 million was allocated and disbursed for regional governance. Public buildings, miscellaneous ministry projects, and other reconstruction $18 million was allocated for a Program Management Office/Iraqi Ministry of Planning and Development Cooperation business complex; about $6 million was disbursed. $9 million was allocated for legal fees and settlements; about $3 million was disbursed. According to the CPA, since May 6, 2004, the CPA Administrator approved additional PRB-recommended allocations totaling about $1.5 billion for the essential services, humanitarian and human services, and economic reconstruction projects, and for other purposes. Essential services projects include $460 million for the oil infrastructure and $315 million for the electricity sector. Humanitarian and human services projects include $200 million to maintain current levels of food procurement through 2004 and $65 million for agriculture development. Economic reconstruction projects include $65 million for vocational training and $65 million to provide capital to critical state-owned enterprises. Examples of other allocations include $180 million for the Iraq Property Claims Commission, $125 million to protect the Iraqi budget from oil revenue volatility, and $25 million for the Victims’ Compensation Fund. The Commanders’ Emergency Response Program and the Rapid Regional Response Program have been allocated DFI funds for local humanitarian, essential services, economic, general construction, security, and governance projects, as discussed below. Under the Commanders’ Emergency Response Program, the CPA allocated $353 million through the multinational force to military division and brigade commanders; about $214 million was disbursed. According to multinational force officials, commanders have completed more than 21,000 small high-impact projects at an average cost of about $11,000. For example, as of May 8, 2004, multinational force officials reported that about $45 million had been disbursed for more than 4,100 education projects. The activities of the Rapid Regional Response Program incorporate and expand upon previous authorities of the Construction Initiative and the Directors’ Emergency Response Program. Under the program, about $265 million in DFI funds was allocated to regions and governorates; about $120 million was disbursed. According to CPA, more than 2,100 regional projects designed to create jobs, support local industry, and respond to community needs have been initiated across the northern, Baghdad central, southern central, and southern regions. The process for meeting the CPA requirements for U.S. personnel evolved as the CPA’s mission changed. The original mission of CPA’s predecessor, the Office for Reconstruction and Humanitarian Assistance, was to coordinate the efforts addressing the humanitarian, reconstruction, and administration challenges facing Iraq—not to govern the country. In May 2003, CPA replaced ORHA when it became the temporary authority governing Iraq during the period of transitional administration. The initial staffing process for the reconstruction effort was not always well coordinated between Washington and Baghdad. CPA officials stated that, prior to the CPA’s establishment, the requirements for staff were identified and personnel were recruited in an ad hoc manner. For example, U.S. officials from the CPA and the State Department stated that, due to the independent recruiting of staff by some detailees in Baghdad, agency personnel authorities were unaware of personnel who went to Iraq after the initial deployment in March 2003. Further, officials from the State Department responsible for staffing personnel to Iraq stated that they ultimately sent a representative to Baghdad to physically account for all State Department personnel present in the country. According to a CPA official, by July 2003, the process for identifying personnel requirements was centralized in Baghdad under the guidance of the CPA administrator. In addition, the CPA had generally operated with about one-third of its direct positions vacant. U.S. and CPA officials most frequently cited the hardship of the posting and the budgetary implications as the reasons for this situation. The hardship of the posting has affected some civilian agencies’ abilities to meet their staffing requirements. The security situation in Iraq has also made it difficult to attract and retain personnel. For example, USAID officials cited the security situation as a reason for the early return of some staff and the difficulty in filling direct-hire positions in Iraq. Further, State Department officials stated that some qualified agency personnel who had volunteered to go to Iraq were unable to meet the required medical standards. Another dimension of the hardship of the posting is the limitations of family accompaniment. Beginning in November 2003, the CPA requested that all personnel serve a minimum of 6 months. According to USAID officials, in some cases this required Foreign Service personnel to relocate family members from their previous posts to the United States. State Department officials also cited family relocation issues and travel plans as reasons for delays in providing personnel to Iraq. State Department officials stated that they had no difficulty in recruiting volunteers for positions in Iraq, attributing this largely to Secretary Powell’s support for the mission, incentive packages, and the department’s efforts to ensure that those who served in Iraq were not disadvantaged. Other agencies, such as USAID and the U.S. Army Corps of Engineers, while also relying on volunteers, stated that they were constrained in their ability to meet staffing requirements. USAID and Army Corps of Engineers officials said that prior downsizing had left their agencies with a smaller pool of personnel from which to draw. Additionally, some requirements that the CPA attempted to meet were beyond the capability of the agency tasked. For example, according to Department of Justice officials, the department was requested to provide three international law litigators to the CPA but had only three such personnel. To meet the requirement, Justice provided one litigator to the CPA. In addition, providing personnel on a nonreimbursable basis to the CPA creates an unbudgeted expense to the supplying agency. Replacing detailees creates additional costs for the agencies that their budgets may not be able to sustain. Further, detailing of staff not only creates gaps in the supplying agency but increases the workload of those remaining. According to State Department officials, this burden could not be sustained beyond 6 to 12 months. To counter these challenges, the CPA and executive branch agencies have relied on a number of mechanisms to support the staffing effort, including the use of special hiring authorities, temporary tours of duty (60 to 180 days), and incentive packages. The CPA had relied on a special hiring authority under 5 USC 3161 to obtain temporary civilian employees. Personnel obtained under this authority constituted about 20 percent of CPA staff. The passage of the emergency supplemental in November 2003 provided a specific budget to the CPA. According to a CPA official, this budget imposed a funding limit on CPA’s ability to hire personnel under the 3161 authority. In addition, agencies used temporary tours of duty to supply personnel to the CPA due to the hardship of the posting. Agencies also used incentive packages to compensate civilian personnel, which included danger-pay allowances and hardship differential payments. In April and May 2004, the Deputy Secretary of Defense said that the multinational force was engaged in combat and a continuing war in Iraq, rather than peacekeeping as had been expected. The increase in attacks has had a negative impact on the presence and operations of international military and civilian personnel in Iraq. It has led to an increase in U.S. force levels and to a decrease in freedom of movement for international civilians working to rebuild Iraq and assist in its political transition. United States and United Kingdom Increased Troop Levels as Other Coalition Members Reduced Them As a result of the increase in violence during April 2004, the United States and the United Kingdom decided to increase their overall force levels in the country. The United States decided to maintain a force level of about 138,000 troops until at least the end of 2005, keeping about 33,000 more troops in Iraq as of May 2004 than the 105,000 troops originally planned. On May 24, 2004, the President said that if military commanders determine that they need more troops to fulfill the mission, he would send them. The following week, the United Kingdom announced that it would send an additional 370 troops to southern Iraq in response to the increased violence, bringing its total troop contribution to the multinational force to about 8,900 military personnel. This figure includes 170 engineering personnel who would deploy for 3 months to help fortify U.K. military bases and facilities in Iraq against the increased threat of mortar and rocket attacks. In mid-April 2004, the new government of Spain announced that it would withdraw its 1,300 troops from Iraq. The government withdrew the troops much earlier than the United States expected, after violence escalated in the Spanish area of operations in Iraq. Shortly thereafter, Honduras and the Dominican Republic announced they would also withdraw their national contingents from the multinational force. During April 2004, the United States redeployed forces from Baghdad and northern areas of Iraq to cities in the south that had come under the control of a radical Shi’a militia. The United States did so because Iraqi security forces and at least one contingent of the multinational force would not or could not fight the insurgents. For example, according to a CPA official, Iraqi police in the cities of Karbala, Najaf, and Kut collapsed in April when a radical Shi’a militia overran the cities and took control of police stations. Moreover, according to a USAID report, after heavy fighting in the city of Kut, a non-U.S. contingent of the multinational force withdrew from the city as the militia overran it. International Civilian Organizations Have Reduced Operations in Iraq and Have Faced Increased Security Requirements The deteriorating security situation has also adversely affected the operations of civilian organizations in Iraq. The dangerous environment has led many to halt operations completely or to reduce activity by severely restricting staff movement around the country. No systematic data exist on the effect of these restrictions on efforts to assist in Iraq’s political transition and reconstruction. Anecdotal evidence suggests, however, that the efforts overall have been scaled back. In general, international civilian staff have had increasingly little contact with the Iraqi people, and Iraqi staff working for the coalition, including interpreters, have been increasingly threatened for cooperating with foreign organizations. Many important reconstruction efforts had to at least temporarily cease operation. Civilian organizations that continue to operate in the country face increased security measures for their personnel and compounds in the country. The following examples show the effect of the security situation on the operations of the CPA and supporting U.S. agencies, reconstruction contractors, international organizations, and nongovernmental aid organizations. Due to the unsafe security environment, the CPA and its supporting U.S. agencies have had difficulty staffing their operations, opening offices throughout the country, and providing protection for U.S. civilian personnel as they travel around the country. U.S. agencies, particularly USAID, had difficulty in attracting and retaining personnel because of security concerns. In addition, according to a CPA official, as the security situation worsened during 2003, the CPA abandoned plans to fully staff offices throughout Iraq to assist in Iraq’s political transition and reconstruction and instead established a much smaller field presence. Further, the CPA established stringent security measures that U.S. government staff had to follow in traveling outside the Green Zone, the coalition’s “safe area” in Baghdad, thereby making it difficult for them to move around the country. In late February 2004, the Department of Homeland Security decided to stop sending teams of customs investigators to assist CPA. They could no longer do their jobs because it had become too dangerous for them to move around the country. CPA officials also stated that they were concerned about the safety of their Iraqi employees, particularly their interpreters, as insurgents had increasingly targeted them for cooperating with the coalition. In an April 17, 2004, document, the CPA administrator stated that lack of security is the key obstacle to reaching reconstruction objectives. Referring to the entire reconstruction program, the administrator stated that a worsened security situation would mean that projects would take longer to complete and that the kinds of projects undertaken and their costs would change to an unknown extent. Our review of selected electricity projects showed that the security situation delayed the implementation of key projects, thereby contributing to the CPA not meeting its objective of providing 6,000 megawatts of electrical generating capacity to the Iraqi people by its original goal of June 1, 2004. In late March 2004, the CPA Inspector General reported that that rising security concerns were a significant cost driver for CPA activities and contractor projects, representing at least 10 percent to 15 percent of total costs. The United Nations and its programs have faced significant setbacks as a result of the deteriorating security situation. Most importantly, after the attacks on the U.N. headquarters in Baghdad in August and September 2003, the U.N. Secretary General redeployed all U.N. international personnel from Baghdad, Basra, and other area offices to neighboring countries, particularly Jordan and Kuwait, where they have continued to support assistance operations inside Iraq. As of late May 2004, the United Nations had not allowed most of its international personnel to return to Iraq. Although Iraqi staff continued some U.N. programs, the United Nations had to scale down or delay both ongoing activities and new initiatives. The United Nations sent three separate assessment teams to Iraq during the first half of 2004 to assist Iraqis in assessing options for forming an interim government and in preparing for national elections. The dangerous security situation forced these teams to restrict their travel around Iraq during the first half of 2004, thereby limiting their interaction with Iraqis during important political discussions about the country’s future. In discussions during the fall of 2003 and the spring of 2004, nongovernmental organization representatives stated that the deteriorating security situation has forced numerous nongovernmental aid organizations to reduce or shut down operations in Iraq. In response to the dangerous security environment, many nongovernmental organizations and contractors that we interviewed have hired private security to provide protection for their staff and compounds. In addition, one representative emphasized his view that as more international workers leave Iraq, insurgents will increasingly focus their efforts on killing Iraqi nationals who are seen as collaborators. U.N. officials and documents have expressed concern that the lack of security could threaten Iraq’s transition toward a democratic government. According to a U.N. assessment, the lack of security may lead to major disturbances that could undermine the administration of the elections, alter the established timetable, and compromise the overall credibility of the process. By mid-April 2004, the multinational force had begun to consider how it could provide security, logistical, and other support for the elections, but the United Nations and others had not yet developed a specific plan for important tasks such as the registration of political parties, voters, and candidates or the number and locations of polling sites. 1. How will the Iraqi security forces coordinate with the multinational force after the transfer of power, and how will they resolve potentially differing views on security issues? What arrangements have been made to facilitate coordination between the multinational force and the interim Iraqi government? 2. What kind of provisioning process will be used to equip the Iraqi security forces after the transfer of power? Will this be administered by the Ministries of Defense and Interior, the multinational force, or another body? 3. What level of support does the multinational force expect Iraqi security forces to provide during Iraq’s upcoming election process, and what options and contingency plans are being explored? This page left intentionally blank. A large but unknown number of militias are operating outside the control of the central government in Iraq. Some of these militias have taken hostile action against the coalition and Iraqi security forces, while others have remained neutral or are participating in Iraq’s political transition. In a February 2004 report, the United Nations warned that the existence of militias—especially those connected with political movements—could be a source of coercion and intimidation that would undermine the political credibility of Iraq’s upcoming elections, which are currently scheduled to be held by the end of January 2005. | Rebuilding Iraq is a U.S. national security and foreign policy priority. According to the President, the United States intends to help Iraq achieve democracy and freedom and has a vital national interest in the success of free institutions in Iraq. As of April 30, 2004, billions of dollars in grants, loans, assets, and revenues from various sources have been made available or pledged to the reconstruction of Iraq. The United States, along with its coalition partners and various international organizations and donors, has embarked on a significant effort to rebuild Iraq following multiple wars and decades of neglect by the former regime. The Coalition Provisional Authority (CPA), established in May 2003, was the U.N.-recognized coalition authority led by the United States and the United Kingdom that was responsible for the temporary governance of Iraq. Specifically, the CPA wasresponsible for overseeing, directing, and coordinating the reconstruction effort. On June 28, 2004, the CPA transferred power to a sovereign Iraqi interim government, and the CPA officially dissolved. To pave the way for this transfer, the CPA helped the Iraq Governing Council develop the Law of Administration for the State of Iraq for the Transitional Period in March 2004. The transitional law provides a framework for governance of Iraq while a permanent government is formed. In June 2004, U.N. Security Council Resolution 1546 provided international support to advance this process, stating that, by June 30, CPA will cease to exist and Iraq will reassert full sovereignty. Resolution 1546 also endorsed the formation of a fully sovereign Iraqi interim government; endorsed a timetable for elections and the drafting of an Iraqi constitution; and decided that the United Nations, at the Iraq government's request, would play a leading role in establishing a permanent government. Resolution 1546 further noted the presence of the multinational force in Iraq and authorized it to take all necessary measures to contribute to security and stability in Iraq, in accordance with letters annexed to the resolution. Such letters provide, in part, that the multinational force and the Iraqi government will work in partnership to reach agreement on security and olicy issues, including policy on sensitive offensive operations. Resolution 1546 stated that the Security Council will review the mandate of the multinational force in 12 months or earlier if requested by the government of Iraq and that it will terminate the mandate if requested by the government of Iraq. As part of our broad effort to monitor Iraq reconstruction, which we undertook at the request of Congress, this report provides information on the status of the issues we have been monitoring, as well as key questions that will assist Congres in its oversight responsibilities. Specifically, this report focuses on issues associated with (1) resources, (2) security, (3) governance, and (4) essential services. For the essential services issue, we focused on the Army Corps of Engineers' Restore Iraqi Electricity project, a major component of the U.S. assistance effort to rebuild the power sector. As of the end of April 2004, about $58 billion in grants, loans, assets, and revenues from various sources had been made available or pledged to the relief and reconstruction of Iraq. Resource needs are expected to continue after the transfer of power to a sovereign Iraqi interim government. Of the funds available, the United States obligated about $8 billion of the available $24 billion in U.S. funds. The CPA obligated about $15.5 billion of the nearly $21 billion in available Iraqi funds. The international community pledged nearly $14 billion. In December 2003, the CPA put into effect an Iraqi-led process to coordinate reconstruction efforts. An October 2003 U.N./World Bank assessment noted that Iraq's ability to absorb resources as the country gains sovereignty and decision-making authority will be one of the most significant challenges to reconstruction. The security situation in Iraq has deteriorated since June 2003, with significant increases in attacks against the coalition and coalition partners. The increase in attacks has had a negative impact on military operations and the work of international civilian organizations in Iraq. As part of the effort to provide stability, the coalition plans to transfer security responsibilities from the multinational force to Iraqi security forces and to dissolve Iraqi militias operating outside the central government's control. During the escalation of violence that occurred during April 2004, these security forces collapsed in several locations. However, key elements of the CPA's transition and reintegration process remain to be finalized. With U.S. and others' assistance, Iraqis have taken control of government institutions at the national and subnational levels. National ministries are providing some services to citizens as their facilities are being rebuilt, reforms are being introduced, and their staffs trained. According to the head of the now-dissolved CPA, all ministries were under Iraqi authority as of the transfer of power on June 28, 2004. However, the security situation hinders the ability of the ministries to provide needed services and maintain daily operations. To reform the rule of law, ongoing efforts have begun to establish a functioning independent judiciary, although courts are not at their pre-war capacity. However, efforts to rebuild Iraq's judicial system and restore the rule of law face multiple challenges. U.S. officials said that rehabilitating and reforming Iraq's judicial system will likely take years. The Coalition considers reconstruction of the power sector critical to reviving Iraq's economy, supporting essential infrastructure, improving daily well-being, and gaining local support for the coalition presence in Iraq. The CPA set a goal of 6,000 megawatts of generating capacity by June 30, 2004, in anticipation of the higher demand for power during the summer months. As part of the overall effort to achieve this goal, the U.S. Army Corps of Engineers (Corps) has undertaken $1.4 billion in work under the Restore Iraqi Electricity (RIE) program. As of late May, the Corps anticipated that 59 of the 66 RIE projects expected to help meet the goal would be completed by June 30. However, electrical service in the country as a whole has not shown a marked improvement over the immediate postwar levels of May 2003 and has worsened in some governorates. RIE contractors report numerous instances of project delays due to difficulties in getting employees and materials safely to project sites. Further, the security environment continues to affect the cost of rebuilding the power sector. |
Information security is a critical consideration for any organization that depends on information systems and computer networks to carry out its mission or business. It is especially important for government agencies, where the public’s trust is essential. The dramatic expansion in computer interconnectivity and the rapid increase in the use of the Internet are changing the way our government, the nation, and much of the world communicate and conduct business. Without proper safeguards they also pose enormous risks that make it easier for individuals and groups with malicious intent to intrude into inadequately protected systems and use such access to obtain sensitive information, commit fraud, disrupt operations, or launch attacks against other computer systems and networks. Protecting the computer systems that support critical operations and infrastructures has never been more important because of the concern about attacks from individuals and groups, including terrorists. These concerns are well founded for a number of reasons, including the dramatic increase in reports of security incidents, the ease of obtaining and using hacking tools, the steady advance in the sophistication and effectiveness of attack technology, and the dire warnings of new and more destructive attacks to come. Computer-supported federal operations are likewise at risk. Our previous reports, and those of agency inspectors general, describe persistent information security weaknesses that place a variety of critical federal operations, including those at IRS, at risk of disruption, fraud, and inappropriate disclosure. We have designated information security as a governmentwide high-risk area since 1997—a designation that remains today. In December 2002, Congress enacted the Federal Information Security Management Act of 2002 (FISMA) to strengthen security of information and systems within federal agencies. FISMA requires each agency to develop, document, and implement an agencywide information security program to provide information security for the information and systems that support the operations and assets of the agency, using a risk-based approach to information security management. In addition, FISMA requires that the Secretary of the Treasury be responsible for, among other things, (1) providing information security protections commensurate with the risk and magnitude of the harm resulting from unauthorized access, use, disclosure, disruption, modification, or destruction of the agency’s information systems and information; (2) ensuring that senior agency officials provide information security for the information and information systems that support the operations and assets under their control; and (3) delegating to the agency chief information officer (CIO) the authority to ensure compliance with the requirements imposed on the agency under the act. Treasury’s CIO is responsible for developing and maintaining a departmentwide information security program and for developing and maintaining information security policies, procedures, and control techniques that address all applicable requirements. Each Treasury bureau, including the IRS, is responsible for implementing Treasury-mandated security policies within its domain. In order to implement departmentwide security policies, IRS is required to develop its own information security program, including its own security compliance functions. As the nation’s tax collector, IRS has the demanding responsibility of collecting taxes, processing tax returns, and enforcing the nation’s tax laws. In fiscal years 2004 and 2003, IRS collected about $2 trillion in tax payments, processed hundreds of millions of tax and information returns, and paid about $278 billion and $300 billion, respectively, in refunds to taxpayers. IRS employs tens of thousands of people in its 10 service campuses, three computing centers, and numerous field offices throughout the United States. To efficiently fulfill its tax processing responsibilities, IRS relies extensively on interconnected networks of computer systems to perform various functions, such as collecting and storing taxpayer data, processing tax returns, calculating interest and penalties, generating refunds, and providing customer service. Because of the nature of its mission, IRS also collects and maintains a significant amount of personal and financial data on each American taxpayer. The confidentiality of this sensitive information must be protected; otherwise, taxpayers could be exposed to loss of privacy and to financial loss and damages resulting from identity theft or other financial crimes. To help provide information security for its operations and assets (including computing resources and taxpayer information), IRS has developed and is implementing an agencywide information security program. The Commissioner of Internal Revenue has overall responsibility for ensuring the confidentiality, availability, and integrity of information and information systems supporting the agency and its operations. The Chief of MASS is responsible for developing policies and procedures regarding information technology security; providing assurance services to improve physical, data, and personnel security; conducting independent testing; and ensuring security is integrated into its modernization activities. To help accomplish these goals, IRS has developed and published information security policies, guidelines, standards, and procedures in the Internal Revenue Manual, Law Enforcement Manual, and other documents. In addition to processing its own financial and tax information, IRS provides information processing support to FinCEN, another Treasury bureau. FinCEN administers and enforces the Bank Secrecy Act (BSA) and its implementing provisions. Congress enacted the BSA to prevent banks and other financial service providers from being used as intermediaries for, or to hide the transfer or deposit of money derived from, criminal activity. Since its passage, Congress has amended the BSA to enhance law enforcement effectiveness. Today, more than 170 crimes are listed in federal money-laundering statutes. They cover a broad range, including drug trafficking, gunrunning, murder for hire, fraud, acts of terrorism, and the illegal use of wetlands. The list also includes certain foreign crimes. The reporting and record keeping requirements of the BSA regulations create a paper trail for law enforcement to investigate money laundering schemes and other illegal activities. This paper trail operates to deter illegal activity and provides a means to trace the movements of money through the financial system. FinCEN relies on IRS to operate and maintain computer systems that process and store a significant amount of FinCEN’s sensitive information. This information includes reports and filings from banks and other financial institutions that are required under BSA, such as currency transactions, foreign bank and financial accounts, international transportation of currency or monetary instruments, and criminal referrals of suspicious activities reports. This information is determined by FinCEN to have a high degree of usefulness in criminal, tax, regulatory, intelligence, and counterterrorism investigations, and in implementing counter money laundering programs and compliance procedures. This network supports federal, state, and local law enforcement, and intelligence and investigative agencies as part of the federal government’s effort to combat terrorism and to investigate and prosecute crime. The objectives of our review were to determine (1) the status of IRS’s actions to correct or mitigate previously reported weaknesses and (2) whether controls over key financial and tax processing systems located at the facility have been effective in ensuring the confidentiality, integrity, and availability of sensitive financial and taxpayer data. We concentrated our evaluation primarily on threats emanating from internal sources on IRS’s computer networks. To guide our work, we used the audit methodology described in our Federal Information System Controls Audit Manual, which discusses the scope of such reviews and the type of testing required for evaluating general controls. We also used FISMA to guide our review of IRS’s implementation of its information security program. Specifically, we evaluated information system controls intended to limit, detect, and monitor logical and physical access to sensitive computing resources and facilities, thereby safeguarding them from misuse and protecting them from unauthorized disclosure and modification; maintain operating system integrity through effective administration and control of powerful computer programs and utilities that execute privileged instructions; prevent the introduction of unauthorized changes to application software in the existing software environment; ensure that work responsibilities are segregated, so that one individual does not perform or control all key aspects of computer-related operations and thereby have the ability to conduct unauthorized actions or gain unauthorized access to assets or records; minimize the risk of unplanned interruptions and recover critical computer processing operations in the case of disaster or other unexpected interruptions; and implement an agencywide information security program that includes a continuing cycle of assessing risk, implementing and promoting policies and procedures to reduce such risk, and monitoring the effectiveness of those activities. To evaluate these controls, we identified and reviewed pertinent IRS information security policies and procedures, guidance, security plans, relevant reports, and other documents, and we tested the effectiveness of these controls. We also discussed with key security representatives and management officials whether information security controls were in place, adequately designed, and operating effectively. We performed our review at the IRS facility, at IRS’s National Office in New Carrollton, Maryland, and at our headquarters in Washington, D.C., in accordance with generally accepted government auditing standards from August through December 2004. We discussed the results of our review with IRS, Treasury, and FinCEN officials. IRS has made progress in correcting previously reported information security weaknesses. The agency has corrected or mitigated 32 of the 53 weaknesses that we reported as unresolved at the time of our last review in 2002. For example, IRS has improved perimeter security by installing barriers at the facility’s entrance to prevent unauthorized vehicles from entering the premises, implemented policies and procedures to ensure that system software products are tested and evaluated prior to installation, discontinued the practice of using shared accounts and passwords to administer its network authentication server and firewall, and implemented procedures to ensure that disaster recovery plans are up- to-date and maintained at the off-site storage facility. While IRS has taken steps to strengthen its information security controls, it had not completed actions to correct or mitigate the remaining 21 previously reported weaknesses. These weaknesses include granting and authorizing inappropriate access permissions over Unix system files, permitting remote access capabilities that expose passwords and user identifications, allowing users to implement easily guessed passwords, and permitting unrestricted physical access to sensitive computing areas. Failure to resolve these issues will leave IRS facilities and sensitive data vulnerable to unauthorized access, manipulation, and destruction. IRS has not effectively implemented information security controls to properly protect the confidentiality, integrity, and availability of data processed by the facility’s computers and networks. In addition to the 21 previously reported weaknesses that remain uncorrected, we identified 39 new information security weaknesses during this review. Serious weaknesses related to electronic access to computing resources from sources located on IRS’s internal computer network place sensitive taxpayer and Bank Secrecy Act data—including information related to financial crimes, terrorist financing, money laundering, and other illicit activities—at significant risk of unauthorized disclosure, modification, or destruction. In addition, information security weaknesses that exist in other control areas, such as physical security, segregation of duties, and service continuity, further increase risk to the computing environment. Collectively, these weaknesses threaten IRS’s ability to perform its operational missions, such as processing tax returns and law enforcement information, both of which rely on IRS’s computer systems and networks to process, store, and transmit data. A basic management objective for any organization is to protect the data supporting its critical operations from unauthorized access. Organizations accomplish this objective by designing and implementing electronic controls that are intended to prevent, limit, and detect unauthorized access to computing resources, programs, and data. Electronic access controls include user accounts and passwords, access rights and permissions, network services and security, and audit and monitoring of security-related events. Inadequate electronic access controls diminish the reliability of computerized data and increase the risk of unauthorized disclosure, modification, and destruction of these data. Electronic access controls were not effectively implemented to prevent, limit, and detect unauthorized access to the facility’s computer systems and data. Numerous vulnerabilities existed in IRS’s computing environment because of the cumulative effects of control weaknesses in the areas of user accounts and passwords, access rights and permissions, network services and security, and audit and monitoring of security-related events. A computer system must be able to identify and differentiate among users so that activities on the system can be linked to specific individuals. Unique user accounts assigned to specific users allow systems to distinguish one user from another—a process called identification. The system must also establish the validity of a user’s claimed identity through some means of authentication, such as a password, known only to its owner. The combination of identification and authentication, such as user account/password combinations, provides the basis for establishing individual accountability and controlling access to the system. Accordingly, agencies should (1) implement procedures to control the creation, use, and removal of user accounts and (2) establish password parameters, such as length, life, and composition, to strengthen the effectiveness of account/password combinations for authenticating the identity of users. IRS did not adequately control user accounts and passwords to ensure that only authorized individuals were granted access to its systems and data. For example, it did not adequately protect mainframe systems files that contain embedded user accounts and passwords. Access to these files was not adequately restricted, and user account and password combinations could have been read by any authorized user—IRS, law enforcement, and contractors—of the system. In addition, IRS did not adequately control user accounts and passwords to ensure that only authorized individuals were allowed access to its servers and networks. As a result, increased risk exists that unauthorized users could gain authorized user ID and password combinations to claim a user identity and then use that identity to gain access to sensitive taxpayer or Bank Secrecy Act data. A basic underlying principle for securing computer systems and data is the concept of least privilege. This means that users are granted only those access rights and permissions they need to perform their official duties. Organizations establish access rights and permissions to restrict the access of legitimate users to only the specific programs and files that they need to do their work. User rights are allowable actions that can be assigned to users or groups. File and directory permissions are rules associated with a file or directory; they regulate which users can access them and in what manner. Assignment of rights and permissions must be carefully considered to avoid giving users unnecessary access to sensitive files and directories. IRS routinely permitted excessive access to the facility’s computer systems—mainframes, Unix, and Windows—that support sensitive taxpayer and Bank Secrecy Act data and to critical datasets and files. Access controls over the mainframe computing environment did not logically separate IRS’s data from FinCEN’s data. For example, IRS granted all 7,460 mainframe users—IRS employees, non-IRS employees, contractors—regardless of their official duties, the ability to read and modify sensitive taxpayer and Bank Secrecy Act data, including information about citizens, law enforcement personnel, and individuals subject to investigation. In addition, IRS also did not adequately restrict access rights and permissions on its Windows servers. For example, it did not adequately restrict access to Windows accounts with powerful rights over the operating system. Inappropriate access to accounts with powerful rights can compromise the integrity of the operating system and the privacy of the data that reside on the servers. Networks are series of interconnected devices and software that allow individuals to share data and computer programs. Because sensitive programs and data are stored on or transmitted along networks, effectively securing networks is essential to protecting computing resources and data from unauthorized access, manipulation, and use. Organizations secure their networks, in part, by installing and configuring network devices that permit authorized network service requests and deny unauthorized requests and by limiting the services that are available on the network. Network devices include (1) firewalls designed to prevent unauthorized access into the network, (2) routers that filter and forward data along the network, (3) switches that forward information among parts of a network, and (4) servers that host applications and data. Network services consist of protocols for transmitting data between computers. Insecurely configured network services and devices can make a system vulnerable to internal or external threats, such as denial-of-service attacks. Since networks often provide the entry point for access to electronic information assets, failure to secure those networks increases the risk of unauthorized use of sensitive data and systems. IRS did not securely control network services to prevent unauthorized access to and ensure the integrity of IRS’s computer networks and systems at the facility. For example, IRS did not adequately secure its network against known vulnerabilities or misconfigured network services on several of its infrastructure devices. As a result, an unauthorized user could gain access to these network devices and gain control of the facility’s network, placing IRS and FinCEN data at risk. Further, this unauthorized control could seriously disrupt computer operations. Determining what, when, and by whom specific actions were taken on a system is crucial to establishing individual accountability, monitoring compliance with security policies, and investigating security violations. Organizations accomplish this by implementing system or security software that provides an audit trail for determining the source of a transaction or attempted transaction and for monitoring users’ activities. How organizations configure the system or security software determines the nature and extent of audit trail information that is provided. To be effective, organizations should (1) configure the software to collect and maintain sufficient audit trails for security-related events; (2) generate reports that selectively identify unauthorized, unusual, and sensitive access activity; and (3) regularly monitor and take action on these reports. Without sufficient auditing and monitoring, organizations increase the risk that they may not detect unauthorized activities or policy violations. The risks created by the serious electronic access control weaknesses discussed above were heightened because IRS did not effectively audit and monitor system activity on its servers. For example, not all Windows servers at the facility were configured to ensure sufficient retention of security logs. As a result, there was a higher risk of unauthorized system activity going undetected. The cumulative effect of inadequate electronic access controls specific to user accounts and passwords, access rights and permissions, network services and security, and audit and monitoring places sensitive taxpayer and Bank Secrecy Act data at risk of unauthorized disclosure, use, modification, or destruction, possibly without detection. More specifically, electronic access controls over authorized users—IRS employees, contractors, and law enforcement officials—were not effectively implemented to restrict these users to the data they needed in order to perform their official duties and to protect sensitive programs and data from unauthorized access, manipulation, and use. As a result, we were able to view and print Bank Secrecy Act data from datasets containing Suspicious Activity Reports that have been filed under the Bank Secrecy Act. The information we were able to capture included, among other things, dates of the investigation, the name, Social Security number, and driver’s license number of the individual under investigation, the number and total dollar amount of financial transactions, and suspected terrorist activity, if any. Moreover, the weaknesses in electronic access controls also allowed FinCEN users, who include federal, state, and local law enforcement officials, the capability to access sensitive IRS systems and view taxpayer information. The Internal Revenue Code prohibits disclosure of taxpayer data generally, and the Taxpayer Browsing Protection Act prohibits unauthorized browsing of taxpayer returns or information by federal, state, and local employees. We have previously reported violations of IRS employees browsing taxpayer information and on IRS’s efforts to monitor employee browsing. Given the weaknesses with its audit and monitoring controls, it is unlikely that IRS would be able to detect any illegal browsing of taxpayer information with the systems currently in use. Unless these weaknesses are corrected, sensitive taxpayer and Bank Secrecy Act data will remain at risk of unauthorized disclosure, use, modification, or destruction, possibly without detection. In addition to the electronic access security controls, other information security controls should be in place to ensure the confidentiality, integrity, and availability of an organization’s systems and data. These controls include policies, procedures, and control techniques that physically secure an organization’s computer resources and systems, provide proper segregation of incompatible duties and computer functions among computer users, and ensure continuity of computer processing operations in the event of a disaster or unexpected interruption. Physical security controls are important for protecting computer facilities and resources from vandalism and sabotage, theft, accidental or deliberate alteration or destruction of information or property, attacks on personnel, and unauthorized access to computing resources. Physical security controls should prevent, limit, and detect access to facility grounds, buildings, and sensitive work areas and the agency should periodically review the access granted to computer facilities and resources to ensure that this access continues to be appropriate. Examples of physical security controls include perimeter fencing, surveillance cameras, security guards, and locks. Inadequate physical security could lead to the loss of life and property, the disruption of functions and services, and the unauthorized disclosure of documents and information. Although IRS has implemented physical security controls, certain weaknesses reduce the effectiveness of these controls in protecting and controlling physical access to assets at the facility. For example, guards did not always verify employees’ identities as they entered the facility. Failure to check IRS photo identifications increases the risk that unauthorized individuals could gain access to the facility. In addition, IRS did not always maintain effective control over the issuance of master keys. The lack of accountability over master keys increases the likelihood that an unauthorized person could gain possession of a master key and use it to access sensitive areas. Controls that segregate duties are the policies, procedures, and organizational structure that prevent one individual from controlling key aspects of computer-related operations and thereby having the capability to conduct unauthorized actions or gain unauthorized access to assets or records without being promptly detected. Inadequately segregated duties increase the risk that erroneous or fraudulent transactions could be processed, improper program changes implemented, or computer resources damaged or destroyed. We identified instances in which duties were not adequately segregated to ensure that no individual had complete authority or system access, which could result in fraudulent activity. For example, developers were routinely granted production level access on the facility’s mainframe processing environment by individuals other than those responsible for the security administration of the mainframe. A review of one month of audit logs showed that 24 users (including 5 contractors) who were only granted access to the development mainframe environment had their access privileges elevated to production—several of them on a daily basis. Although user access was being logged, MASS employees neither controlled the action that elevated the developers’ access permissions nor routinely monitored audit logs. As a result, MASS employees did not detect that users’ access had been elevated. Granting developers access to production systems creates the potential for those individuals to perform incompatible functions. Service continuity controls should be designed to ensure that when unexpected events occur, critical operations continue without interruption or are promptly resumed and that critical and sensitive data are protected. These controls include (1) environmental controls and procedures designed to protect information resources and minimize the risk of unplanned interruptions and (2) a well-tested plan to recover critical operations should interruptions occur. If service continuity controls are inadequate, even relatively minor interruptions can result in lost or incorrectly processed data, which can cause financial losses, expensive recovery efforts, and inaccurate or incomplete financial or management information. IRS has in place environmental controls designed to protect computing resources and personnel; it also has a program for periodic testing of disaster recovery plans. However, IRS’s disaster recovery and business resumption plans for resuming operations following a disruption did not include procedures for Unix and Windows systems. In the event of a disaster, the facility may not be able to coordinate appropriate measures to restore critical Unix and Windows systems. The weaknesses described in this report are symptomatic of an agencywide information security program that is not fully implemented across IRS. Implementing an information security program is essential to ensuring that controls over information and information systems work effectively on a continuing basis, as described in our May 1998 study of security management best practices. We previously recommended to the IRS Commissioner that IRS complete its implementation of an effective agencywide information security program. Since our last review, IRS has made important progress toward improving information security management. For example, as part of activities required for certification and accreditation of all IRS general support systems, it established MASS, appointed a senior information security officer to manage the program, and established a task force for conducting risk assessments and security test and evaluations. However, the recurring and newly identified weaknesses discussed in this report, as well as the similarity of these weaknesses to those we have previously identified at other IRS facilities, are indicative of an information security program that is not fully implemented across the agency. FISMA, consistent with our security management best practices guide, requires key elements of an agency’s information security program to strengthen information security and to adequately protect the information and systems that support its operations. These elements include policies and procedures that (1) are based on risk assessments, (2) cost-effectively reduce risks, (3) ensure that information security is addressed throughout the life cycle of each system, and (4) ensure compliance with applicable requirements; security awareness training to inform personnel, including contractors and other users of information systems, of information security risks and their responsibilities in complying with agency policies and procedures; and at least annual testing and evaluation of the effectiveness of information security policies, procedures, and practices relating to the management, operational, and technical controls of every major information system that is identified in the agencies’ inventories. A key element of an effective information security program is establishing and implementing appropriate policies, procedures, and technical standards to govern security over an agency’s computing environment. Such policies and procedures should integrate all security aspects of an organization’s interconnected environment, including local and wide area networks and interconnections to contractor and other federal agencies that support critical mission operations. In addition, technical security standards are needed to provide consistent implementing guidance for each computing environment. Establishing and documenting security policies is important because they are the primary mechanism by which management communicates its views and requirements; these policies also serve as the basis for adopting specific procedures and technical controls. In addition, agencies need to take the actions necessary to effectively implement or execute these procedures and controls. Otherwise, agency systems and information will not receive the protection that should be provided by the security policies and controls. Although IRS has established and documented policies and procedures for specific security areas, including password standards and disaster recovery planning, it frequently has not implemented them. We continue to report that the facility has not implemented policies and procedures contained in IRS’s Law Enforcement Manual and Internal Revenue Manual pertaining to user accounts and passwords, access rights and permissions, network services and security, audit and monitoring, and other information system controls. Of the new weaknesses identified, 33 of 39 resulted from IRS not implementing its established security policies and procedures. As a result, IRS is at increased risk that sensitive financial, taxpayer, and Bank Secrecy Act data could be exposed to unauthorized access without detection. Another key element of an information security program involves promoting awareness and providing required training so that users understand the risks and their role in implementing related policies and controls to mitigate those risks. Computer intrusions and security breakdowns often occur because computer users fail to take appropriate security measures. For this reason, it is vital that employees who use computer resources in their day-to-day operations be made aware of the importance and sensitivity of the information they handle, as well as the business and legal reasons for maintaining its confidentiality, integrity, and availability. FISMA mandates that all federal employees and contractors involved in the use of agency information systems be provided periodic training in information security awareness and accepted information security practice. Further, FISMA requires agency heads to ensure employees with significant information security responsibilities are provided sufficient training. IRS has established information security awareness programs for its employees and contractors. These programs include distributing security awareness bulletins and brochures and creating information security poster boards. As reported by Treasury’s OIG in its 2004 FISMA report, 100 percent of IRS employees received security awareness training; however, only 28 percent of IRS government and contractor employees with significant security responsibilities received specialized training. Security administration staff at the facility stated that they were largely self-taught in security software and that only one staff member in the past 2 years had received technical mainframe security training. Consequently, the staff was not knowledgeable about some of the more recent technical advances relating to the mainframe operating system and security software. Subsequent to the completion of our fieldwork, the Chief of MASS informed us that he formally assigned information system security officers for each of the IRS campuses and computing centers, and the IRS network and held specialized training for these officers. The final key element of an information security program is ongoing testing and evaluation to ensure that systems are in compliance with policies, and that policies and controls are both appropriate and effective. This type of oversight is a fundamental element because it demonstrates management’s commitment to the security program, reminds employees of their roles and responsibilities, and identifies and mitigates areas of noncompliance and ineffectiveness. Although control tests and evaluations may encourage compliance with security policies, the full benefits of such activities will not be achieved unless the results improve the security program. Analyzing the results of monitoring efforts—as well as security reviews performed by external audit organizations—provides security specialists and business managers with a means of identifying new problem areas, reassessing the appropriateness of existing controls, and identifying the need for new controls. IRS performs periodic testing and evaluation of its Unix, Windows, and Mainframe systems. Specifically, IRS uses software tools and monitoring reports to determine if its systems are in compliance with agency information security policies, procedures, and practices. However, output from these tools was not always reliable and accurate. Further, IRS did not effectively audit and monitor the facility’s information security systems. Specifically, user activity on critical Unix systems were not being logged, full auditing of system user rights was not always occurring, audit logs on Windows servers were not always retained, and monitoring reports detailing security-related events on mainframe computers were not always complete. Until IRS fully implements an effective program, it will not be able to ensure the security of its highly interconnected computer environment, facilities, and resources. Moreover, IRS will not be able to ensure the confidentiality, integrity, or availability of the sensitive financial, taxpayer, and Bank Secrecy Act data that it processes, stores, and transmits. As a result, IRS’s operations and assets remain vulnerable to unauthorized disclosure, manipulation, use, or destruction. Significant information security weaknesses exist at IRS that place sensitive financial, taxpayer, and Bank Secrecy Act data at risk of disclosure, modification, or loss, possibly without detection, and place IRS’s operations at risk of disruption. Specifically, IRS has not consistently implemented effective electronic access controls, including user accounts and passwords, access rights and permissions, and network security, or fully implemented a program to audit and monitor access activity. In addition, weaknesses in physical security, segregation of duties, and service continuity increase the level of risk. Although IRS continues to make progress in mitigating previously reported information security weaknesses and implementing general controls over key financial and tax processing systems at the facility, it has not taken all the necessary steps to mitigate known information security control weaknesses and to ensure the confidentiality, integrity, and availability of taxpayer and Bank Secrecy Act data. Consequently, taxpayer and Bank Secrecy Act data may have been disclosed to unauthorized individuals. Ensuring that known weaknesses affecting IRS’s computing resources are promptly mitigated and that general controls are effective to protect the facility’s computing environment require top management support and leadership, disciplined processes, and consistent oversight. Until IRS takes steps to mitigate these weaknesses and fully implements its agencywide information security program, limited assurance exists that taxpayers’ personal information and IRS-processed law enforcement information will be adequately safeguarded against unauthorized disclosure, modification, or destruction. To help fully implement IRS’s information security program, we recommend that Secretary of the Treasury direct the IRS Commissioner to take the following three actions: Ensure that established security policies and procedures are consistently followed and implemented. Ensure that employees with significant information security responsibilities are provided the sufficient training and understand their role in implementing security related policies and controls. Implement an ongoing process of testing and evaluating IRS’s information systems to ensure compliance with established policies and procedures. In addition, we recommend that the Secretary of the Treasury direct the IRS Commissioner to perform an assessment to determine whether taxpayer data has been disclosed to unauthorized individuals. Further, we recommend that the Secretary of the Treasury direct the FinCEN Director to perform an assessment to determine whether Bank Secrecy Act data have been disclosed to unauthorized individuals. We are also making recommendations in a separate report designated for “Limited Official Use Only.” These recommendations address actions needed to correct the specific information security weaknesses related to electronic access controls and other information system controls at the facility. In providing written comments on a draft of this report (reprinted in app. I), the Acting Deputy Secretary of the Treasury generally concurred with our recommendations in both the public and Limited Official Use Only reports and identified specific corrective actions that IRS has taken or plans to take to address the recommendations. The Acting Deputy Secretary of the Treasury concurred with our recommendation to take several actions to fully implement an effective agencywide information security program. The Acting Deputy stated that IRS continues to make progress in addressing the computer security deficiencies throughout the agency, as noted in our public and Limited Official Use Only reports. The Acting Deputy stated that in mid-2004, IRS began an agencywide initiative to complete required security activities, such as the development of security plans and security testing by fiscal year 2005. The Acting Deputy’s comments also addressed several completed corrective actions, including properly configuring access rights to the mainframe computing environment, auditing the activity of high-level user access on the mainframe environment, capturing and pursuing all security violations, designating Information Systems Security Officers at all IRS locations, and establishing the position of Director, Information Technology Security to ensure that the overall design of new applications and the operation of current systems adhere to security requirements. The Acting Deputy Secretary also concurred with our recommendation to direct the IRS Commissioner to perform an assessment to determine whether taxpayer data have been disclosed to unauthorized individuals. Regarding our recommendation to direct the FinCEN Director to perform an assessment to determine whether Bank Secrecy Act data have been disclosed to unauthorized individuals, the Acting Deputy stated that it is more appropriate to have IRS conduct this review because FinCEN does not have the legal authority to conduct such an assessment of IRS tax information. This alternative approach meets the intent of our recommendation as long as IRS reports the results of its assessment to the Director of FinCEN. We are sending copies of this report to the Chairmen and Ranking Minority Members of the House Committee on Government Reform; House and Senate Committees on Appropriations; House and Senate Committees on Budget; Secretary of the Treasury; Commissioner of Internal Revenue; and Treasury’s Director, Financial Crimes Enforcement Network. We also will make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your office have any questions about this report, please contact Gregory C. Wilshusen at (202) 512-3317 or Keith A. Rhodes at (202) 512- 6412; we can also be reached by e-mail at [email protected] or [email protected]. Other contacts and key contributors to this report are listed in appendix II. In addition to the individual named above, Gerald Barnes, Bruce Cain, Joseph Cruz, Joanne Fiorino, Denise Fitzpatrick, Ed Glagola, David Hayes, Myong Suk Kim, Harold Lewis, Mary Marshall, Duc Ngo, Ron Parker, Charles Roney, Eugene Stevens, and Henry Sutanto made key contributions to this report. | The Internal Revenue Service (IRS) relies extensively on computerized systems to support its financial and mission-related operations. In addition, IRS provides computer processing support to the Financial Crimes Enforcement Network (FinCEN)--another Treasury bureau. As part of IRS's fiscal year 2004 financial statements, GAO assessed (1) the status of IRS's actions to correct or mitigate previously reported weaknesses at one of its critical data processing facilities and (2) the effectiveness of IRS's information security controls in protecting the confidentiality, integrity, and availability of key financial and tax processing systems. IRS has made progress in correcting or mitigating previously reported information security weaknesses and in implementing controls over key financial and tax processing systems that are located at one of its critical data processing facilities. It has corrected or mitigated 32 of the 53 weaknesses that GAO reported as unresolved at the time of our prior review in 2002. However, in addition to the remaining 21 previously reported weaknesses for which IRS has not completed actions, 39 newly identified information security control weaknesses impair IRS's ability to ensure the confidentiality, integrity, and availability of its sensitive financial and taxpayer data and FinCEN's Bank Secrecy Act data. For example, IRS has not implemented effective electronic access controls over its mainframe computing environment to logically separate its taxpayer data from FinCEN's Bank Secrecy Act data--two types of data with different security requirements. In addition, IRS has not effectively implemented certain other information security controls relating to physical security, segregation of duties, and service continuity at the facility. Collectively, these weaknesses increase the risk that sensitive taxpayer and Bank Secrecy Act data will be inadequately protected from unauthorized disclosure, modification, use, or destruction. Moreover, weaknesses in service continuity and business resumption plans heighten the risk that assets will be inadequately protected and controlled to ensure the continuity of operations when unexpected interruptions occur. An underlying cause of these information security control weaknesses is that IRS has not fully implemented certain elements of its agencywide information security program. Until IRS fully implements a comprehensive agencywide information security program, its facilities and computing resources and the information that is processed, stored, and transmitted on its systems will remain vulnerable. |
The Postal Service is an independent establishment in the executive branch. The Postmaster General, Deputy Postmaster General, and nine presidentially appointed members of the Postal Board of Governors direct the operations of the Postal Service. The Postal Service is to operate in a businesslike manner and is to break even in the long term. An independent Postal Rate Commission was established to, among other things, regulate the Postal Service’s adherence to ratemaking standards and to ensure that it does not take advantage of its monopoly on the delivery of letter mail. Since the creation of the General Post Office in 1775, the core business of the U.S. Postal Service has been the collection and delivery of letters and packages to the households and businesses of the nation. Today, however, the Service sees its core business threatened by the advent of the electronic age. The Service believes that its role as provider of universal postal service at uniform rates faces competition significantly more challenging than the competition from past eras—most notably the telegraph and the telephone. In 1997, former Postmaster General Marvin Runyon, in testimony before your Subcommittee, said the electronic rival the Postal Service currently faces goes far beyond anything faced before. He stated that computers, telephones, television, and electronic funds transfers are being brought together with a rapidly evolving communications network, and this network promises one day to link nearly every home and business in the nation with the capability to rapidly trade messages, money, and multimedia content. According to the Postal Service, this new communications network—e.g., the Internet and its World Wide Web, e-mail, electronic commerce, and electronic data exchange—is fundamentally altering consumers’ choices and expectations. More importantly, because of these new choices, the Service is concerned that future First-Class Mail revenues will decline due to the electronic diversion of mail. In fact, the former Postmaster General was so concerned about this prospect that he testified before the Subcommittee that if a significant amount of First-Class Mail gravitates to alternative sources of delivery, this could jeopardize the Service’s core business, which is the financial bedrock of universal service. It is against this backdrop that the Postal Service began, in the mid-1990s, focusing resources on the aggressive development and introduction of new products—primarily nonpostal products. This move, however, has created controversy. Some Members of Congress and some private sector companies have said that the Postal Service is unfairly expanding its product line to compete in nonpostal-related markets, and they have manifested their concerns in various forms. For example: Representative Hunter introduced a bill (H.R. 3690) on June 20, 1996, to prohibit the Service from making available to the public any commercial nonpostal service that it did not have available on January 1, 1994. H.R 3690 was not enacted and was reintroduced as H.R. 198 on January 7, 1997. H.R. 198 was referred to the Committee on Government Reform and Oversight with no further legislative action. Representative Northup sought to stop the Postal Service from expanding one of its international mail services—Global Package Link—through an amendment to the Fiscal Year 1998 Treasury, Postal Service, and General Government Appropriations bill. Although the proposed amendment did not become part of the Fiscal Year 1998 Appropriations Act, the conferees agreed to study the issue. Additionally, the Conference Report accompanying the act included a request that the Postal Service report on its nonpostal activities. New products originate from several different sources within the Postal Service organization, and various review and approval processes are used for the introduction of new products—the source and type of approval process used generally being related to the type of product. New products typically fall into one of the following major groups—capital, philatelic, postal, and nonpostal products. To identify the statutory and regulatory authorities and constraints covering all groups of new products, we researched and analyzed applicable sections of the U.S. Code, Postal Service regulations, PRC regulations, and relevant court and administrative opinions and decisions. Additionally, we reviewed H.R. 22 and the Postal Service’s proposed reform legislation to determine how existing statutory and regulatory authorities and constraints governing new products may be affected by enactment of either of these legislative proposals. To document the Marketing Department’s CustomerPerfect! new product development process, we interviewed marketing and finance managers responsible for the development and oversight of the process. To track the flow of three judgmentally selected products through the process, we worked primarily with the program managers responsible for those products. In all cases, we obtained, where possible, documentation to corroborate oral statements. This documentation included, for example, copies of draft and approved Business Proposition Statements, copies of draft and approved Business Plans, documents provided to top management and the Postal Service’s Board of Governors, financial information about the three new products, and summary information about contracts and contractors. We did not independently verify the accuracy of the financial data provided or validate the Service’s claim as to how much of its annual revenues were at risk to electronic diversion. We gathered pertinent information from the Service’s Finance Department to develop profiles, including financial data, on the remaining new products the Service marketed and/or had under development during fiscal years 1995, 1996, and 1997 and that had been publicly announced as of November 1997. Included in the information we gathered were Business Proposition Statements, Business Plans, documents provided top management and the Board of Governors, and financial information about each new product. We reviewed and analyzed the information gathered and summarized the results of that work in appendix III. Clarification questions were addressed either by Finance officials or the program manager responsible for a particular product. As with the three products we reviewed in detail, we did not independently verify the accuracy of the financial data provided on the remaining products in appendix III. The inventory of products in appendix III is limited to products marketed and products under development that have been publicly announced by the Service. It does not include products under development that have not been publicly announced because of the proprietary nature of the Service’s research and development effort. To help ensure that all new products were identified, we researched the Service’s electronic database of press releases, speeches, and testimonies to identify announcements concerning products under development. We conducted our review at Postal Service Headquarters in Washington, D.C., between November 1997 and July 1998 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Postal Service, and the Service’s comments are discussed at the end of this letter. The Postal Service has broad statutory authority to develop, test, approve, and market a variety of new products, including new capital, philatelic, domestic and international postal, and nonpostal products. However, our analysis shows that the Service is subject to at least three constraints. First, since it is the underlying statutory mission of the Postal Service to provide postal services to bind the nation together, the Service needs to be able to explain how any new product it develops will further that mission. Second, under its statutory authority, before marketing (including test marketing) a new domestic postal product, which necessarily involves classification of mail, the Service must request a recommended decision from PRC regarding the propriety of the Service’s proposed classification, rates, or fees for the new product. Prior to issuing its recommended decision, PRC is required to hold hearings on the Service’s proposal. The Governors of the Postal Service may approve, allow under protest, reject, or modify PRC decisions as provided for in statute. Finally, the Service’s ability to market new products can be constrained or influenced by congressional oversight, restrictions imposed during the appropriations process, or other legislative actions. Adoption of H.R. 22 or legislative changes offered by the Postal Service would amend the Service’s current statutory authority to develop, test, approve, and market new products. H.R. 22 would place new restrictions on the introduction of new, nonpostal products and international postal products. For example, the Service would be restricted to introducing new, nonpostal products through a for-profit corporation created and owned by the Postal Service. However, H.R. 22 would provide the Service with broader latitude to test market experimental postal products. For example, market tests of new postal products could be conducted for as long as 2 years and generate $10 million in revenues per year without prior PRC approval and could be extended to a third year with PRC’s approval. The Postal Service’s proposed legislative changes would also provide the Service with broader latitude to test market experimental postal products. Under the Service’s proposed changes, it would be able to test market experimental domestic postal products without having them reviewed by PRC first. The Postal Reorganization Act of 1970 provides the Postal Service with broad statutory authority to develop, test, approve, and market new products. With respect to the Postal Service’s general duties, the act directs the Service to plan, develop, promote, and provide adequate and efficient postal services at fair and reasonable rates and fees. In addition, it specifies that it is the Service’s general duty to “receive, transmit, and deliver . . . written and printed matter, parcels, and like materials and provide such other services incidental thereto as it finds appropriate to its functions and in the public interest.” In more specific terms, the act also provides the Postal Service authority to develop a variety of new products. With regard to new capital products, the Service has authority under the act to determine the need for post offices, postal and training facilities, and equipment and to provide such offices, facilities, and equipment as it determines are needed. The act also provides the Service with the specific power to provide philatelic services. With regard to new international products, the act has been interpreted by the courts as providing the Service, with the consent of the president, the authority to establish international products. Finally, with regard to nonpostal products, the act provides the Service with the specific power to “provide, establish, change, or abolish special nonpostal or similar services.” These provisions do not contain any specific limitations or constraints on the Postal Service’s authority to develop, test, approve, and market these products except for the requirement to obtain presidential consent with regard to international products. Nevertheless, our analysis shows that the Postal Service is subject to at least three constraints that affect postal operations, including the development and marketing of new products. First, the act sets forth the mission of the Service to provide “postal services to bind the Nation together through the personal, educational, literary, and business correspondence of the people.” In addition, it directs the Service to provide postal services in a prompt, reliable, and efficient manner, at reasonable rates, and to all communities and patrons. Therefore, when the Service develops any new product, it needs to be able to explain how that new product will further its underlying statutory mission. For example, in response to recent questions from Congress regarding its marketing of new retail products with postal themes, such as neckties, T-shirts, greeting cards, and other gift items, Postal officials justified these nonpostal products as being needed to help provide the necessary revenues to operate its basic functions and obligations.However, more recently, the Postal Service acknowledged growing concerns in Congress and in the private sector about its marketing of these retail products, and it decided to end the sales of apparel merchandise at post offices. Second, under its statutory authority, before marketing a new domestic postal product, which necessarily involves classification of mail, the Service must request a recommended decision from PRC regarding the propriety of the Service’s proposed classification, rates, or fees for the new product. The requirement to request a recommended decision from PRC before marketing a new product applies, however, only to new domestic postal products. Therefore, the Service may introduce new capital, philatelic, international, and nonpostal products without first requesting a recommended decision from PRC. Although there is no statutory definition of a postal product, court and administrative decisions have held that a product is considered to be postal in nature if it involves an aspect of the posting, handling, or delivery of mail. With regard to new domestic postal products, the act also requires that PRC provide an opportunity for a hearing on the record for the Service, mail users, and a PRC officer representing the interests of the general public prior to PRC issuing its recommended decision. Under its regulations, PRC provides general rules of practice for these proceedings and special rules and expedited proceedings for recommended decisions, such as decisions on (1) experimental products, (2) market tests of new products, and (3) new products that are to be marketed for only a limited amount of time. The Postal Service’s Board of Governors may approve, allow under protest, reject, or modify PRC decisions as provided for in statute. Third, the Postal Service’s ability to market new products can be constrained or influenced by congressional oversight and other congressional action. The act provides for congressional oversight of the Postal Service. This oversight responsibility resides primarily with the Senate Committee on Governmental Affairs and its Subcommittee on International Security, Proliferation and Federal Services; and with the House Committee on Government Reform and Oversight and its Subcommittee on the Postal Service. These Committees and Subcommittees periodically hold oversight hearings on postal operations, at which time the Postal Service may be asked to justify any new product being developed or marketed. Additionally, other congressional action, including restrictions imposed during the appropriations process and other types of legislative action, can constrain or influence the Postal Service’s new product activities. On January 7, 1997, the Chairman, Subcommittee on the Postal Service, introduced H.R. 22 in the 105th Congress to reform the laws that govern the Postal Service. H.R. 22 followed up on a similar bill (H.R. 3717, 104th Congress (1996)) introduced by the Chairman in the 104th Congress. The most recent version of H.R. 22 was agreed to by the Subcommittee on the Postal Service on September 24, 1998. H.R. 22—currently entitled the Postal Modernization Act of 1998—would amend the Service’s current statutory authority to develop, test, approve, and market new products in a number of ways. First, H.R. 22 would provide, for the first time, statutory definitions for the terms postal products and nonpostal products. A postal product would be specifically defined as “any service that provides for the physical delivery of letters, printed matter, or packages weighing up to 70 pounds, including physical acceptance, collection, sorting, or transportation services ancillary thereto.” A nonpostal product would be defined as “any product or service offered by the Postal Service (or that could have been offered by the Postal Service under section 404(a)(6), as last in effect before the date of enactment of the Postal Modernization Act of 1998) that is not a postal product.” Having specifically distinguished between postal and nonpostal products, H.R. 22 would place additional constraints on the introduction of new, nonpostal products. Under H.R. 22, the Service would be restricted to introducing new, nonpostal products through a private, for-profit corporation funded through revenues derived from the Service’s competitive products and loans obtained on the credit of the corporation itself. The corporation would be owned by, but separate from, the Postal Service and would be subject to the same corporate laws as any other similar private company. Furthermore, nonpostal products that the Service first offered to the public between January 1, 1994, and the date of enactment of H.R. 22 would be transitioned into the private corporation, following a schedule and procedures established by PRC. Nonpostal products first offered to the public prior to January 1, 1994, could continue to be produced or discontinued by the Service directly (but not established or changed). PRC would not, as under current law, be involved in reviewing the establishment of new nonpostal products. Under H.R. 22, for the first time postal products would be specifically divided into separate “competitive” and “noncompetitive” categories. Competitive products would include those postal products facing full competition within the marketplace. As specified in H.R. 22, competitive activities would be, to the maximum possible extent, on the same terms and conditions as those faced by private sector competitors. After establishment of initial rates (referred to in H.R. 22 as baseline rates) based on a recommended decision by PRC, the Postal Service would have discretion to set prices for competitive products as it deems appropriate, as long as (1) each of these products was priced to cover its own costs, and (2) the competitive products collectively made a specified contribution to the overhead of the Postal Service. PRC would do annual audit reviews of competitive products to ensure that prices were set in accordance with the law. Noncompetitive products would include those products such as First-Class Mail and other classes of mail for which there are few practical or legal alternatives to the Postal Service. After establishment of baseline rates based on a recommended decision by PRC, rates for noncompetitive products would be established using a price “cap” regimen, based on the consumer price index less a “productivity offset,” which PRC will determine every 5 years. Once the cap is established, the Postal Service may adjust prices on an annual basis within specified limits. International postal products would be grouped into the competitive or noncompetitive categories, as appropriate, and would, for the first time, be treated the same as any other postal product with regard to PRC involvement and oversight. H.R. 22 would provide the Service with broader latitude to test market experimental postal products. Under H.R. 22, experimental postal products could be tested in the marketplace without having to meet the specific price cap/competitive category requirements the bill would impose. Specifically, the proposal would authorize market tests of experimental noncompetitive and competitive postal products for as long as 2 years and for $10 million in revenues per year without prior PRC approval. Market tests could be extended to a third year with PRC’s approval. Larger scale market tests, generating up to $100 million in annual revenues, would also be permitted under rules adopted by PRC. The Postal Service would be required to provide to PRC (1) notice prior to the initiation of any market tests; and (2) annually, information regarding costs, revenues, and quality of service on its market tests of new products. PRC would have the authority to review market tests through annual audit, to review market tests upon complaint, or to stop market tests that do not meet established criteria. After completion of the market tests, the Service would be required to either discontinue the test or follow the requirements for its permanent placement in either the competitive or noncompetitive postal product categories. In response to the introduction of the original version of H.R. 22, the Postal Service presented to the Subcommittee on the Postal Service its own legislative proposal for postal reform on May 7, 1997. The proposal, referred to as the Postal Pricing Reform Act of 1997, would allow the Postal Service to test market experimental domestic postal products without having them reviewed by PRC first. The Postal Service believes that the existing system is unduly inhibiting, potentially too lengthy, and inadequate to accommodate the needs of a modern Postal Service. The proposal provides for the Postal Service to test market experimental, domestic postal products without first requesting a recommended decision from PRC on product classification and rates or fees. After an experimental product has been in existence for 3 years or has actually generated $100 million of annual revenue, the Postal Service could either discontinue the experiment or request a recommended decision from PRC. The Service could continue to offer experimental products while PRC was conducting hearings. Under the Service’s proposal, the Service could continue to develop, test, approve, and market new capital, philatelic, international, and nonpostal products without having them reviewed by PRC. Finally, the proposal does not appear to affect current distinctions between postal and nonpostal products set forth in administrative and court decisions. The Service’s Marketing Department is one of the primary players in the introduction of new products. Since June 1996, the Marketing Department has relied on a formalized review and approval process to govern the introduction of its new products. The process, referred to as the CustomerPerfect! new product development process, is based on the Malcolm Baldrige Award criteria and incorporates many aspects of the Service’s review and approval process for capital projects. As part of our overall review of the Marketing Department’s new product development process, we traced the movement of three products through that process, and we found that they generally followed the tenets of the CustomerPerfect! new product development process. During the early 1990s, Postal management recognized that the Postal Service was facing a future of growing competition across many of its product lines. In particular, managers believed that the emerging electronic communications industry had the potential to seriously erode the Service’s First-Class Mail base—the financial bedrock of universal service. Faced with this perspective, management developed the corporate goal of initiating and growing new businesses, particularly in the electronic communications arena, in order to ensure its commercial viability as a service provider for the worldwide movement of messages, merchandise, and money. To carry out its goal of initiating and growing new businesses, the Service turned primarily to its Marketing Department, which began developing concepts for new products. To oversee this work, Marketing established a New Business Initiatives and Products Group. Additionally, to facilitate the process of developing and introducing new products and to ensure effective management control, the Service developed a formalized system of checks and balances that requires top management buy-in at critical stages of the development process. This system of checks and balances, adopted in June 1996, is known as the CustomerPerfect! new product development process. This process is also used to review the performance of products and terminate those that do not perform to Postal Service expectations. As an additional check to ensure that the new product development process is followed, top management established a Business Evaluation Group in the Finance Department. In addition to helping the Marketing Department oversee the process, the Business Evaluation Group is to validate the financial feasibility of new products and provide the Board of Governors with an independent financial assessment of each new product. The Business Evaluation Group reports directly to the Chief Financial Officer/Senior Vice President. Under the new product development process, new products initiated by the Marketing Department’s New Business Initiatives and Products Group go through four distinct stages: the (1) concept stage, (2) business plan stage, (3) test stage, and (4) implementation stage. During each stage, there are specific review and decision points for top management. Additionally, the Board of Governors must approve the Business Plan, product testing and results, and product implementation (rollout). The purpose of the concept stage is to generate ideas for new products that are consistent with the Service’s strategic plan and CustomerPerfect!. The Marketing Department prepares a Business Proposition Statement during this stage that outlines such things as the business objective for the new product, the market situation, and a revenue forecast. If the Chief Marketing Officer approves the Business Proposition Statement, then the new product proposal advances to stage 2—the business plan stage. In the business plan stage, a preliminary Business Plan is prepared that includes detailed sections on customer requirements, the target market and strategy for entering that market, the organization and management structure for the business, financial projections, and critical success factors and measures of success. In developing the preliminary Business Plan, a cross-functional team is assembled to achieve consensus on the product assumptions needed to build the preliminary Business Plan. Team members, selected on the basis of skills needed, are drawn from various postal headquarters departments, such as Marketing, Finance, Legal, and Purchasing; and Field Operations. Any issues the cross-functional team cannot resolve by consensus are settled by the Chief Marketing Officer. After the preliminary Business Plan is developed, the Chief Marketing Officer solicits feedback from individual members of the Management Committee, which comprises the Postmaster General, Deputy Postmaster General, Chief Operating Officer, Chief Financial Officer, and Chief Marketing Officer. Following review and approval by the Management Committee, the Marketing Department conducts a proof of concept operations test with a vendor to validate the new product concept. If the operations test indicates that the new product concept is valid and ready for market testing, then the Chief Marketing Officer presents the preliminary Business Plan to the Strategic Planning Committee of the Board of Governors for review. With the Strategic Planning Committee’s approval, the Chief Marketing Officer presents the preliminary Business Plan to the Board of Governors. If the Board approves the preliminary Business Plan, then the proposed new product moves to stage 3—the test stage. The purpose of the test stage is to test and evaluate the new product in the marketplace. Postal field operations participate with cross-functional team representatives to establish the scope of a limited market test and the measures of success. Following the limited market test, the Chief Marketing Officer reviews the test results and determines the need for an expanded test. If the Chief Marketing Officer determines that an expanded test is warranted, then a proposal for a major market test is prepared. That proposal is then to be reviewed and approved by the Management Committee, Strategic Planning Committee of the Board of Governors, and the Board of Governors. Following Board approval, the new product is tested in a major market. After the major market test, the process requires a thorough review of the results by the cross-functional team and Chief Marketing Officer. If this review determines that the established measures of success have been met, the new product proceeds to stage 4—the implementation stage. The first step in the implementation stage is for the Marketing Department to update and finalize the Business Plan on the basis of the results of the major market test and feedback from the individual members of the Management Committee. After a final review and approval of the market test results and Business Plan by the Management Committee, Strategic Planning Committee of the Board, and the Board of Governors, the new product is rolled out to the target market, which, in most cases, is the nation. After a new product is rolled out, it is to be tracked continuously against the Business Plan and subjected to annual performance reviews by the Marketing Department. On the basis of the results of the annual performance reviews, the Marketing Department is to make improvements to the new product as indicated. Appendix I lists the major events during each of the four stages of the new product development process. As part of our overall review of the Marketing Department’s new product development process, we traced the movement of three products—FIRSTCLASS PHONECARDTM, REMITCO, and Electronic PostmarkTM System—through that process, primarily to determine how closely they followed prescribed steps. The Postal Service had partially developed all three products before the CustomerPerfect! new product development process was implemented in June 1996. Prior to that date, the products followed developmental steps similar to and later incorporated into the new product development process. FIRSTCLASS PHONECARDTM is the name of the Postal Service’s prepaid phone card, which can be purchased at postal retail outlets and from postal vending machines. REMITCO is the Postal Service’s remittance processing business. REMITCO extends the Postal Service’s business of delivering payments, such as credit card and utility payments, to the actual processing of checks being mailed from customers to businesses. Electronic PostmarkTM is the Postal Service’s electronic version of its traditional postmark. The Electronic PostmarkTM System applies the digital signature of the Postal Service to an electronic transaction, states the time and date it is applied, and displays notification to the recipient if the transaction has been tampered with. Although all three products were moved into the new product development process in June 1996, the products entered different stages of the new process and progressed at different rates. FIRSTCLASS PHONECARDTM entered the new process at the test stage and has since progressed to the implementation stage. At the end of fiscal year 1997, FIRSTCLASS PHONECARDTM was the only product to have achieved national rollout under this process. REMITCO and Electronic PostmarkTM System entered the new process at the business plan stage, although REMITCO is the only one of the two that has progressed to the test stage. In general, we found that each of the three products followed the tenets of the new process. However, proof of concept operations tests were not done for FIRSTCLASS PHONECARDTM and REMITCO, although the process called for these tests. According to Postal officials, such tests were unnecessary because the product concepts had already been validated by various private sector companies. Appendix II contains a more detailed discussion of each product, including information on the origin and development of the product; the short- and long-term goals for the product; and our assessment of how closely the product followed the new product development process, as well as the Postal Service’s rationale for any deviations from the new process. Appendix III contains an inventory and summary information about each publicly announced new product the Postal Service marketed and/or had under development during fiscal years 1995, 1996, and 1997—excluding capital and philatelic products. Table 1 summarizes the financial performance of each new product and the 19 products in total, from product inception through fiscal year 1997, and for the first 3 quarters of fiscal year 1998. The information displayed in appendix III provides (1) a description of each product, (2) a history of each product, (3) financial data from inception of product through fiscal year 1997, and (4) fiscal year 1998 financial data—through quarter 3—for each product. Highlighted below are some of our observations concerning the inventory listing. Of the 19 new products listed, 11 were at least partially developed under the Marketing Department’s CustomerPerfect! new product development process and 8 were not. Three products—FIRSTCLASS PHONECARDTM, Dinero Seguro, and Unisite Antennas—involved strategic alliances with other entities. Of the 19 new products listed, 5 had been discontinued as of July 1998, and the Service was considering discontinuing 1 more—Customer Initiated Payment System (CIPS). Additionally, the Service was awaiting a decision from its Board of Governors on whether or not to proceed with its Provisional Packaging Service (formerly known as pack-and-send). Of the 19 new products listed, 10 were started before fiscal year 1996, 6 were started in fiscal year 1996, and 3 were started in fiscal year 1997. From date of product inception through fiscal year 1997, only one product reported making a profit—retail merchandise. Total revenues and expenses reported for the 19 products, through fiscal year 1997, were $148.8 million and $233.5 million, respectively, resulting in a net loss of $84.7 million. In this regard, it may not be reasonable to expect all new products to become profitable in their early years, because new products generally take several years to become established and recover their start-up costs. During the first 3 quarters of fiscal year 1998, 13 of the 19 products listed had financial activity. Four of the 13 reported net profits, and 9 reported net losses for the period. Total revenues and expenses for the 13 products during the first 3 quarters of fiscal year 1998 were $117.8 million and $121.5 million, respectively, resulting in a reported net loss of $3.7 million. We requested comments from the Postmaster General on a draft of this report. On October 27, 1998, the Postal Service’s Chief Marketing Officer/Senior Vice President provided comments on the draft report. He said that the Service was in agreement with the information presented. He provided some technical updates, which we incorporated into the report where appropriate. We are sending copies of this report to the Ranking Minority Member of your Subcommittee; the Chairman and Ranking Minority Member of the Subcommittee on International Security, Proliferation and Federal Services, Senate Committee on Governmental Affairs; the Postmaster General; and other interested parties. Copies will also be made available to others upon request. Major contributors to this report are listed in appendix IV. If you have any questions about the report, please call me on (202) 512-8387. Generate an idea for new product that is consistent with the Service’s strategic plan and CustomerPerfect!. Prepare a Business Proposition Statement for the new product idea. Present the Business Proposition Statement to the Chief Marketing Officer for Review and Approval. Move the new product idea to the business plan stage following the Chief Marketing Officer’s approval. Prepare a preliminary Business Plan for the new product and solicit feedback from the individual members of the Management Committee. Present the preliminary Business Plan to the Management Committee for review and approval to proceed with an operations test. Conduct a proof of concept operations test to validate the new product concept and its readiness for market testing. Provide operations test results to the Chief Marketing Officer for review and approval. Present the preliminary Business Plan, including operations test results, to the Board of Governors’ Strategic Planning Committee and then to the Board of Governors for their sequential review and approval. Move the new product to the test stage following approval by the Board’s Strategic Planning Committee and the Board of Governors. Perform a limited-scope market test of the new product. Evaluate limited-scope market test results and present results to the Chief Marketing Officer for review and decision on whether to proceed with a major market test. Present a proposal for a major market test to the Management Committee, the Board’s Strategic Planning Committee, and the Board of Governors for their sequential review and approval to proceed with the major market test. Conduct the major market test and evaluate the results against measures of success. Submit results for the Chief Marketing Officer’s review. Move to the implementation stage following determination by the Chief Marketing Officer that measures of success for the major market test were met. Implementation Stage Finalize the Business Plan on the basis of major market test results and feedback from individual members of the Management Committee. Present the finalized Business Plan and results of the major market test to the Management Committee, the Board’s Strategic Planning Committee, and the Board of Governors for their sequential review and approval. Roll out new product to target market following review and approval of the major market test results and Business Plan by the Management Committee, the Board’s Strategic Planning Committee, and the Board of Governors. Track the new product continuously against the Business Plan, perform annual reviews, and improve the product as indicated. As part of our overall review of the Marketing Department’s new product development process, we traced the movement of three products—FIRSTCLASS PHONECARDTM, REMITCO, and Electronic PostmarkTM System—through that process, primarily to determine how closely those products followed prescribed steps. Our discussion of each product includes information on the origin and development of the product; the short- and long-term goals for the product; and our assessment of how closely the product followed the new product development process, as well as the Postal Service’s rationale for any deviations from the process. In general, we found that each of these three products followed the tenets of the CustomerPerfect! new product development process. FIRSTCLASS PHONECARDTM is the exclusive brand name of a phone card offered through a strategic alliance between the U.S. Postal Service and SmarTalk Teleservices, Inc. Phone cards are a way of paying for telephone service in advance by establishing a prepaid account with a card issuer. Phone cards provide customers with a convenient way of making calls when away from the home or office. The Postal Service entered the phone card business about 3 years ago as a way of increasing revenues and providing customers with a convenient, reliable, and trusted means for purchasing and using phone cards. The Service’s short-term goal for the FIRSTCLASS PHONECARDTM is to provide a reliable service and make the business profitable. Its long-term goal is to become a leading retailer in the phone card industry. The FIRSTCLASS PHONECARDTM initiative has generally followed the CustomerPerfect! new product development process. An electronic postmark is an unmodifiable time and date stamp attached to an electronic communication—such as e-mail. In the case of a Postal Service-applied electronic postmark, the associated communication is digitally signed. The digital signature enables the Service to determine if there has been any unauthorized access or modification to the electronic message after it was postmarked. The Electronic PostmarkTM System was developed under the Postal Service’s electronic commerce services research initiative. The electronic commerce services research initiative was discontinued at the end of fiscal year 1997 following the development of the Electronic PostmarkTM System and the Certificate Authority System. The Postal Service continues work on both the Electronic PostmarkTM System and the Certificate Authority System. The Service’s short-term goal for its Electronic PostmarkTM System is to refine the product through operations testing and begin marketing. The Service’s long-term goal is to elevate the public’s acceptance of the Electronic PostmarkTM System to the same level as the postmark for traditional mail. Prior to June 1996, activities associated with developing the Service’s Electronic PostmarkTM System were approved under the capital projects review and approval process. Since June 1996, Electronic PostmarkTM System activities have been under the Service’s CustomerPerfect! new product development process. The Postal Service’s Electronic PostmarkTM System prototype originated from a research initiative known as electronic commerce services. That research effort began in fiscal year 1993 and was discontinued at the end of fiscal year 1997. According to Postal officials, the electronic commerce services research initiative was discontinued after it met its objectives, i.e, the successful development of two new electronic capabilities—the Electronic PostmarkTM System and the Certificate Authority System. The electronic commerce services research initiative was the Service’s first endeavor in the electronic commerce arena. The Postal Service views its entry into the electronic commerce market as an extension of its core business—the delivery of traditional mail. According to Service officials, electronic mail has the same attributes as traditional mail, but because of security concerns, electronic mail has not gained wide acceptance in the legal and business community—especially for legal and financial transactions. The Service believes that its Electronic PostmarkTM System will help bring the level of acceptability of electronic mail up to that of First-Class Mail. The Service recognizes that some private companies are already marketing electronic postmarking services. However, the Service believes it is in the best position to serve the public’s need for an independent, third-party agent offering secure electronic mail. According to the Postal Service, the public has trusted the Service with the security of its traditional mail for over 200 years. Postal officials believe that with Postal-backed electronic services, the public will have the same high level of trust and confidence in the security of the Service’s electronic mail that it does with the Service’s traditional mail. The Service’s short-term goal for its Electronic PostmarkTM System is to complete operational testing, make refinements to the product as called for by the operations tests, and build a solid case for a substantial investment to build and deploy an Electronic PostmarkTM production system. The Service expects to begin wide-scale marketing of its Electronic PostmarkTM System within the next 2 years. Additionally, the Service plans to explore the feasibility of licensing private companies to use its Electronic PostmarkTM System. The Service’s long-term goal is to elevate the level of acceptance of its Electronic PostmarkTM System to the same level as its traditional postmark. No specific time frames have been established for this goal. According to Postal officials, the speed at which this occurs will be dictated not only by advancements in electronic technology but also by the courts, which must decide issues relating to the legal acceptability of digitally signed electronic documents in lieu of traditional “hard-copy” documents. As noted above, the Service’s Electronic PostmarkTM System was initiated under the umbrella of its electronic commerce services research initiative. The concept of electronic commerce services was conceived in 1993, about 3 years before the CustomerPerfect! new product development process was implemented. During that period, the electronic commerce services research initiative was under the capital projects review and approval process—a process used to monitor the development of capital projects, such as the upgrading of postal equipment and the construction and renovation of postal facilities. According to Postal officials, there are many similarities between the new product development process and the capital projects review and approval process. Consequently, the electronic commerce services research initiative, between 1993 and 1996, went through stages similar to the concept stage and business plan stage of the new product development process. For example, a capital projects decision analysis report was prepared for the electronic commerce services research initiative, which is very similar to the preliminary Business Plan required during the business plan stage of the new product development process. Also, the Board of Governors approved the electronic commerce services research initiative, just as the Board must approve new products under the new product development process. According to Postal officials, when the initiative was discontinued at the end of fiscal year 1997, the Service had spent $20.3 million on electronic commerce services. Of that amount, $3.2 million was spent on the Electronic PostmarkTM System. With the implementation of the new product development process in June 1996, the electronic commerce services research initiative was moved from the capital projects review and approval process to the business plan stage of the new product development process. It remained at that stage until it was discontinued in September 1997. According to Postal officials, the Electronic PostmarkTM System is to be moved under the auspices of another Postal Service initiative, PostOffice Online, after some limited market testing later in 1998 under Postal Electronic Courier Service (PostECS), a joint project involving the U.S. Postal Service, Canada Post, and LaPoste (France). PostECS is an electronic service designed to replace traditional international faxes and overnight courier services. The U.S. Postal Service joined the PostECS project with Canada Post and LaPoste in early 1998. After successfully testing its Electronic PostmarkTM System capability under PostECS, the Service plans additional testing under its PostOffice Online initiative. PostOffice Online, currently in the test stage of the new product development process, is a service designed to help small businesses move money and messages and sell merchandise conveniently and securely over the Internet. PostOffice Online began market testing in March 1998. A classification case was filed on July 15, 1998, with PRC for Mailing Online Services—a component of PostOffice Online. A more detailed description of PostOffice Online can be found in appendix III. Prepaid telecommunications card. The FIRSTCLASS PHONECARDTM is the brand name of a prepaid phone card available to the public through a strategic alliance between the Postal Service and SmarTalk Teleservices, Inc. The FIRSTCLASS PHONECARDTM can be purchased at postal retail units and from postal vending machines throughout the U.S. At the end of 1997, the FIRSTCLASS PHONECARDTM was available in $10, $20, and $50 denominations, and the per-minute rate for domestic calls was 39 cents. In April 1998, the Service lowered its per-minute rate and added a $100 phone card. The new per-minute rate ranged from 25 cents for the $100 card to 33 cents for the $10 and $20 cards. International rates varied by country. In July 1995, American Express Telecom, Inc., approached the Postal Service about forming a strategic alliance to market phone cards. In August 1995, the Postal Service and American Express entered into an agreement to test market phone cards. Following the market test, the FIRSTCLASS PHONECARDTM was made available nationwide. At the end of 1997, the FIRSTCLASS PHONECARDTM was being sold in about 11,700 postal retail units and in about 2,000 postal vending machines. At the end of 1997, SmarTalk Teleservices, Inc., acquired American Express Telecom, Inc., including the FIRSTCLASS PHONECARDTM business, for $34 million and formed a new strategic alliance with the Postal Service for continuing the business. The $34 million from the sale of the business was split equally between the Postal Service and American Express. The FIRSTCLASS PHONECARDTM business is sponsored by the New Businesses Marketing Group and has been monitored under the CustomerPerfect! new product development process since adoption of that process in June 1996. At the end of 1997, this was the only product to have achieved national rollout under the new product development process. Expenses (millions) Profit (loss) (millions) Revenue goal for FY 1998(millions) Revenue (millions) Expenses (millions) Profit (loss) (millions) ($3.0) (continued) Remittance processing. REMITCO is a Postal Service business managed by the REMITCO Management Corp. REMITCO extends the Service’s role beyond mail delivery to the processing of remittance documents. Remittance processing involves opening return envelopes and extracting bill payments, processing the checks and depositing them into business recipients’ bank accounts, and electronically transmitting remittance records to the business recipients. In 1995, American Express decided to outsource its in-house remittance processing operation located on Staten Island in New York City. The Postal Service was the successful bidder on this project and in December 1996 signed a contract with American Express. In turn, the Postal Service contracted with REMITCO Management Corp. to manage and operate the Staten Island facility. As potential REMITCO customers, the Service is targeting businesses that receive 10 million remittances or more annually and do their own remittance processing. Examples include credit card companies, utilities, communications companies, mortgage companies, insurance companies, and large retailers. The Postal Service assumed the lease on the Staten Island facility from American Express on July 15, 1997, and has spent approximately $2 million on improvements. The facility is owned by the New York Port Authority. REMITCO began processing American Express remittances on May 15, 1997. Since then it has started processing remittances for Public Service Electric and Gas of Metro Park, NJ; and Mellon Bank Credit Card of Wilmington, DE. Ultimately, the Service hopes to have a nationwide network of about 10 other similar processing facilities. REMITCO is sponsored by the Service’s New Businesses Marketing Group and has been monitored under the CustomerPerfect! new product development process since adoption of that process in June 1996. Expenses (millions) Profit (loss) (millions) Revenue goal for FY 1998(millions) Revenue (millions) Expenses (millions) Profit (loss) (millions) ($6.1) ($6.3) (continued) The initial research under the electronic commerce services initiative began in FY 1993. With the development of two new electronic systems—the Electronic PostmarkTM System and the Certificate Authority System—this research initiative was completed. Plans are to integrate these two new systems into Postal Service products and possibly commercial vendor products for testing during 1998. Value added services for electronic transmissions. The electronic commerce services initiative was a research effort initiated by the Postal Service to develop value added services for electronic transmissions. Through this research, electronic commerce services developed two new electronic commerce systems—the Electronic PostmarkTM System and a Certificate Authority System. The Electronic PostmarkTM System applies an electronic time and date stamp and the digital signature of the Postal Service to an entire electronic transaction, and displays notification to the recipient if the transaction has been tampered with. The Certificate Authority System authenticates or certifies the identity of customers sending and receiving electronic messages. The Postal Service was to begin testing its Electronic PostmarkTM System in October 1998. The first tests are to be done under PostECS (Postal Electronic Courier Service), a joint project involving the U.S. Postal Service, Canada Post, and LaPoste (France). PostECS is an electronic service designed to replace international faxes and overnight courier services. The U.S Postal Service joined PostECS in early 1998. The principal sponsor of the electronic commerce services initiative was the Service’s Technology Applications Group. The initiative began about 3 years before adoption of the CustomerPerfect! new product development process. Funding for the initiative was approved under the capital projects review and approval process. Future activities associated with the Electronic PostmarkTM System and Certificate Authority System are to be governed by the new product development process. Expedited international delivery service for documents, correspondence, and merchandise. Conceptually, Global Priority Mail is the Service’s domestic priority mail service elevated to an international level. Priority Mail is First-Class Mail that receives special handling for a premium price. Global Priority Mail is available for mail sent from the U.S. to any 1 of 33 destinations. Global Priority Mail evolved from an earlier pilot program launched in March 1995 known as WorldPost Priority Letter Service. WorldPost Priority Letter Service officially became Global Priority Mail in March 1996. Global Priority Mail is an expedited international service for documents, correspondence, and merchandise being sent to designated countries. The service features a 4-business-day delivery standard to designated countries for a premium price. Global Priority Mail is sponsored by the Service’s International Business Unit and is not under the purview of the CustomerPerfect! new product development process. Expenses (millions) Profit (loss) (millions) Revenue goal for FY 1998(millions) Revenue (millions) Expenses (millions) Profit (loss) (millions) ($20.3) ($5.4) ($0.6) (continued) Global Package LinkExpedited international package delivery service for high-volume U.S. mailers. Global Package Link is an expedited international parcel delivery service offered by the Postal Service to U.S. mailers who send at least 10,000 parcels per year to 1 or more destinations covered by the program. To participate in the program, U.S. mailers must agree to link their information systems with those of the Postal Service so the customer and the Service can generate reciprocal data concerning the parcels, meet certain shipping preparation requirements, and designate the Postal Service as the carrier of choice for each country to which the Global Package Link parcels are being sent. Global Package Link evolved from an earlier pilot program launched in November 1994 known as International Package Consignment Service. International Package Consignment Service officially became Global Package Link in November 1995. The initial work on the program began in FY 1995. According to Service officials, Global Package Link was designed as a parcel delivery service that would make it easier and more economical for direct marketers to export bulk shipments of merchandise internationally. In 1998, Global Package Link service was available to 11 destinations. Global Package Link parcels are generally scheduled for delivery in 3 to 10 business days, depending on the destination. Global Package Link is sponsored by the Service’s International Business Unit and is not under the purview of the CustomerPerfect! new product development process. Marketing merchandise displaying stamp images or Postal Service symbols. Retail merchandise marketed by the Service contains either a stamp image, heritage logo, or the logo of a core service—e.g., Priority Mail. Examples of retail merchandise marketed by the Service include T-shirts, beverage mugs, neckties, greeting cards, and stationery. As of July 1998, such merchandise was being sold in all 500 postal storesand in about 25,000 of the Service’s 33,000 traditional retail units. Merchandise may also be ordered from a Postal Service catalog or through the Service’s Web site. However, in June 1998, the Service announced plans to curtail its retail merchandising activity. The Service will no longer sell apparel merchandise in post offices, although such merchandise will still be available at the Postmark America Store in the Mall of America and through catalog and web site programs and special events. Stationery, greeting cards, packaging products, and a limited line of collectables will continue to be sold at retail units. The Service’s centralized retail merchandise program started in early FY 1997 with the emphasis primarily on postal stores. According to Postal officials, the program quickly expanded to the traditional postal retail units because of the positive feedback from customers. Prior to FY 1997, merchandise was marketed on a decentralized basis. According to Postal officials, merchandise marketed in this manner was generally associated with a special event, such as the unveiling of a new stamp. Under the decentralized program, each postmaster could decide what merchandise, if any, to market. Retail merchandising is sponsored by the Service’s Retail Group and is not under the purview of the CustomerPerfect! new product development process. However, retail merchandise does follow a modified retail product development process. Expenses (millions) Profit (loss) (millions) Revenue goal for FY 1998(millions) Revenue (millions) Expenses (millions) Profit (loss) (millions) ($1.1) ($0.2) (continued) Internet-based postal services. PostOffice Online is a service designed to help small businesses move money, messages, and merchandise conveniently and securely over the Internet. Conceptually, PostOffice Online customers will be able to (1) pay for their mailings and print postage using their personal computers; (2) buy mailing products and supplies on-line; and (3) contact the Postal Service and request parcel pickup service, or check to see if a particular package has been delivered. Customers will also be able to design their own newsletters or advertisements and send them to the Postal Service electronically. At that point, the Service will assume responsibility for printing the documents and delivering them to the addresses the customer chooses. Also, as part of PostOffice Online, the Service will test its Electronic PostmarkTM System. However, the Service does not plan to conduct these tests until after the Electronic PostmarkTM System has been successfully tested under PostECS—Postal Electronic Courier Service. PostECS is a joint project involving the U.S. Postal Service, Canada Post, and LaPoste (France). PostECS is designed to replace international faxes and overnight courier services. (The Electronic PostmarkTM System is discussed in detail on pages 35-38 and in summary form in this appendix under “Electronic Commerce Services.”) The PostOffice Online project began in July 1997. It is an umbrella electronic initiative that combines some of the Service’s new ideas with some of its prior research work in the electronic arena. For example, the ability to send newsletters and advertisements electronically to the Service for preparation and delivery began as a research and development project known as NetPost, and the Electronic PostmarkTM System began as part of a research initiative known as electronic commerce services. (See discussion on pages 35-38.) Market testing of PostOffice Online began in March 1998 with 50 customers in Tampa, FL. In May 1998, the test was expanded to include about 50 customers in Hartford, CT. An updated version of PostOffice Online has been developed based on experience from these tests. The Electronic PostmarkTM System portion of the test is not scheduled to begin until later in 1998—following its initial test under PostECS. On July 15, 1998 the Service filed a classification case with PRC for a component of PostOffice Online—Mailing Online Services. PostOffice Online is sponsored by the New Businesses Marketing Group and has always been monitored under the CustomerPerfect! new product development process. Internet-based information on government services and products. WINGS was designed to provide one-stop shopping for federal, state, and local government information and services. Conceptually, using a portable computer connected to the Internet or a public kiosk located in high-traffic areas, such as post office lobbies, libraries, shopping malls, and grocery stores, the public could (1) locate needed government information and services, and (2) transact government business. Examples of the types of information and services that were to be available under WINGS included (1) motor vehicle registration, (2) tax forms and answers, and (3) change of address notices. Anticipated revenues were to come from fees paid by the agencies participating in WINGS. The Postal Service began a 6 month operations test of WINGS in May 1996 in North Carolina. No fees were charged participating agencies during the operations test. WINGS was discontinued at the end of its operations test because of (1) lower-than-anticipated public demand for the service, (2) agencies’ reluctance to participate in a consolidated interagency information program, and (3) a new direction for electronic commerce services. WINGS was sponsored by the New Businesses Marketing Group and was monitored under the CustomerPerfect! new product development process following adoption of that process in June 1996. Expenses (millions) Profit (loss) (millions) Revenue goal for FY 1998(millions) Revenue (millions) Expenses (millions) Profit (loss) (millions) ($0.8) ($4.5) ($4.0) ($1.1) (continued) Interactive catalog shopping through kiosks. Conceptually, through kiosks connected to the Internet, customers could have electronically ordered stamps, postal-related retail merchandise, and U.S. Mint collectible coins and have the merchandise delivered by the Postal Service to the address(es) of their choice. Plans were to expand available merchandise, after an initial test period, to include sportswear, business supplies, and housewares. The project, however, was discontinued before any tests were conducted. The idea for the Deliver America kiosks originated in FY 1995. The project was put “on-hold” for several months due to the reassignment of resources. No market tests were conducted. The Deliver America initiative was subsequently discontinued in June 1997. Deliver America was sponsored by the New Businesses Marketing Group and was monitored under the CustomerPerfect! new product development process following adoption of that process in June 1996. Electronic Postage Using Personal Computers. To print electronic postage using a personal computer, a customer purchases postage on-line through an established account with the Postal Service. The value of the postage is then downloaded and secured in an electronic vault that is connected to the personal computer. With the required software, indicias can then be printed directly on a mailstrip or the mailpiece, and the amount of the postage is automatically deducted from the electronic vault. Each indicia produced in this manner contains a digital signature that makes counterfeiting, without detection, difficult. On August 25, 1998, the Service announced that it had approved, for market testing, a system for printing electronic postage that would not require a vault attached to the customer’s computer. The initial research for the project began in FY 1996, following our report on weaknesses in the Service’s postage meter program. In May 1994, we reported that the Service incurred revenue losses stemming from criminal tampering with postage meters, counterfeiting of indicia, and criminal use of lost and stolen meters to produce meter indicia for which postage was not paid. In response to that report and its own investigation, the Service initiated the Information Based Indicia Program to enhance its postage metering revenue security. After successfully meeting laboratory conditions for secure postage, the Postal Service began market testing products to print Information Based Indicia in March 1998. On March 31, 1998, at the National Postal Museum in Washington, D.C., the first letter bearing approved personal computer-generated postage was produced. In April 1998, this service was available, only on a test basis, in the Washington, D.C., metropolitan area. The Postal Service expects to expand this service to other geographic locations during the latter part of 1998. The Information Based Indicia Program is sponsored by the Service’s Retail Group, which manages all postage metering. Although this product is not sponsored by the New Businesses Marketing Group, it has followed the CustomerPerfect! new product development process since adoption of that process in June 1996. Payment alternative for recurring bills. CIPS is another way for consumers to pay recurring bills. Conceptually, under CIPS, consumers who choose to participate in the program will receive a prebarcoded post card with a unique identification number—instead of a courtesy reply envelope—along with their monthly statements from participating companies. Consumers drop their prebarcoded cards in the mail, and the Postal Service initiates the payment. Financial institutions are then electronically instructed via the automated clearinghouse network to debit the customer’s account and credit the invoicer’s account—thus paying the bill. The research work on CIPS began in FY 1996. At the end of 1997, no customer tests had been conducted on CIPS. The Postal Service had been unsuccessful in its efforts to convince large private sector companies to participate in the program. The Postal Service is considering terminating this program because of difficulty in getting a major company to participate in the program. CIPS is sponsored by the New Businesses Marketing Group and has been monitored under the CustomerPerfect! new product development process since adoption of that process in June 1996. Expenses (millions) Profit (loss) (millions) Revenue goal for FY 1998(millions) Revenue (millions) Expenses (millions) Profit (loss) (millions) ($3.2) ($3.1) ($1.8) ($1.3) (continued) Wireless communication towers on postal property. Through a strategic alliance between the Postal Service and Unisite Incorporated, 150 communication towers are to be built on postal property and then leased to wireless carriers. Under the strategic alliance agreement, the Postal Service contributes the land and Unisite Incorporated contributes its construction and marketing services. Revenues and expenses are to be essentially shared equally between the two parties. The first antenna constructed under the Unisite Antenna Program became operational in June 1996. Constructing antennas on postal sites led to unexpected public criticism of the program. Because of this, the Postal Service put its plans on hold to expand the program beyond the original 150 sites. At the end of 1997, 15 antenna sites were operational. The Unisite Antenna Program is sponsored by the Service’s Facilities Group and is not under the purview of the CustomerPerfect! new product development process. The approval for the program was granted under the rules governing the Service’s contracting authority. Stored-value card. LibertyCash is a Postal Service stored-value card that can be used to pay for all postal products and services. The card can be filled in amounts of $5 to $300 at the retail unit or over the telephone. The card is replaceable if lost or damaged. The customer selects his/her own personal identification number. Market test locations include about 2,800 post offices in Indiana, Colorado, Wyoming, Florida, Nevada, Northern California, and Minneapolis/St. Paul, MN. Exploratory work on the LibertyCash card began in FY 1995. Following an operations test in late 1996, the Service began market testing the card in 1,222 postal retail units in May 1997. In August 1998, the Service expanded its market test to include an additional 1,600 retail units, bringing the total to about 2,800 post offices. LibertyCash is sponsored by the New Businesses Marketing Group and has been monitored under the CustomerPerfect! new product development process since adoption of that process in June 1996. Expenses (millions) Profit (loss) (millions) Revenue goal for FY 1998(millions) Revenue (millions) Expenses (millions) Profit (loss) (millions) ($1.6) ($6.4) ($1.9) (continued) Electronic money transfers from the U.S. to Mexico. Dinero Seguro, which means “safe money,” is an electronic version of a Money Order that can be used to transfer money from designated U.S. locations to Mexico. At the end of 1997, Dinero Seguro was available at about 870 postal retail units in California, Texas, and Illinois. As part of a Dinero Seguro transaction, the customer is given a confirmation number and a prepaid phone card good for one 3-minute call to Mexico. The customer can then use the phone card to inform the person in Mexico that the money has been sent and pass along the confirmation number. The transferred funds can then be picked up from any one of the more than 1,300 Bancomer Bank branches in Mexico. This service is provided through a strategic alliance between the U.S. Postal Service and Bancomer Bank. The idea for Dinero Seguro originated in 1989. However, it was not until FY 1996 that the Service began an earnest effort to market Dinero Seguro. According to Postal officials, the Service thought it was inappropriate to enter this market before 1996 because of the ailing financial condition of the market leader. According to Postal officials, the Service did not want to be perceived as contributing to the market leader’s financial woes. The Service decided to move forward with Dinero Seguro in 1996 following the market leader’s financial recovery. In May 1996, the Service began an operations test and shortly thereafter began test marketing Dinero Seguro in three states with significant Mexican-origin populations. Plans to further expand Dinero Seguro have been put on hold pending further review by the Service. Dinero Seguro is part of an umbrella initiative known as Money Mover. Money Mover covers the Service’s international and domestic money order business and its new electronic money-by-wire service—Sure Money. Dinero Seguro is sponsored by the New Businesses Marketing Group and has been monitored under the CustomerPerfect! new product development process since adoption of that process in June 1996. Electronic money transfers from the U.S to El Salvador, the Philippines, and the Dominican Republic. This service was not available at the end of 1997. Rather, it was awaiting the results of the Dinero Seguro tests. Sure Money provides the same service as Dinero Seguro, except in this case, the money is transferred to El Salvador, the Dominican Republic, or the Philippines. Sure Money was designated a potential Postal Service product in FY 1997. Assuming favorable outcome of the Dinero Seguro tests, Postal officials expect to test market Sure Money in early FY 1999. This schedule may be affected, however, by the outcome of the Postal Service’s review of its Dinero Seguro program. A domestic version of this money-by-wire service is also planned. The domestic version will allow immediate money transfers between post offices, stations, and branches within the United States. Plans call for testing to begin in 1999. Sure Money is part of an umbrella initiative known as Money Mover. Money Mover covers the Service’s international and domestic money order business and its planned domestic electronic money-by-wire service. Sure Money is sponsored by the New Businesses Marketing Group and has been monitored under the CustomerPerfect! new product development process since adoption of that process in June 1996. Revenue goal for FY 1998(millions) Expenses (millions) Profit (loss) (millions) Revenue (millions) Expenses (millions) Profit (loss) (millions) ($10.5) ($5.4) ($0.5) ($0.5) (continued) Tracking mail as it moves through the mailstream and notifying shippers upon delivery. This service is designed to provide the date of delivery or attempted delivery for Express Mail, Priority Mail, and Standard Mail (B)—parcels, bound printed matter, and library mail. This service was included in the rate filing approved by the Board of Governors in July 1998. It is designed to meet expedited and package shippers’ need for delivery status information. To support this service, a new data acquisition and communications infrastructure is being implemented. A major component of this implementation is the deployment of hand-held scanners to all delivery employees. This deployment is expected to be completed by February 1999. To help ensure that a high level of service is provided to customers who purchase the service when it becomes available, a national delivery confirmation operations test was started in late 1997. The revenues to date are associated with the test customers. The Postal Service began offering a limited delivery confirmation service for Express Mail in 1991. In February 1996, the Board of Governors approved $60.5 million for track-and-trace research and development testing, and in May 1997, it approved $704.3 million to implement the delivery confirmation system infrastructure. Delivery Confirmation was initially sponsored by the Postal Service’s Comprehensive Interactive Information System Management Group, which is now the Information Systems Group in Expedited/Package Services. Delivery Confirmation is not subject to the CustomerPerfect! new product development process. Project funding, however, was approved under the Service’s capital projects approval process—a process similar to the new product development process. Packaging service. Under this proposed service, the Postal Service will, for a fee, prepare customers’ packages for shipment and enter them directly into the mailstream. In April 1998, PRC approved a 2-year test of this service; and as of July 1998, the Service was awaiting a decision from its Board of Governors on whether or not to proceed with its packaging service. Following an initial test in 1993, the Postal Service expanded testing in 1996 to about 20 Post Office Express units located in supermarkets and other high customer traffic locations. The packaging service was suspended following a PRC decision in February 1997 that the service was subject to PRC classification and rate-setting procedures. On July 30, 1997, the Postal Service filed a request with PRC to offer a provisional packaging service. PRC approved a 2-year test, but it encouraged the Board of Governors to reconsider the public interest before marketing this service. In particular, it asked the Governors to consider “the financial consequences of entering into competition with the thousands of existing owner-operated small businesses that currently provide packaging services, and to consider what measures the Postal Service might implement to mitigate the potential harm to individual private businesses.” As of October 1998, Provisional Packaging Service was on hold pending further evaluation. Provisional Packaging Service is sponsored by the Service’s Marketing Systems Group and is not under the purview of the CustomerPerfect! new product development process. Expenses (millions) Profit (loss) (millions) Revenue goal for FY 1998(millions) Revenue (millions) Expenses (millions) Profit (loss) (millions) ($2.9) ($2.6) (continued) Overnight package delivery service in selected metropolitan areas. Fastnet was an overnight delivery service available in selected geographic locations for parcels originating and destinating within the same area. Fastnet service was available in Austin, TX; Baltimore, MD; Buffalo, NY; Columbus, OH; Hackensack, NJ; Indianapolis, IN; Jacksonville, FL; Las Vegas, NV; Miami, FL; Minneapolis/St. Paul, MN; Orlando, FL; San Diego, CA; and Tampa, FL. Beginning in 1995, the Service test marketed Fastnet in 13 selected geographic locations. At the conclusion of the test in early 1996, the Service discontinued Fastnet because the results fell short of expectations. Fastnet was sponsored by the Service’s New Businesses Marketing Group and was discontinued before the Group adopted the CustomerPerfect! new product development process. International E-mail to hard copy delivery system. Under the Global e-Post concept, a mailer would prepare data and transmit it to the Postal Service, which would then route the electronic transmission to a partner postal administration in the destination country. At the destination foreign postal facility, the transmission would be matched with stored templates, printed, placed in envelopes, and delivered through the foreign postal system. In April 1996, the Postal Service conducted an operations test of Global e-Post in Anaheim, CA. In that test, Xerox Corporation electronically sent, through the U.S. Postal Service, a letter to the German Postal Administration that was downloaded, printed, and delivered to more than 10,000 business addresses in Germany. The project was discontinued later in 1996 so available staff could be devoted to higher priority projects. Global e-Post was sponsored by the Service’s New Businesses Marketing Group. Global e-Post began before adoption of the CustomerPerfect! new product development process. However, the project was discontinued under the CustomerPerfect! new product development process. Expenses (millions) Profit (loss) (millions) Revenue goal for FY 1998(millions) Revenue (millions) Expenses (millions) Profit (loss) (millions) ($11.7) ($3.5) N/A means not applicable. Retail merchandising was the subject of a Postal Service report prepared in response to a House Appropriations Committee request on this activity. The report, dated February 27, 1998, was addressed to the Chairman of the House Committee on Appropriations. Additional information concerning the Postal Service’s Unisite Antenna Program can be found in a report prepared by the Postal Service’s Office of Inspector General—(CAG-AR-98-001, Apr. 1998). Revenues from market tests conducted prior to 1997 could not be collected because there was no dedicated account identifier code in place. Closely associated with Global e-Post was International Data Post, which was a consortium of several European countries and the U.S. Postal Service to establish a network among various postal administrations to make it possible to e-mail personal correspondence to foreign postal administrations that, in turn, would deliver hard copies of the correspondence to the intended recipient. That concept has not yet materialized. Jill P. Sayre, Senior Attorney 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 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the Postal Service's (USPS) development and marketing of new products and provided information on the expense and revenues associated with the products, focusing on: (1) the statutory and regulatory authorities and constraints covering all major groups of new products; (2) the potential impact that enactment of H.R. 22 and USPS' proposed reform legislation could have on new products; (3) providing information on USPS Marketing Department's new product development process and determining, for three selected products, how closely that process was followed; and (4) providing information, including financial data, on all new postal and nonpostal products USPS marketed or had under development during fiscal years (FY) 1995, 1996, and 1997. GAO noted that: (1) the statutory and regulatory authorities governing USPS provide USPS broad latitude to develop and market a wide variety of new products; (2) GAO's analysis shows that USPS is subject to at least three constraints in developing and marketing new products; (3) since it is the underlying statutory mission of USPS to provide postal services to bind the nation together, USPS needs to be able to explain how any new product it develops will further that mission; (4) under its statutory authority, before marketing a new domestic postal product, USPS must request a recommended decision from the Postal Rate Commission (PRC) regarding the propriety of USPS' proposed classification, rates, or fees for the new product; (5) prior to issuing its recommended decision, PRC is required to hold hearings on USPS' proposal; (6) the Postal Board of Governors may reject or modify PRC's recommended decision; (7) USPS is not required to request a recommended decision from PRC in the case of nonpostal products; (8) USPS' ability to market new products can be constrained by congressional oversight, restrictions imposed during the appropriations process, or other legislative actions; (9) adoption of either H.R. 22 or legislative changes offered by USPS would amend USPS' current statutory authority to develop, test, approve, and market new products; (10) H.R. 22 should place new restrictions on the introduction of new, nonpostal products and international postal products; (11) however, H.R. 22 would provide USPS with broader latitude to test market experimental postal products; (12) USPS' Marketing Department established the New Business Initiatives and Products Group, which implemented a new product development process, CustomerPerfect!; (13) it is intended to ensure effective management control through a formalized system of checks and balances that require top management buy-in at four critical stages: (a) concept; (b) business plan; (c) test; and (d) implementation; (14) three judgmentally selected products showed that in developing these products, the Marketing Department's New Business Initiatives and Products Group generally followed the CustomerPerfect! new product development process; (15) information and financial data show that during fiscal years 1995, 1996, and 1997, USPS marketed, or had under development, 19 new products that had been publicly announced; and (16) total revenues and expenses for the 19 products, from inception through FY 1997 were $148.8 million and $233.5 million. |
Friendly fire is a serious problem confronting DOD and the military services. According to a report issued by the Office of Technology Assessment in 1993, about 24 percent of the fatalities experienced during Operation Desert Storm were the result of friendly fire—a rate that appeared very high compared to past conflicts. Sixty-one percent of these incidents involved ground-to-ground incidents, while air-to-ground and ground-to-air incidents accounted for 36 and 3 percent, respectively. A more recent notable incident is the 1994 friendly forces’ shootdown of two Blackhawk helicopters over Iraq during Operation Provide Comfort. Such incidents may be caused by command and control failures, navigation failures, or target misidentification. A key aspect of DOD’s effort to prevent friendly fire is the development of new combat identification systems. Some of these systems will “cooperate” to identify friendly targets through queries and answers. Others will identify targets as friendly or unknown with the help of data sources, such as radio emissions or acoustic signals. And others, known as situational awareness systems, will rely on periodic updates of position data to help users locate friendly forces. The cost of such systems is significant. For example, the Army’s efforts to develop, field, and maintain cooperative combat identification systems alone are expected to cost more than $1 billion. Successfully developing and implementing these systems is a major challenge for DOD. The systems themselves will be developed and managed by many different entities within DOD and the military services. They will be involved in a wide range of military operations and installed on a broad array of equipment. At the same time, however, these systems will need to be compatible and interoperable. They will also need to fit in with DOD’s long-term goals for achieving information superiority over the enemy. DOD defines this as “the capability to collect, process, and disseminate an uninterrupted flow of information while exploiting or denying an adversary’s ability to do the same.” Additionally, it is important that these systems be able to work with systems belonging to North Atlantic Treaty Organization (NATO) and other allies in order to help preclude friendly fire incidents during coalition operations. DOD does not yet have a complete enterprise architecture to guide its efforts to develop a family of combat identification systems and past attempts to establish an architecture were not comprehensive or adopted by the services. Without a “blueprint” to guide and constrain DOD’s investments in combat identification systems, the military services and Defense agencies may well find themselves with combat identification systems that are duplicative, not interoperable, and unnecessarily costly to maintain and interface. An enterprise architecture systematically captures in useful models, diagrams, and narrative the full breadth and depth of the mission-based mode of operations for a given enterprise, which can be (1) a single organization or (2) a functional or mission area that transcends more than one organizational boundary (e.g., financial management, acquisition management, or combat identification). Further, such an architecture describes the enterprise’s operations in both (1) logical terms, such as interrelated functions, information needs and flows, work locations, and system applications, and (2) technical terms, such as hardware, software, data, communications, and security attributes and performance standards. If defined properly, enterprise architectures can assist in optimizing interdependencies and interrelationships among an organization’s operations and the underlying technology supporting these operations. Our experience with federal agencies has shown that attempting to define and build major systems without first completing an enterprise systems architecture often results in systems that are duplicative, not well integrated, unnecessarily costly to maintain and interface, and do not effectively optimize mission performance. The Office of Management and Budget (OMB) has recognized the importance of agency enterprise architectures. OMB has issued guidance that, among other things, requires agency information system investments to be consistent with agency architectures. More recently, the Chief Information Officers Council produced guidance for federal agencies in initiating, developing, using, and maintaining enterprise architectures. DOD has also issued architecture policy, including a framework defining an architecture’s structure and content. Specifically, in February 1998,DOD directed its components and activities to use the Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR) Architecture Framework, Version 2.0. DOD’s framework is comprised of three components: (1) an operational architecture—that is, the operational elements, activities, tasks, and information flows required to accomplish or support a mission, (2) a systems architecture—that is, the systems and interconnections supporting the functional mission, and (3) a technical architecture—that is, the minimum set of standards and rules governing the arrangement, interaction, and interdependence of systems applications and infrastructure. According to DOD, the C4ISR Architecture Framework is a critical tool for achieving its strategic direction and all DOD components and activities should use the framework for all functional areas and domains within the Department. The C4ISR Architecture Framework is recognized in the Federal Chief Information Officers Council’s A Practical Guide to Federal Enterprise Architecture as a model architecture framework for developing enterprise architectures. Appendix I provides more detailed information on the C4ISR Architecture Framework. DOD has also recognized the importance of architectures in its recently revised acquisition guidance, DOD Directive 5000.1 and Instruction 5000.2. This guidance sets DOD policy for managing all acquisition programs. Among other things, it requires the use of architectures to characterize the interrelationships and interactions between U.S., allied, and coalition systems. DOD has initiated efforts to develop an architecture for combat identification, but they have not been comprehensive or adopted by the military services. The first effort began in 1994 with the creation of a Combat Identification Task Force. Among other things, such as identifying promising combat identification technologies for a planned demonstration, the Task Force sought to develop an overall architecture for combat identification through an architecture working group. However, this effort only focused on specific systems and how they would work together. It did not define the operational elements and activities required to support a future warfighting vision or technical standards. Both views are integral to an overall architecture. According to DOD, for example, the operational view is useful for facilitating a number of actions across DOD, such as defining operational requirements to be supported by physical resources and systems. The technical view enables interoperability and compatibility of systems, by providing the standards, criteria, and reference models upon which engineering specifications are based, common building blocks are established, and applications are developed. The work of the architecture working group also excluded elements integral to the battlefield, such as dismounted soldiers, ships, air defense sites, and air-to-ground missions other than close-air support. Additionally, the architecture developed only dealt with the need to identify forces as being either friendly or hostile. It did not address the need to further distinguish targeted systems by class (e.g., “tank” vs. “truck”), platform (e.g., MIG 29 vs. T-72 Main Battle Tank) or intent (e.g., a defecting vs. an attacking platform). More critically, the architecture was never adopted by the services. Subsequent work began in January 2000 when the Joint Chiefs of Staff’s Combat Identification Assessment Division began planning draft guidance on an effort to analyze alternative current and evolving combat identification technologies to support development of an operational architecture. The analysis is expected to take over 2 years to complete at an estimated cost of $10 million. However, this effort is to focus on surface-to-surface and air-to-surface military operations and not to include air-to-air or surface-to-air operations. While the draft guidance for the analysis indicated that the Army should lead the effort with support from the other services, thus far, only the Air Force has budgeted funds— $2 million—toward accomplishing this task. Similarly, in January 2001, the Assessment Division described efforts to develop the operational architecture itself. However, this effort is currently unfunded. According to DOD officials, the reasons for the current lack of funding include the difficulty of reflecting such efforts in DOD’s budgets in a timely manner and addressing competing service funding priorities. Architectures enable organizations to know their portfolio of desired systems and to develop a clear understanding of how these systems will collectively support and carry out their objectives. Moreover, they help ensure that systems are interoperable, function together effectively, and are cost-effective over their life cycles. Our previous reviews at the Federal Aviation Administration, Customs Service, Department of Education, Internal Revenue Service, Bureau of Indian Affairs, and National Oceanic and Atmospheric Administration have shown that while the absence of a complete architecture does not guarantee the failure of system modernization efforts, it does greatly increase the risk that agencies will spend more money and time than necessary to ensure that systems are compatible and in line with business needs. Our previous work reviewing DOD’s combat identification efforts has shown that DOD is confronting such risks. In 1993, we reported on the Army’s ongoing efforts to develop its Battlefield Combat Identification System (see fig. 1)—a system designed to provide a ground-to-ground and potentially an air (helicopter)-to-ground cooperative identification capability. We found that the Army planned to spend up to $100 million on a near-term combat identification system even though the system might eventually be discarded if it could not be integrated into a long-term solution. We also reported that the Army planned to eventually buy 1,520 of the near-term systems to equip some forces even though that number would not be sufficient for a larger-scale operation. Additionally, absent the understanding provided by an enterprise architecture, the services risk being unable to effectively define and develop weapon system requirements (e.g., system characteristics, functions, and performance parameters). As mentioned earlier, developing an enterprise architecture provides further understanding of (1) the operational elements, activities, tasks, and information flows needed to accomplish a mission, (2) the systems needed and their interconnections to support that mission, and (3) the minimum set of standards and rules needed to govern their arrangement, interaction, and interdependence. As a result, systematically reviewing specific systems’ requirements within the context of such an architecture can help ensure the development of cost-effective systems to provide needed capabilities. DOD has already identified some broader needs for combat identification. Specifically, in 1992 and again in 1998, DOD defined its overall mission needs for combat identification systems and it defined the capabilities it expected from these systems, including positive, timely, and reliable identification of friends, foes, and neutrals;classification of foes by platform, class/type, and nationality; and friend-from-friend discrimination. More recently, the U.S. Joint Forces Command developed a Capstone Requirements Document that defines overarching requirements for the combat identification family of systems. Lastly, without having a complete architecture for combat identification, DOD may not be able to ensure that its own operational, systems, and technical requirements are aligned with those of NATO allies. NATO is currently developing both an operational architecture and a systems architecture in all mission domains (air-to-air, surface-to-air, air-to-surface, and surface-to-surface). It plans to complete these architectures by the end of 2001 and the end of 2002, respectively. If DOD’s efforts to develop an enterprise architecture for combat identification occur in a timely manner, they could be more closely aligned with NATO’s efforts and possibly improve coalition interoperability. Moreover, DOD would be able to ensure that the long-term capabilities it envisions for combat identification are recognized. The effort to develop new systems for combat identification is challenging not only because the systems themselves span a number of entities within DOD but also because they may need to operate jointly and with systems belonging to allies and work in concert with DOD’s long-term goals for information superiority. DOD’s success, therefore, hinges on having effective management structures and processes—e.g. focal points, funding and development plans, schedule and resource estimates, performance measures, progress reporting requirements—to guide and manage systems development. DOD and the services have established focal points for coordinating combat identification efforts. For example, the Assistant Secretary of Defense for Command, Control, Communications and Intelligence is responsible for overseeing combat identification programs and the Joint Chiefs of Staff has ongoing efforts to improve combat identification capabilities. However, DOD currently lacks a formalized framework defining the procedures and controls that would facilitate these efforts. As a result, coordination and funding of development initiatives is not assured. Because the prevention of friendly fire is a DOD-wide effort involving the military services, other DOD components, and even U.S. allies, it must be approached as an enterprise endeavor with senior executive management sponsorship. This requires identifying an entity or individual with organizational authority, responsibility, and accountability for managing system development as an agencywide project and ensuring appropriate resources are provided to accomplish needed tasks and develop required systems. We have reported on the need for cohesive management in developing combat identification systems in the past. In 1995, we issued a report on Army and Navy-led efforts to develop cooperative identification systems. We found that the Army and Navy were pursuing development of systems without having developed a cohesive management plan and organizational structure and made recommendations to strengthen those efforts. Given the size and complexity of the project, it is important for DOD to have a plan that lays out the current combat identification capabilities, desired capabilities, and specific initiatives, programs, and projects intended to get DOD and the services to that vision. Such plans, or roadmaps, are often developed as part of an enterprise architecture. To facilitate the implementation of these plans, it is also necessary for DOD to define the organizational structure, responsibilities, and procedures for such things as defining system requirements, developing and procuring systems, and funding specific efforts. Together, these structures and processes can help ensure that combat identification projects are not duplicative or disparate and that they receive adequate priority and funding. Lastly, it is important that DOD define performance measures to assess the progress of combat identification improvements. The Government Performance and Results Act of 1993 requires federal agencies and activities to clearly define their missions, set goals, link activities and resources to goals, prepare annual performance plans, measure performance, and report on their accomplishments. Performance measures can be particularly helpful in ensuring that services and components are effectively coordinating their development efforts. For example, DOD could measure the progress associated with planning and successfully conducting joint, cross-service, and allied demonstrations of interoperable systems. Performance measures can also help ensure projects are adequately funded, for example, by measuring whether the services’ budgets support efforts to develop an enterprise architecture for combat identification. DOD has recognized the benefit of formally defining management structures and processes in the past to guide combat identification efforts, but those efforts are no longer in use. First, in January 1993, the services signed a Memorandum of Agreement on Joint Management of Combat Identification to coordinate and provide oversight of their requirements, policies, procedures, development and procurement programs, and related technology efforts. The agreement stated that combat identification encompasses widely varying requirements, policies, platforms, mission areas, and technologies. Among other things, the agreement created a General Officer Steering Committee to serve as a primary focal point for all DOD combat identification activities; a Joint Combat Identification Officer under that committee to provide lower-level coordination on all DOD efforts and develop a master plan for combat identification efforts; three supporting committees; and two acquisition-related groups. Following the agreement, DOD published a joint master plan for its “cooperative identification” system development efforts (that is, systems that identify friendly or unknown through queries and answers). The plan defined management strategies and structures to plan and execute these technologies and it defined an acquisition strategy that called for such things as baselining existing capability, identifying and prioritizing deficiencies, coordinating advanced research and development activities, and integrating system architectures. However, the memorandum of agreement is no longer in use and only one of the entities created from the memorandum still exists—the Joint Chiefs of Staff’s Combat Identification Assessment Division (formerly the Joint Combat Identification Office). Moreover, according to a DOD official, the Joint Master Plan for cooperative systems development is no longer in use because the services’ efforts did not evolve into joint programs as originally envisioned. In 1996, the services developed another master plan that represented their strategic vision for developing, maintaining, and enhancing their combat identification capability. This plan went beyond the 1993 plan by including noncooperative and situational awareness system development efforts. The plan was to serve as the focal point for coordination of joint and service-unique initiatives during the budget process. However, it was updated only once in 1998 and that revision was never adopted by the department. Since then, the Joint Chiefs of Staff’s Combat Identification Assessment Division has developed and updated an annual action plan. Many of the plan’s tasks are designed to address known deficiencies that can be corrected in the near term. The plan does not define management structures and procedures for guiding system development. And, while it does call for a semiannual report on progress, it does not define specific measures to be used in assessing that progress. Moreover, the Assessment Division does not have authority to direct the services to implement its plan nor does it have funding authority of its own to carry out the plan’s tasks. Rather, an Assessment Division official stated that the services’ cooperation is essential to implement the plan. Without sufficient structures and processes to coordinate and guide systems development, some combat identification projects have not been sufficiently funded. For example, as mentioned earlier, the systems analysis DOD planned to support development of an operational architecture for combat identification has an estimated cost of $10 million. However, while the guidance for this analysis indicated that the Army should lead the effort with support from the other services, thus far only the Air Force has budgeted funds—$2 million—toward its accomplishment. In addition, the Combat Identification Assessment Division’s planned operational architecture is also unfunded at this time. Similar problems are occurring at the service level. Based on a review of the Battlefield Combat Identification System program, the DOD Inspector General recently reported that the Army has obligated $132.4 million in research, development, test and evaluation, and procurement funds through fiscal year 2000 and plans to obligate another $86.5 million to complete development efforts and procure 1,169 low-rate initial production systems from fiscal year 2001 through fiscal year 2007 for the 4th Infantry Division. However, the Inspector General also reported that the Army has not provided $918.5 million of procurement and operations and maintenance funds for the program’s procurement objective of 16,414 systems. The lack of a management framework also makes it difficult to coordinate projects among the services to ensure that they are not redundant or disparate. For example, the Army recently proposed a memorandum of agreement between the Army and the Marines for cooperation in battlefield identification activities. The memorandum was to describe the activities and intentions of the two services to promote and ensure joint operational interoperability and to encourage sharing of information and joint work on combat identification concepts, doctrine (tactics, techniques, and procedures), experimentation, operational analysis, and lessons learned. The proposed agreement was also to acknowledge that the Army was pursuing its Battlefield Combat Identification System for ground-to-ground identification and that the Marines’ priority of effort would go toward air-to-ground identification. The Marines declined the Army’s proposed agreement. A Marine Corps official told us that the recent approval of a NATO Standardization Agreement for battlefield identification systems mandating the use of the same technology employed in the Army’s system and the development of the recently approved combat identification Capstone Requirements Document negate the need for a separate agreement to address interoperability between Army and similar Marine Corps systems. Complying with the NATO agreement and the Capstone Requirements Document may enable the Marines to build systems that can interact with those built to NATO’s standards and that have the capabilities that DOD has envisioned. However, it reduces assurance that Marine systems will be fully interoperable with the Army’s and it will not reduce the risk of inefficient redundancy of service efforts. Preventing friendly fire is a complex and challenging endeavor. It encompasses the development of new technologies as well as new training, tactics, and warfighting techniques. It involves a range of equipment and systems that have historically not been able to effectively interact as well as a variety of military operations. And it’s a concern among each of the services as well as our allies. Clearly, it is essential to have a blueprint that ties together these elements and provides a comprehensive map for long-term improvements as well as a management framework that is strong enough to implement the blueprint. While DOD has taken some concrete steps toward both ends, it needs to strengthen these efforts and ensure that they are supported by the services. Without doing so, it may well continue to contend with problems leading to friendly fire incidents. To improve DOD’s combat identification system development efforts, we recommend that the Secretary of Defense direct the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence, in collaboration with the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics; the Joint Staff’s Combat Identification Assessment Division; and the services; to Develop—in accordance with federal guidelines and relevant DOD policies and guidance—an enterprise architecture for combat identification that reflects the needs of its future warfighting vision. The architecture should define (1) the operational elements, activities, tasks, and information flows required to accomplish the combat identification mission, (2) the systems and interconnections supporting the mission, and (3) the minimum set of standards and rules governing the arrangement, interaction, and interdependence of systems applications and infrastructure. It should also encompass air-to-air, surface-to-air, surface-to-surface, and air-to-surface operations. Once the architecture is defined, we recommend that DOD review specific system requirements to determine whether they should be adjusted to address the needs reflected in those architectures or determine if gaps exist and new development efforts are needed. Develop and annually update a written, formalized management framework to guide the department’s combat identification efforts. The framework should define the organizational structure and procedures to be used in managing those efforts including the structures and procedures to coordinate requirements’ and systems’ development and funding, and develop and enforce the enterprise architecture. Until an enterprise architecture is developed, the framework should contain interim procedures for the review of ongoing efforts and that allow continuation of only efforts deemed essential or for which risk mitigation mechanisms have been provided. The framework should also provide roadmaps to future developments and define time-phased measures of program performance. In addition, to enable accomplishment of overarching combat identification efforts, we recommend that the Secretary of Defense ensure that adequate funding is provided to implement these initiatives. In written comments on a draft of this report, DOD agreed with all three of our recommendations and cited ongoing and planned initiatives to address our concerns. We are encouraged by the department’s initiatives. In concurring with our recommendation related to the development and use of an enterprise architecture, DOD stated that two of the three views forming that architecture—the operational and systems views—are to be developed in the near-term. The department added—as we recommended—that these views can then be used as a guide to review and adjust systems requirements and to determine if gaps exits that may require new development efforts. DOD also stated that development of the technical architecture view will be initiated once development of the other views has progressed to an appropriate point. DOD agreed with our recommendation that the department develop and annually update a written, formalized management framework to guide its combat identification efforts. DOD commented that it has a formalized framework to guide its combat identification efforts that is delineated in a draft Joint Staff Combat Identification Assessment Team charter, the Joint Staff Combat Identification Action Plan, and a Combat Identification Capstone Requirements Document. To complement the Joint Staff’s efforts, DOD proposes the establishment of a combat identification integrated product team to assist in developing and enforcing the combat identification systems architecture and resolving combat identification system acquisition, integration, and synchronization issues. Also, the team is to produce roadmaps and time-phased measures of program performance for individual system’s development efforts as required. DOD stated that it agreed with our recommendation regarding the need for adequate funding of overarching combat identification efforts. The department commented that it is committed to the identification of funding to support these efforts through its budgeting and requirements processes. DOD’s comments are reprinted in appendix II. In addition, DOD also provided technical comments that we incorporated as appropriate. To determine whether the services are using an enterprise architecture to guide their combat identification efforts, we reviewed documents relating to services’ prior, current, and planned combat identification efforts. We also discussed architecture-related issues with officials from the Office of the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence; the Joint Chiefs of Staff Combat Identification Assessment Division; the NATO Identification System Coordination Office; and various service activities. Additionally, we reviewed DOD and Joint Chiefs of Staff guidance on requirements development and examined DOD’s and the service’s planned actions within the context of that guidance. We also discussed requirements issues with cognizant DOD and service officials. To determine whether DOD and the services have developed and are using cohesive management plans to assure inter-service and allied interoperability of cost-effective combat identification systems, we reviewed previous combat identification plans and discussed those plans with DOD representatives and the services. We also discussed general management issues with those officials and developed information on management problems that might be avoided by developing a cohesive management plan. Additionally, to gain a better understanding of DOD and allied interoperability requirements, we discussed combat identification issues with representatives of NATO and the United Kingdom’s National Audit Office, Ministry of Defence, and Defence Evaluation and Research Agency. We conducted our work from September 2000 through June 2001 in accordance with generally accepted government auditing standards. This report contains recommendations to you. As you know, 31 U.S.C. 720 requires the head of a federal agency to submit a written statement of the actions taken on our recommendations to the Senate Committee on Governmental Affairs and to the House Committee on Government Reform not later than 60 days from the date of this letter and to the House and Senate Committees on Appropriations with the agency’s first request for appropriations made more than 60 days after the date of this letter. We are sending copies of this report to the appropriate congressional committees. We are also sending copies to the Honorable Thomas E. White, Secretary of the Army; the Honorable Gordon R. England, Secretary of the Navy; the Honorable James G. Roche, Secretary of the Air Force; General James L. Jones, Commandant of the Marine Corps; the Honorable Mitchell E. Daniels, Jr., Director, Office of Management and Budget; and other interested parties. We will make copies available to others upon request. The report will also be available on our homepage at http://www.gao.gov. Please contact me at (202) 512-4841 if you have any questions concerning this report. Major contributors to this report were Charles F. Rey, Bruce H. Thomas, Thomas W. Hopp, Rahul Gupta, Hai Tran, Gary L. Middleton, Cristina Chaplain, and Randolph C. Hite. The Department of Defense (DOD) has published a framework for the development and presentation of architectures within DOD. The framework defines the type and content of architectural artifacts, as well as the relationships among artifacts, that are needed to produce a useful enterprise architecture. Briefly, the framework decomposes an enterprise architecture into three primary views (perspectives into how the enterprise operates): the operational, systems, and technical views, also referred to as architectures. According to DOD, the three interdependent views are needed to ensure that information technology systems are developed and implemented in an interoperable and cost-effective manner. Each of these views is summarized below. (Fig. 2 is a simplified diagram depicting the interrelationships among the views.) The operational architecture view defines the operational elements, activities and tasks, and information flows required to accomplish or support an organizational mission or business function. According to DOD, it is useful for facilitating a number of actions and assessments across DOD, such as examining business processes for reengineering or defining operational requirements to be supported by physical resources and systems. The systems architecture view defines the systems and their interconnections supporting the organizational or functional mission in context with the operational view, including how multiple systems link and interoperate, and may describe the internal construction and operations of particular systems. According to DOD, this view has many uses, such as helping managers to evaluate interoperability improvement and to make investment decisions concerning cost-effective ways to satisfy operational requirements. The technical architecture view defines a minimum set of standards and rules governing the arrangement, interaction, and interdependence of system applications and infrastructure. It provides the technical standards, criteria, and reference models upon which engineering specifications are based, common building blocks are established, and applications are developed. | Friendly fire incidents, or fratricide, accounted for about 24 percent of U.S. fatalities during Operation Desert Storm in 1991. Since then, the Department of Defense (DOD) and the military services have been working to find new ways to avoid friendly fire in joint and coalition operations. Preventing friendly fire is a complex and challenging endeavor. It encompasses the development of new technologies as well as new training, tactics, and warfighting techniques. It involves a range of equipment and systems that have historically not been able to effectively interact as well as various military operations. It is a concern among each of the services as well as U.S. allies. Clearly, it is essential to have a blueprint that ties together these elements and provides a comprehensive map for long-term improvements as well as a management framework that is strong enough to implement the blueprint. Although DOD has taken some concrete steps toward both ends, it needs to strengthen these efforts and ensure that they are supported by the services. Otherwise, it may continue to contend with problems leading to friendly fire incidents. |
As part of our audit of the fiscal years 2016 and 2015 CFS, we considered the federal government’s financial reporting procedures and related internal control. Also, we determined the status of corrective actions Treasury and OMB have taken to address open recommendations relating to their processes to prepare the CFS, detailed in our previous reports, that remained open at the beginning of our fiscal year 2016 audit. A full discussion of our scope and methodology is included in our January 2017 report on our audit of the fiscal years 2016 and 2015 CFS. We have communicated each of the control deficiencies discussed in this report to your staff. We performed our audit in accordance with U.S. generally accepted government auditing standards. We believe that our audit provides a reasonable basis for our findings and recommendations in this report. During our audit of the fiscal year 2016 CFS, we identified three new internal control deficiencies in Treasury’s processes used to prepare the CFS. Specifically, we found that (1) Treasury did not have sufficient procedures and metrics for monitoring the federal government’s year-to- year progress in resolving intragovernmental differences at the federal entity level, (2) Treasury did not have a sufficient process for working with federal entities to reduce or resolve the need for significant adjustments to federal entity data submitted for the CFS, and (3) three of Treasury and OMB’s corrective action plans did not include sufficient information to effectively address related control deficiencies involving processes used to prepare the CFS. During our fiscal year 2016 CFS audit, we found that the federal government continued to be unable to adequately account for and reconcile intragovernmental activity and balances between federal entities. Treasury has taken significant action over the past few years to address control deficiencies in this area, including actions to improve reporting of intragovernmental differences to federal entities and to work actively with federal entities to encourage resolution of reported differences. However, Treasury did not have sufficient procedures and metrics for monitoring the federal government’s year-to-year progress in resolving intragovernmental differences at the federal entity level. When preparing the CFS, intragovernmental activity and balances between federal entities should be in agreement and must be subtracted out, or eliminated. If the two federal entities engaged in an intragovernmental transaction do not both record the same intragovernmental transaction in the same year and for the same amount, the intragovernmental transactions will not be in agreement, resulting in errors in the CFS. Federal entities are responsible for properly accounting for and reporting their intragovernmental activity and balances in their entity financial statements and for effectively implementing related internal controls. This includes reconciling and resolving intragovernmental differences at the transaction level with their trading partners. To support this process, Treasury has established procedures for identifying whether intragovernmental activity and balances reported to Treasury by federal entities are properly reconciled and balanced. For example, Treasury calculates intragovernmental differences by reciprocal category and trading partner for each federal entity. Through these calculations, Treasury has identified certain recurring issues, such as significant differences related to specific entities, reciprocal categories, and trading partners. Treasury provides quarterly scorecards to the individual federal entities that are significant to the CFS to highlight intragovernmental differences requiring these entities’ attention. Treasury also prepares a quarterly government-wide scorecard to communicate the total differences on a government-wide basis. The government-wide scorecard also identifies the 10 largest federal entity contributors to the total government-wide difference. While Treasury’s scorecard process and other initiatives focus on identifying and communicating differences to federal entities, they do not include procedures for monitoring the federal government’s year-to-year progress in resolving intragovernmental differences at the federal entity level. For example, the entity-level scorecards do not include metrics that could be used to gauge the federal government’s year-to-year progress in resolving intragovernmental differences at the entity level by reciprocal category and trading partner. Although Treasury produces a government- wide scorecard, the chart included on the scorecard shows changes in the total intragovernmental differences for recent quarters but does not identify increases or decreases at the individual entity level by reciprocal category and trading partner. While the total of intragovernmental differences has declined in recent years as a result of the scorecard process and other Treasury initiatives, we continued to note that amounts reported by federal entities were not in agreement by hundreds of billions of dollars for fiscal year 2016. Standards for Internal Control in the Federal Government states that management should (1) design control activities to achieve objectives and respond to risks, such as establishing and reviewing performance measures and indicators, and (2) implement control activities, such as documenting responsibilities through policies and procedures. The standard also states that management should establish and operate monitoring activities to monitor the internal control system and evaluate the results and should remediate any identified internal control deficiencies on a timely basis. Without adequate procedures and metrics for effectively monitoring federal government progress in resolving intragovernmental differences at the entity level, Treasury cannot effectively identify areas where specific federal entities need further improvement and attention from year to year to resolve intragovernmental differences that result in errors in the CFS. We recommend that the Secretary of the Treasury direct the Fiscal Assistant Secretary to develop and implement procedures and metrics for monitoring the federal government’s year-to-year progress in resolving intragovernmental differences for significant federal entities at the reciprocal category and trading partner levels. During our fiscal year 2016 CFS audit, we found that Treasury continued to record significant adjustments to data reported by federal entities for inclusion in the CFS. Treasury collects financial statement information from federal entities through its Governmentwide Treasury Account Symbol Adjusted Trial Balance System and Governmentwide Financial Report System. Auditors for entities significant to the CFS are responsible for providing opinions on these entities’ closing package submissions to Treasury. Once federal entities have submitted data for inclusion in the CFS, Treasury performs procedures to determine the consistency of the submitted data to (1) federal entity audited financial statements and (2) government-wide financial reporting standards. Treasury also performs procedures to determine if adjustments are needed to resolve certain unreconciled differences in intragovernmental activity and balances. Through these processes, Treasury identified the need for tens of billions of dollars of adjustments to federal entity- submitted data and recorded these adjustments to the CFS. Treasury identified many of the adjustments needed as recurring because they related to the same line items and federal entities as in prior years. The adjustments were necessary often because of inaccurate or incomplete information that federal entities submitted for the CFS. Though Treasury had procedures for identifying adjustments needed to data that federal entities submitted at fiscal year-end as well as procedures for reviewing recurring intragovernmental adjustments, Treasury did not have a sufficient process for reviewing recurring non-intragovernmental adjustments. Specifically, Treasury did not have a process to work with federal entities to correctly report non-intragovernmental information in federal entities’ closing packages prior to submission to Treasury, thereby reducing or resolving the need for Treasury to make significant adjustments to federal entity data. For adjustments related to intragovernmental differences, we found that Treasury’s procedures did include steps for reviewing recurring intragovernmental adjustments and for working with federal entities to reduce or resolve the need for these intragovernmental adjustments. Statement of Federal Financial Accounting Concepts No. 4, Intended Audience and Qualitative Characteristics for the Consolidated Financial Report of the United States Government, states that the consolidated financial report should be a general purpose report that is aggregated from federal entity reports. The Treasury Financial Manual (TFM) provides guidance on how federal entities are to provide their financial data to Treasury for consolidation. In accordance with the TFM, significant component entities are required to submit their financial data to Treasury using a closing package. A significant component entity’s chief financial officer must certify the accuracy of the data in the closing package and have it audited. Because the closing package process requires that significant component entities verify and validate the information in their closing packages compared with their audited department-level financial statements and receive audit opinions, Treasury is provided a level of assurance that it is compiling the CFS with reliable financial information. In addition, OMB Bulletin 15-02, Audit Requirements for Federal Financial Statements, establishes requirements for audits of federal financial statements, including audits of the closing packages. Also, Standards for Internal Control in the Federal Government states that management should design and implement control activities, such as procedures to help ensure that financial information is completely and accurately reported. Without a sufficient process aimed at reducing or resolving the need for significant adjustments to federal entity data submitted for the CFS, Treasury is unable to reasonably assure that it has reliable financial information for all federal entities, which is needed to achieve auditability of the CFS. We recommend that the Secretary of the Treasury direct the Fiscal Assistant Secretary to develop and implement a sufficient process for working with federal entities to reduce or resolve the need for significant adjustments to federal entity data submitted for the CFS. Three of Treasury and OMB’s corrective action plans did not include sufficient information to effectively address related control deficiencies involving processes used to prepare the CFS. Corrective action plans are the mechanism whereby management presents the actions the entity will take to resolve identified internal control deficiencies. Treasury, in coordination with OMB, compiled a collection of corrective action plans in a remediation plan focused on resolving material weaknesses related to the processes used to prepare the CFS. The corrective action plans contained in the remediation plan—which are intended to address control deficiencies related to (1) treaties and international agreements, (2) additional audit procedures for intragovernmental activity and balances, and (3) the Reconciliations of Net Operating Cost and Unified Budget Deficit and Statements of Changes in Cash Balance from Unified Budget and Other Activities (Reconciliation Statements)—did not include sufficient information to demonstrate that the plans, if properly implemented, will effectively resolve such deficiencies. Treasury and OMB did not include sufficient information in their corrective action plan to help ensure that major treaty and international agreement information is properly identified and reported in the CFS. We found that the corrective actions included steps and milestones for meeting with the Department of State, a key entity with respect to treaties and international agreements, but did not include specific actions and outcomes planned to analyze all treaties and international agreements to obtain reasonable assurance whether they are appropriately recognized and disclosed in the CFS. As a result of not having specific actions to analyze all treaties and international agreements, any treaties and international agreements that had been omitted from entity reporting would not be identified. Not having procedures for reasonably assuring that information on major treaties and other international agreements is reported in the CFS could result in incomplete recognition and disclosure of probable and reasonably possible losses of the U.S. government. Treasury and OMB’s corrective action plan to make intragovernmental scorecards available directly to federal entity auditors was not sufficient to address the control deficiency related to not having a formalized process to require the performance of additional audit procedures focused on intragovernmental activity and balances. Billions of dollars of unreconciled intragovernmental differences continued to be reported in the fiscal year 2016 CFS based on the financial data submitted in federal entities’ audited closing packages. Although making the scorecard information available to auditors is helpful, that action in and of itself does not establish a process requiring federal entity auditors to perform additional audit procedures specifically focused on intragovernmental activity and balances. A formalized process to require the performance of additional audit procedures would provide increased audit assurance over the reliability of the intragovernmental information and help address the significant unreconciled transactions at the government-wide level. Treasury and OMB’s corrective action plans related to the Reconciliation Statements did not clearly demonstrate how, once implemented, the corrective actions will remediate the related control deficiencies. For example, the corrective actions did not include sufficient information to explain how they would achieve Treasury’s objectives to (1) identify and report all necessary items in the Reconciliation Statements and (2) reasonably assure that the amounts are consistent with underlying audited financial data. Also, some outcome measures did not describe what and how progress related to specific actions taken would be measured. Not including sufficient information on actions and outcomes in the corrective action plan impairs management’s ability to assess the progress made toward resolution. The Chief Financial Officers Council’s Implementation Guide for OMB Circular A-123, Management’s Responsibility for Internal Control – Appendix A, Internal Control over Financial Reporting (Implementation Guide) includes guidance for preparing well-defined corrective action plans. According to the Implementation Guide, key elements necessary for well-defined corrective action plans include 1. descriptions of the deficiency and the planned corrective actions in sufficient detail to facilitate a common understanding of the deficiency and the steps that must be performed to resolve it; 2. interim targeted milestones and completion dates, including subordinate indicators, statistics, or metrics used to gauge resolution progress; and 3. planned validation activities and outcome measures used for assessing the effectiveness of the corrective actions taken. Also, Standards for Internal Control in the Federal Government states that management should (1) remediate identified internal control deficiencies on a timely basis and (2) design control activities to achieve objectives and respond to risks. In addition, OMB Circular No. A-123, Management’s Responsibility for Enterprise Risk Management and Internal Control, requires management to develop corrective action plans for material weaknesses and periodically assess and report on the progress of those plans. The Implementation Guide is widely viewed as a “best practices” methodology for executing the requirements of Appendix A of OMB Circular No. A-123. Corrective actions need to be designed and implemented effectively to allow timely remediation of the deficiencies. An effective corrective action plan facilitates accountability, monitoring, and communication and helps ensure that entity personnel responsible for completing the planned corrective actions and monitoring progress toward resolution have the information and resources they need to do so. Without well-defined, sufficiently descriptive corrective action plans in these three areas, it will be difficult for Treasury and OMB to reasonably assure that corrective action plans will effectively remediate the internal control deficiencies and monitor progress toward resolution. We recommend that the Secretary of the Treasury direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to improve corrective action plans for (1) treaties and international agreements, (2) additional audit procedures for intragovernmental activity and balances, and (3) the Reconciliation Statements so that they include sufficient information to address the control deficiencies in these areas effectively. At the beginning of our fiscal year 2016 audit, 24 recommendations from our prior reports regarding control deficiencies in the processes used to prepare the CFS were open. Treasury implemented corrective actions during fiscal year 2016 that resolved certain of the control deficiencies addressed by our recommendations. For 7 recommendations, the corrective actions resolved the related control deficiencies, and we closed the recommendations. We also closed 1 additional recommendation, related to corrective action plans, by making a new recommendation that is better aligned with the remaining internal control deficiency in this area. While progress was made, 16 recommendations from our prior reports remained open as of January 4, 2017, the date of our report on the audit of the fiscal year 2016 CFS. Consequently, a total of 19 recommendations need to be addressed—16 remaining from prior reports and the 3 new recommendations we are making in this report. Appendix I summarizes the status as of January 4, 2017, of the 24 open recommendations from our prior years’ reports according to Treasury and OMB as well as our own assessment and additional comments, where appropriate. Various efforts are under way to address these recommendations. We will continue to monitor Treasury’s and OMB’s progress in addressing our recommendations as part of our fiscal year 2017 CFS audit. In written comments, reprinted in appendix II, Treasury stated that it appreciates our perspective and will continue to focus its efforts on cost- beneficial solutions to sufficiently resolve the material conditions that preclude having an opinion rendered on the CFS. Although in its comments Treasury neither agreed nor disagreed with our recommendations, Treasury provided information on actions that it plans to take to address two of the recommendations and stated with regard to the third recommendation that its current corrective action plans were effective. For our first two recommendations related to monitoring intragovernmental differences and reducing significant adjustments to federal entity data submitted for the CFS, Treasury stated that it will continue to (1) evolve its processes as necessary to ensure that appropriate and effective metrics are deployed to measure and monitor agency performance and (2) work with agencies to facilitate improvement of processes, minimizing the need for Treasury adjustments to agency reporting. For our third recommendation aimed at improving corrective action plans for (1) treaties and international agreements, (2) additional audit procedures for intragovernmental activity and balances, and (3) the Reconciliation Statements, Treasury stated that its current remediation plan, including its various corrective action plans, is comprehensive, appropriate, and effective, with robust ongoing monitoring processes in place. Treasury also stated that corrective actions aimed at increasing the quality of intragovernmental data are proving effective and that it does not support encumbering agencies with the cost and burden associated with requiring additional audit procedures. In addition, Treasury stated that it will continue to collaborate with OMB and federal entities on existing corrective actions. However, we continue to believe that the corrective action plans in these three areas do not include sufficient information to effectively address related control deficiencies involving processes used to prepare the CFS. For example, as discussed in our report, Treasury and OMB did not have specific actions in their corrective action plan to analyze all treaties and international agreements to help ensure that major treaty and international agreement information is properly identified and reported in the CFS. Further, we believe that a formalized process for Treasury to require the performance of additional audit procedures focused on intragovernmental activity and balances would provide increased audit assurance over the reliability of intragovernmental information and help address the hundreds of billions of dollars of unreconciled intragovernmental differences at the government-wide level. Treasury also described various actions taken and planned to address long-standing material weaknesses, including improvements in accounting for and reporting on the General Fund of the U.S. Government activity and balances, strengthening internal controls in the preparation of the CFS, and validating material completeness of budgetary information included in the Financial Report of the United States Government. Treasury also indicated that it plans to work with GAO as it fulfills its commitment to improving federal financial reporting. OMB staff in the Office of Federal Financial Management stated in an e-mail that OMB generally agreed with the findings in the report and with Treasury’s written response to the draft. The e-mail noted that the current administration is committed to continuing to work with Treasury and federal agencies to achieve sound financial management across the federal government. We are sending copies of this report to interested congressional committees, the Fiscal Assistant Secretary of the Treasury, and the Controller of the Office of Management and Budget’s Office of Federal Financial Management. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. We acknowledge and appreciate the cooperation and assistance provided by Treasury and OMB during our audit. If you or your staff have any questions or wish to discuss this report, please contact me at (202) 512-3406 or [email protected]. 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 major contributions to this report include Carolyn M. Voltz (Assistant Director), Latasha L. Freeman, Maria M. Morton, Sean R. Willey, and J. Mark Yoder. Table 1 shows the status of GAO’s prior year recommendations for preparing the CFS. The abbreviations used are defined in the legend at the end of the table. | Treasury, in coordination with OMB, prepares the Financial Report of the United States Government , which contains the CFS. Since GAO's first audit of the fiscal year 1997 CFS, certain material weaknesses and other limitations on the scope of its work have prevented GAO from expressing an opinion on the accrual-based consolidated financial statements. As part of the fiscal year 2016 CFS audit, GAO identified material weaknesses and other control deficiencies in the processes used to prepare the CFS. The purpose of this report is to provide (1) details on new control deficiencies GAO identified related to the processes used to prepare the CFS, along with related recommendations, and (2) the status of corrective actions Treasury and OMB have taken to address GAO's prior recommendations relating to the processes used to prepare the CFS that remained open at the beginning of the fiscal year 2016 audit. During its audit of the fiscal year 2016 consolidated financial statements of the U.S. government (CFS), GAO identified control deficiencies in the Department of the Treasury's (Treasury) and the Office of Management and Budget's (OMB) processes used to prepare the CFS. These control deficiencies contributed to material weaknesses in internal control that involve the federal government's inability to adequately account for and reconcile intragovernmental activity and balances between federal entities; reasonably assure that the consolidated financial statements are (1) consistent with the underlying audited entities' financial statements, (2) properly balanced, and (3) in accordance with U.S. generally accepted accounting principles; and reasonably assure that the information in the (1) Reconciliations of Net Operating Cost and Unified Budget Deficit and (2) Statements of Changes in Cash Balance from Unified Budget and Other Activities is complete and consistent with the underlying information in the audited entities' financial statements and other financial data. During its audit of the fiscal year 2016 CFS, GAO identified three new internal control deficiencies. Treasury did not have sufficient procedures and metrics for monitoring the federal government's year-to-year progress in resolving intragovernmental differences at the federal entity level. Treasury did not have a sufficient process for working with federal entities to reduce or resolve the need for significant adjustments to federal entity data submitted for the CFS. Three of Treasury and OMB's corrective action plans did not include sufficient information to effectively address related control deficiencies involving processes used to prepare the CFS. In addition, GAO found that various other control deficiencies identified in previous years' audits with respect to the processes used to prepare the CFS were resolved or continued to exist. For 7 of the 24 recommendations from GAO's prior reports regarding control deficiencies in the processes used to prepare the CFS, Treasury implemented corrective actions during fiscal year 2016 that resolved the related control deficiencies, and as a result, these recommendations were closed. GAO closed 1 additional recommendation that related to corrective action plans, by making a new recommendation that is better aligned with the remaining internal control deficiency in this area. While progress was made, 16 of the 24 recommendations remained open as of January 4, 2017, the date of GAO's report on its audit of the fiscal year 2016 CFS. GAO will continue to monitor the status of corrective actions taken to address the 3 new recommendations made in this report as well as the 16 open recommendations from prior years as part of its fiscal year 2017 CFS audit. GAO is making three new recommendations—two to Treasury and one to both Treasury and OMB—to address the control deficiencies identified during the fiscal year 2016 CFS audit. In commenting on GAO's draft report, although Treasury neither agreed nor disagreed with GAO's recommendations, Treasury provided information on actions that it plans to take to address two recommendations, but stated that its current corrective action plans were effective for the third recommendation. GAO continues to believe that actions for this recommendation are needed as discussed in the report. OMB generally agreed with the findings in the report. |
Internal control is not one event, but rather a series of activities that should occur throughout an entity’s operations and on an ongoing basis. Internal control should be an integral part of each system that management uses to regulate and guide its operations, rather than as a separate system within an agency. In this sense, internal control is management control that should be built into the entity as a part of its infrastructure to help managers run the entity and achieve their goals on an ongoing basis. Section 3512 (c), (d) of Title 31, U.S. Code, commonly known as the Federal Managers’ Financial Integrity Act of 1982 (FMFIA), requires agencies to establish and maintain effective internal control. The agency head must annually evaluate and report on the control and financial systems that protect the integrity of its federal programs. The requirements of FMFIA serve as an umbrella under which other reviews, evaluations, and audits should be coordinated and considered to support management’s assertion about the effectiveness of internal control over operations, financial reporting, and compliance with laws and regulations. Office of Management and Budget (OMB) Circular No. A-123, Management’s Responsibility for Internal Control, provides the implementing guidance for FMFIA, and prescribes the specific requirements for assessing and reporting on internal controls consistent with the Standards for Internal Control in the Federal Government (internal control standards) issued by the Comptroller General of the United States. The circular defines management’s responsibilities related to internal control and the required process for assessing internal control effectiveness, and provides specific requirements for conducting management’s assessment of the effectiveness of internal control over financial reporting. The circular requires management to annually provide assurances on internal control and emphasizes the need for integrated and coordinated internal control assessments that synchronize all internal control–related activities. FMFIA requires GAO to issue standards for internal control in the federal government. The internal control standards provide the overall framework for establishing and maintaining effective internal control and for identifying and addressing major performance and management challenges and areas at greatest risk of fraud, waste, abuse, and mismanagement. As summarized in the internal control standards, internal control in the government is defined by the following five elements, which also provide the basis against which internal controls are to be evaluated: Control environment: Management and employees should establish and maintain an environment throughout the organization that sets a positive and supportive attitude toward internal control and conscientious management. Risk assessment: Internal control should provide for an assessment of the risks the agency faces from both external and internal sources. Control activities: Internal control activities help ensure that management’s directives are carried out. The control activities should be effective and efficient in accomplishing the agency’s control objectives. Information and communication: Information should be recorded and communicated to management and others within the entity who need it and in a form and within a time frame that enables them to carry out their internal control and other responsibilities. Monitoring: Internal control monitoring should assess the quality of performance over time and ensure that the findings of audits and other reviews are promptly resolved. A key objective in our annual audits of IRS’s financial statements is to obtain reasonable assurance that IRS maintained effective internal control with respect to financial reporting. While we use all five elements of internal control, including risk assessment and monitoring, as a basis for evaluating the effectiveness of IRS’s internal controls, our ongoing evaluations and tests have focused heavily on control activities, where we have identified numerous control deficiencies and have provided recommendations for corrective action. Control activities are the policies, procedures, techniques, and mechanisms that are intended to enforce management’s directives. In other words, they are the activities conducted in the everyday course of business that are intended to accomplish a control objective, such as ensuring IRS employees successfully complete background checks prior to being granted access to taxpayer information and receipts. Control activities are an integral part of an entity’s planning, implementing, reviewing, and accountability for stewardship of government resources and achievement of effective results. To accomplish our objectives, we evaluated the effectiveness of corrective actions IRS implemented during fiscal year 2011 in response to open recommendations as part of our fiscal years 2011 and 2010 financial audits. To determine the status of the recommendations, we (1) obtained IRS’s reported status of each recommendation and corrective action taken or planned as of March 2012, (2) compared IRS’s reported status to our fiscal year 2011 audit findings to identify any differences between IRS’s and our conclusions regarding the status of each recommendation, and (3) performed additional follow-up work to assess IRS’s actions taken to address the open recommendations. Because of the sensitive nature of many of the issues related to our recommendations regarding information security, we have reported our recommendations for corrective action related to information security issues to IRS separately. GAO, Management Report: Improvements Are Needed to Enhance the Internal Revenue Service’s Internal Controls and Operating Effectiveness, GAO-12-683R (Washington, D.C.: June 25, 2012). IRS had addressed, in whole or in part, the underlying control deficiencies that gave rise to the recommendations; and other legal requirements and implementing guidance, such as FMFIA and OMB Circular No. A-123. Our work was performed from December 2011 through April 2012 in accordance with generally accepted government auditing standards. IRS continues to make progress in resolving its control deficiencies and addressing outstanding recommendations, but continues to face significant financial management challenges. Since we first began auditing IRS’s financial statements in fiscal year 1992, IRS has taken a significant number of actions that were sufficient to resolve several material weaknesses and significant control deficiencies and to close over 300 of our previously reported recommendations. This includes 38 recommendations we are closing with this report based on actions IRS took through March 2012. Nevertheless, IRS continues to face challenges in establishing effective controls over its financial and operational management. Specifically, IRS continues to face management challenges in (1) resolving its two material weaknesses and one significant deficiency in internal control and (2) developing performance measures necessary to managing operational performance outcomes. Further, as in previous years’ audits, our fiscal year 2011 audit continued to identify additional internal control deficiencies, resulting in 30 new recommendations for corrective action. These deficiencies and related recommendations are discussed in detail in our June 2012 management report to IRS. In addition, as noted earlier, we also identified control deficiencies related to information security during our fiscal year 2011 audit that we reported separately with limited distribution because of the sensitive nature of many of those control deficiencies. As in past years, IRS continued to face significant challenges in resolving its remaining long-standing material weaknesses in internal control concerning (1) unpaid assessmentsyear 2011. and (2) information security in fiscal IRS’s continuing challenge in addressing its material weakness in internal control over unpaid assessments results from its (1) inability to rely on its general ledger and underlying subsidiary records to report federal taxes receivable, compliance assessments, and writeoffs in accordance with federal accounting standards without significant compensating procedures; (2) inability to trace reported taxes receivable to supporting transactions and maintain an effective transaction-based subledger for unpaid assessment transactions; and (3) inability to effectively prevent or timely detect and correct errors in taxpayer accounts. These control deficiencies are caused primarily by IRS’s continued reliance on software applications that were not designed to provide accurate, complete, and timely transaction-level financial information, as well as errors in taxpayer accounts. Consequently, IRS management is impaired in its ability to make well-informed decisions and to accumulate and report financial information in accordance with federal accounting standards. These problems are likely to continue to exist until these software applications are either significantly enhanced or replaced, and IRS remedies the control deficiencies that continue to result in significant errors in taxpayer accounts. IRS’s continuing challenge in addressing its material weakness in internal control over information systems security is primarily due to both continuing and newly identified control deficiencies. As in past years, IRS continued to (1) rely on a procurement system that lacks reliable controls due to access control deficiencies and database maintenance that was not performed; (2) use unencrypted protocols for a sensitive tax processing application; and (3) have unresolved physical security control deficiencies. Further, in fiscal year 2011, we identified control deficiencies in IRS’s (1) system access and configuration controls and (2) controls intended to compensate and mitigate for known information security deficiencies. As a result of these control deficiencies considered collectively, IRS was (1) unable to rely upon its systems or compensating and mitigating controls to provide reasonable assurance that its financial statements were fairly presented, (2) unable to ensure the reliability of other financial management information produced by its systems, and (3) at increased risk of compromising confidential IRS and taxpayer information. In addition to the continuing challenges posed by the two long-standing material weaknesses concerning unpaid assessments and information security, our audit of IRS’s fiscal year 2011 financial statements also identified a continuing significant deficiency in IRS’s internal control over tax refund disbursements, specifically, controls over the processing of claims for the First-time Homebuyer Credit (FTHBC) and over manual refunds. These control deficiencies related to the documentation of FTHBC claims, monitoring of manual refunds, and training of staff having key roles in refund processing. As in past years, IRS continues to face challenges in developing and institutionalizing the use of financial management information to assist it in making operational decisions and in measuring the effectiveness of its programs. IRS made progress during fiscal year 2011 in developing and integrating cost-based performance information into its operational decision-making processes. However, IRS has not yet fully integrated outcome-oriented cost-based performance data into each business units’ routine decision-making processes. IRS has also not yet integrated outcome-oriented performance data into its externally-reported performance metrics. During fiscal year 2011, IRS continued to add to the number of programs and activities for which full cost, and applicable return on investment (ROI), information has been developed. Further, for the past several years, IRS has annually updated the data for each set of such information. Additionally during fiscal year 2011, management teams in several of IRS’s business units began to implement the use of available full cost information for decision making. However, this progress in the use of programmatic full cost and ROI information, and related performance metrics, had not yet extended to IRS’s primary business unit responsible for developing and directing IRS’s corporate-wide enforcement activities to collect unpaid taxes. The integration of such information into both IRS’s strategic and routine enforcement-related management decisions could greatly enhance IRS’s ability to manage for outcomes by evaluating the efficiency and cost- effectiveness of its programs and activities, including comparing the efficiency and effectiveness of various existing enforcement collection strategies, staffing levels, and proposed changes. Developing informative and reliable outcome-oriented performance metrics based on specific enforcement programs’ costs and revenues would assist IRS in improving its ability to (1) establish measurable outcome goals, (2) evaluate the relative merits of various program options, and (3) highlight opportunities for optimizing the allocation of resources. They could also assist IRS in more credibly demonstrating to Congress and the public that it is using its appropriations cost-effectively. A lack of outcome-oriented performance metrics is inconsistent with federal financial management concepts as embodied in the Federal Accounting Standards Advisory Board’s (FASAB) Statement of Federal Financial Accounting Concepts No. 1, Objectives of Federal Financial Reporting. Specifically, in its discussion of financial reporting concepts, FASAB notes that federal financial data should provide accountability and decision-useful information on the costs of programs and the outputs and outcomes achieved, and it should provide data for evaluating service efforts, costs, and accomplishments. The absence of outcome metrics is also inconsistent with the objectives of the CFO Act. A key objective of the act was for agencies to routinely develop and use appropriate financial management information to evaluate program effectiveness, make fully informed operational decisions, and ensure accountability. While obtaining a clean audit opinion on its financial statements is important in itself, it is not the CFO Act’s end goal. Rather, the act’s end goal is modern financial management systems that provide reliable, timely, and useful financial information to support day-to-day decision making and oversight. Such systems and practices should also provide for the systematic measurement of both program outputs and outcomes. We have made several recommendations to IRS over the years to address its financial management challenges in developing internal full cost data for its programs and activities and for outcome-oriented performance measures. Successfully addressing the remaining open recommendations would enhance IRS’s ability to effectively manage for outcomes. In June 2011, we reported on the status of IRS’s efforts to implement corrective actions to address recommendations stemming from our fiscal year 2010 and prior years’ financial statement audits and other financial management–related work. In that report, we identified 77 audit recommendations that remained open and thus required corrective action by IRS. A significant number of these recommendations had been open for several years, either because IRS had not taken corrective action or because the actions taken had not yet effectively resolved the control deficiencies that gave rise to the recommendations. IRS has continued to work to address many of the control deficiencies related to these previously reported open recommendations. In the course of performing our fiscal year 2011 financial audit, we determined IRS took actions sufficient to address 38 of our prior years’ recommendations. However, a total of 39 recommendations from prior years remain open, a significant number of which have been outstanding for several years. IRS considers 16 of the prior years’ recommendations to be effectively addressed and therefore closed. However, we consider them to remain open. For 14 of the 16, in our view, IRS’s actions did not fully address the control deficiencies that gave rise to the recommendations. For the remaining two, we have not yet been able to verify the effectiveness of IRS’s actions. The “Status per IRS” and “Status per GAO” sections of appendix I provide a summary of both IRS’s and our assessment of IRS’s actions on each recommendation. During our audit of IRS’s fiscal year 2011 financial statements, we identified additional control deficiencies that require corrective action. In our June 2012 management report to IRS, we discussed these control deficiencies, and made 30 new recommendations to address them. Consequently, a total of 69 financial management–related recommendations need to be addressed—39 from prior years and 30 new recommendations resulting from our fiscal year 2011 audit. We consider all of the new recommendations to be correctible in the short term. We also consider the majority of the recommendations outstanding from prior years to be correctible in the short term. However, a few, particularly those concerning the functionality of IRS’s automated systems, are complex and may reasonably require several more years to fully and effectively address. In addition to the 69 open recommendations from our financial audits, there are 118 additional open recommendations stemming from our assessment of IRS’s information security controls over key financial systems, information, and interconnected networks conducted as an integral part of our annual financial audits. The control deficiencies that led to our previously reported and our newly identified recommendations related to information security increase the risk of unauthorized disclosure, modification, or destruction of financial and sensitive taxpayer data. Collectively, they constitute material weakness in IRS’s internal control over information security for its financial and tax processing systems. As discussed previously, we are reporting our recommendations resulting from the information security control deficiencies identified in our annual audits of IRS’s financial statements separately because of the sensitive nature of many of these control deficiencies. Appendix I presents a summary of the status of IRS actions to address 107 GAO non-information security-related recommendations based on our financial audits–77 from our audits prior to fiscal year 2011 and 30 new recommendations based on the results of our fiscal year 2011 financial audit. Appendix I consists of the (1) recommendation, (2) GAO report in which the recommendation was made, (3) IRS-reported status of corrective actions taken or planned as of March 2012, and (3) our analysis of the status of IRS actions as to whether those actions effectively addressed the deficiencies that gave rise to the recommendation. Appendix I lists the recommendations by the year in which the recommendation was made and by GAO report number. Appendix II presents the 69 open recommendations that remained at the end of our fiscal year 2011 audit as a result of closing the aforementioned 38 recommendations and adding 30 new recommendations, grouped by related material weakness, significant deficiency, and compliance issue as described in our audit report on IRS’s financial statements, as well as other control deficiencies we have identified and discussed in our annual management reports to IRS. Linking the open recommendations from our financial audits, and the control deficiencies that gave rise to them, to internal control activities that are central to IRS’s tax administration responsibilities provides insight regarding their significance to accomplishing IRS’s mission. As discussed earlier, internal control standards define internal control as consisting of five elements—control environment, risk assessment, control activities, information and communication, and monitoring. For the control activities element, the internal control standards explain that an agency’s system of internal control should provide for an assessment of the risks the agency faces from both external and internal sources and that internal control activities should help ensure that management’s directives and related control objectives are carried out. The control activities element identified 11 specific control activities, which we have grouped into three categories, as shown in table 1. Each of the unresolved recommendations from our financial audits, and the underlying control deficiencies that gave rise to them, can be grouped into one of the 11 specific control activities as shown in table 1. As shown in table 1, 18 (26 percent) of the unresolved recommendations relate to IRS’s controls over safeguarding of assets and security activities, 29 (42 percent) relate to control deficiencies associated with IRS’s ability to properly record and document transactions, and 22 (32 percent) relate to control deficiencies associated with IRS’s management review and oversight. In the following section, we group the 69 open recommendations under the specific control activity to which the condition that gave rise to each recommendation most appropriately fits. We define each control activity as presented in the internal control standards and briefly identify some of the key IRS operations that fall under that control activity. Although not comprehensive, the descriptions are intended to help explain why actions to strengthen these control activities are important for IRS to efficiently and effectively carry out its overall mission. Each control activity description includes a table of the related open recommendations. The tables list the recommendations by the year in which we made them (ID no.). At the end of our description of each recommendation, we also provide an assessment of whether the recommendation can be addressed in the short term or long term. We judged a recommendation to be correctible in the short term when we believe that IRS had the capability to implement solutions within 2 years of the year in which we first reported the control deficiency and made the recommendations. Given IRS’s mission, the sensitivity of the data it maintains, and its responsibility for processing trillions of dollars of tax receipts each year, one of the most important control activities at IRS is safeguarding assets. Internal control in this important area should be designed to provide reasonable assurance regarding prevention or prompt detection of unauthorized acquisition, use, or disposition of an agency’s assets. IRS has outstanding recommendations in the following three control activities related to safeguarding and securing assets: (1) physical control over vulnerable assets, (2) segregation of duties, and (3) access restrictions to, and accountability for, resources and records. Internal control standard: An agency must establish physical control to secure and safeguard vulnerable assets. Examples include security for and limited access to assets such as cash, securities, inventories, and equipment which might be vulnerable to risk of loss or unauthorized use. Such assets should be periodically counted and compared to control records. Of the trillions of dollars in taxes that IRS collects each year, hundreds of billions is collected in the form of checks and cash accompanied by tax returns and related information. IRS collects taxes both at its own facilities as well as at lockbox banks. IRS acts as custodian for (1) tax payments it receives until they are deposited in the General Fund of the U.S. Treasury and (2) tax returns and related information it receives until they are either sent to the Federal Records Center or destroyed. IRS is also charged with controlling many other assets, such as computers and other equipment. IRS’s legal responsibility to safeguard tax returns and the confidential information taxpayers provide on those returns makes the effectiveness of IRS’s internal controls over physical security essential to accomplishing its mission. While effective physical safeguards over receipts should exist throughout the year, such safeguards are especially important during the peak tax filing season. Each year during the weeks preceding and shortly after April 15, an IRS service center or lockbox bank may receive and process daily over 100,000 pieces of mail containing returns, receipts, or both. The dollar value of receipts each service center and lockbox bank processes increases to hundreds of millions of dollars a day during this time frame. The following 13 open recommendations in table 2 are designed to improve IRS’s physical controls over vulnerable assets. They include recommendations for IRS to improve controls over physical security at its Taxpayer Assistance Centers (TAC) and courier activities. We consider all of these recommendations to be correctable in the short term. Internal control standard: Key duties and responsibilities need to be divided or segregated among different people to reduce the risk of error or fraud. This should include separating the responsibilities for authorizing transactions, processing and recording them, reviewing the transactions, and handling any related assets. No one individual should control all key aspects of a transaction or event. As discussed previously, IRS employees process hundreds of billions of dollars in tax receipts in the form of cash and checks. Consequently, it is critical that IRS maintain appropriate separation of duties so that no single individual would be in a position of causing an error or irregularity, or potentially converting the asset to personal use, and then concealing it. For example, when an IRS field office receives taxpayer receipts and returns, it is responsible for depositing the cash and checks in a depository institution and forwarding the related taxpayer information received for further processing, including updating the taxpayer’s tax account records. In order to adequately safeguard receipts from theft, the person responsible for recording the information from the taxpayer receipts on a voucher should not also update the taxpayer’s tax records. Implementing the following recommendation in table 3 would help IRS improve its separation of duties, which will in turn strengthen controls over tax receipts. This recommendation is correctible in the short-term. Internal control standard: Access to resources and records should be limited to authorized individuals, and accountability for their custody and use should be assigned and maintained. Periodic comparison of resources with the recorded accountability should be made to help reduce the risk of errors, fraud, misuse, or unauthorized alteration. Because IRS is responsible for maintaining accountability over a large volume of cash and checks, it is imperative that it maintain strong controls to appropriately restrict access to those assets, the records relied on to track those assets, and sensitive taxpayer information. Our financial audits over the years have identified control deficiencies related to (1) individuals having direct access to cash and checks receiving appropriate background investigations before being granted access to taxpayer receipts and information and (2) maintaining effective access security control. The following four short term recommendations in table 4 are intended to help IRS improve its access restrictions to assets and records. IRS has a number of control deficiencies related to recording transactions, documenting events, and tracking the processing of taxpayer receipts or information. IRS has outstanding recommendations in the following three control activities related to proper recording and documenting of transactions: (1) appropriate documentation of transactions and internal controls, (2) accurate and timely recording of transactions and events, and (3) proper execution of transactions and events. Internal control standard: Internal control and all transactions and other significant events need to be clearly documented, and the documentation should be readily available for examination. The documentation should appear in management directives, administrative policies, or operating manuals and may be in paper or electronic form. All documentation and records should be properly managed and maintained. IRS collects and processes trillions of dollars in taxpayer receipts annually both at its own facilities and at lockbox banks under contract to process taxpayer receipts for the federal government. Therefore, it is important that IRS maintain effective controls to ensure that all documents and records are properly and timely recorded, managed, and maintained both at its facilities and at the lockbox banks. In this regard, it is critical that IRS adequately document and disseminate its procedures to ensure that they are available for IRS employees. IRS must also document its management reviews of controls, such as those regarding refunds and returned checks, document transmittals, and reviews of Taxpayers Assistance Center (TAC) operations. To ensure future availability of adequate documentation, IRS must ensure that (1) its systems, particularly those now being developed and implemented, have appropriate capability to identify and trace individual transactions and (2) all critical steps in its accounting processes are adequately documented. Resolving the following eight recommendations in table 5 would assist IRS in improving its documentation of transactions and related internal control procedures. All of these recommendations are correctible in the short term. Internal control standard: Transactions should be promptly recorded to maintain their relevance and value to management in controlling operations and making decisions. This applies to the entire process or life cycle of a transaction or event from the initiation and authorization through its final classification in summary records. In addition, control activities help to ensure that all transactions are completely and accurately recorded. IRS has stewardship responsibility for maintaining sensitive records of tens of millions of taxpayers in addition to its responsibility for maintaining its own financial records. To maintain these records, IRS often has to rely on outdated computer systems or manual work-arounds. Unfortunately, some of IRS’s recordkeeping difficulties we have reported on over the years will not be fully addressed until it can replace its aging systems; an effort that is long term and, in part, dependent on obtaining future funding. Implementation of the following 16 recommendations in table 6 would strengthen IRS’s recordkeeping abilities. Fifteen of these recommendations are short term, and one is long term regarding requirements for new systems for maintaining taxpayer records. Several of the recommendations listed deal with financial reporting processes, such as maintaining subsidiary records, recording budgetary transactions, and tracking program costs. Some of the control deficiencies that gave rise to several of our recommendations directly affect taxpayers, such as those involving duplicate assessments and errors in calculating and reporting interest and penalties. One of these recommendations has remained open for over 10 years, reflecting the complex nature of the underlying systems control deficiencies that must be resolved to fully address some of these control deficiencies. Internal control standard: Transactions and other significant events should be authorized and executed only by persons acting within the scope of their authority. This is the principal means of ensuring that only valid transactions to exchange, transfer, use, or commit resources and other events are initiated or entered into. Authorizations should be clearly communicated to managers and employees. IRS has thousands of leases that must be managed and properly recorded in its property records. IRS also has thousands of employees whose time and attendance must be properly recorded and approved so that IRS can appropriately manage its payroll expenditures. The following five short term recommendations in table 7 would improve IRS’s controls over those areas. All personnel within IRS have an important role in establishing and maintaining effective internal control, but IRS’s managers have additional review and oversight responsibilities. Management must monitor and evaluate controls to ensure that they are followed. Without adequate monitoring by managers, there is a risk that internal control activities may not be carried out effectively and in a timely manner. IRS has outstanding recommendations in the following three control activities related to effective management review and oversight: (1) reviews by management at the functional or activity level, (2) establishment and review of performance measures and indicators, and (3) management of human capital. Internal control standard: Managers need to compare actual performance to planned or expected results throughout the organization and analyze significant differences. IRS is responsible for managing a large, complex organization. It employs and must oversee the activities of over 100,000 full-time and seasonal employees, which includes managing related personnel actions. IRS is also responsible for overseeing lockbox banks that process tens of thousands of individual receipts totaling hundreds of billions of dollars, monitoring the work of hundreds of contractors and numerous off-site processing facilities, issuing tax refunds, managing tax liens, and preparing financial records. Effective management oversight of such large, complex operations is imperative for IRS to effectively and efficiently accomplish its mission. Implementing the following 17 short term and 1 long term recommendations in table 8 would improve IRS’s management oversight of its operations. One of these recommendations has remained open for over 10 years, reflecting the complexities of the deficiencies involved in ensuring that tax liens are released timely. Internal control standard: Activities need to be established to monitor performance measures and indicators. These controls could call for comparisons and assessments relating different sets of data to one another so that analyses of the relationships can be made and appropriate actions taken. Controls should also be aimed at validating the propriety and integrity of both organizational and individual performance measures and indicators. IRS’s operations include a wide range of activities, including educating taxpayers, processing taxpayer receipts and data, disbursing hundreds of billions of dollars in refunds to millions of taxpayers, maintaining extensive information on tens of millions of taxpayers, and seeking collection from individuals and businesses that fail to comply with the nation’s tax laws. Within its compliance function, IRS has numerous activities, including identifying businesses and individuals that underreport income, collecting from taxpayers who do not pay taxes, and collecting from those receiving refunds to which they are not entitled. Consequently, it is vitally important for IRS to have sound performance measures and related data to assist it in assessing its performance and targeting resources to maximize the return on investment. The following long term recommendation in table 9 is designed to assist IRS in evaluating its operations and determining which activities are the most beneficial. This recommendation is directed at improving IRS’s ability to measure and evaluate program performance costs, benefits, and operational outcomes—particularly with regard to identifying its most cost-effective tax collection activities. Internal control standard: Effective management of an organization’s workforce—its human capital—is essential to achieving results and an important part of internal control. Management should view human capital as an asset rather than a cost. Only when the right personnel for the job are on board and are provided the right training, tools, structure, incentives, and responsibilities is operational success possible. Management should ensure that skill needs are continually assessed and that the organization is able to obtain a workforce that has the required skills that match those necessary to achieve organizational goals. Training should be aimed at developing and retaining employee skill levels to meet changing organizational needs. Qualified and continuous supervision should be provided to ensure that internal control objectives are achieved. Performance evaluation and feedback, supplemented by an effective reward system, should be designed to help employees understand the connection between their performance and the organization’s success. As a part of its human capital planning, management should also consider how best to retain valuable employees, plan for their eventual succession, and ensure continuity of needed skills and abilities. IRS’s operations cover a wide range of technical activities requiring specific expertise in tax-related matters; financial management; and systems design, development, and maintenance. Because IRS has tens of thousands of employees spread throughout the country, it is imperative that management establish and maintain up-to-date guidance and provide appropriate training for its staff. Taking action to implement the following three recommendations in table 10, which are correctible in the short term, would assist IRS in its management of human capital. Increased budgetary pressures and an increased public awareness of the importance of maintaining effective accountability over trillions of dollars of tax receipts and sensitive taxpayer data have served to provide additional pressure on IRS to carry out its mission more efficiently and effectively. As such, sound financial management and effective internal controls are essential if IRS is to efficiently and effectively achieve its goals. IRS has made substantial progress in improving its financial management and internal control since its first financial audit, as evidenced by unqualified audit opinions on its financial statements for the past 12 years, resolution of several material internal control weaknesses, significant deficiencies, and other control deficiencies, and actions taken resulting in the closure of hundreds of financial management recommendations. This progress has been the result of hard work by many individuals throughout IRS and sustained commitment of IRS leadership. Nonetheless, more needs to be done to fully address the agency’s continuing financial management challenges—resolving material weaknesses and significant deficiencies in internal control; developing outcome-oriented performance metrics that can facilitate managing operations for outcomes; and correcting numerous other control deficiencies. Effective implementation of the recommendations we have made through our financial audits and related work could greatly assist IRS in improving its ability to effectively and efficiently carry out its mission. In commenting on a draft of this report, the IRS Commissioner expressed his appreciation for our acknowledgment of the agency’s progress in addressing its financial management challenges as evidenced by our closure of 38 open financial management recommendations from prior GAO reports. The IRS Commissioner also stated that the agency is committed to implementing appropriate improvements to ensure that it maintains sound financial management practices. We will review the effectiveness of further corrective actions IRS has taken or will take to address all open recommendations as part of our audit of IRS’s fiscal year 2012 financial statements. We are sending copies of this report to the Chairmen and Ranking Members of the Senate Committee on Appropriations; Senate Committee on Finance; Senate Committee on Homeland Security and Governmental Affairs; and Subcommittee on Taxation, IRS Oversight and Long-Term Growth, Senate Committee on Finance. We are also sending copies to the Chairmen and Ranking Members of the House Committee on Appropriations; House Committee on Ways and Means; the Chairman and Vice Chairman of the Joint Committee on Taxation; the Secretary of the Treasury; the Acting Director of OMB; the Chairman of the IRS Oversight Board; and other interested parties. The report is also available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-3406 or [email protected]. 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 major contributions to this report are listed in appendix IV. This appendix presents a summary of (1) the 77 previous GAO recommendations that were open as of the beginning of our fiscal year 2011 financial audit, (2) Internal Revenue Service (IRS) reported status and corrective actions taken or planned for such recommendations as of March 2012, and (3) our analysis of whether the control deficiencies that gave rise to the recommendations have been effectively addressed. It also includes a summary of the status of the 30 new recommendations identified as part of our fiscal year 2011 financial statement audit. Table 11 lists the recommendations by the year and recommendation number (ID no.) and also identifies the report in which the recommendation was made. For several years, we have reported material weaknesses, significant deficiencies, noncompliance with laws and regulations, and other control deficiencies in our annual financial statement audits and related management reports. Appendix II provides summary information regarding the primary issue to which each open recommendation is most closely related. To compile this summary, we analyzed the nature of the open recommendations to relate them to the material weaknesses, significant deficiency, compliance issue, or other control deficiencies (not associated with a material weakness, significant deficiency, or compliance issue) identified as part of our financial statement audit. The Internal Revenue Service (IRS) has a material weakness in its internal control over the management of unpaid assessments resulting from the agency’s (1) inability to rely on its general ledger for tax transactions and underlying subsidiary records to report federal taxes receivable, compliance assessments, and writeoffs in accordance with federal accounting standards without significant compensating procedures, (2) lack of transaction traceability for the reported balance in taxes receivable that comprises over 80 percent of IRS’s total assets as of September 30, 2011, and an effective transaction-based subledger for unpaid tax assessment transactions, and (3) inability to effectively prevent or timely detect and correct errors in taxpayer accounts. The recommendations in table 12 address our related findings. IRS has control deficiencies over information security that result primarily from IRS not having fully implemented key components of its information security program. These weaknesses, collectively, represent a material weakness. For example, (1) IRS’s testing did not detect many of the vulnerabilities we identified and did not assess a key application in its current environment, and (2) IRS did not effectively validate corrective actions reported to resolve previously identified control deficiencies. Although IRS has made some progress in addressing previous control deficiencies we identified in its information systems and physical security controls, as of March 2012, there were 118 open recommendations designed to help IRS improve its information systems security controls. Those recommendations are reported separately and are not included in this report primarily because of the sensitive nature of some of the issues. IRS has several control deficiencies over its tax refund disbursements. In our audit of IRS’s fiscal year 2011 financial statements, we reported a significant deficiency in IRS’s internal control over tax refund disbursements that resulted from (1) IRS not having effectively addressed the deficiencies in internal control over manual tax refunds that we have reported in previous years, (2) additional deficiencies in internal control over manual tax refunds we identified during our fiscal year 2011 audit, and (3) continued deficiencies in IRS’s internal control over processing of claims for the First-time Homebuyer Credit (FTHBC). These control deficiencies related to the monitoring of manual refunds, training of staff having key roles in refund processing, and documentation of FTHBC claims. The recommendations in table 13 address our related findings. IRS continues to be noncompliant with the laws and regulations governing the release of federal tax liens. We found IRS did not always release applicable federal tax liens within 30 days of tax liabilities being either paid off or abated, as required by the Internal Revenue Code (section 6325). The Internal Revenue Code grants IRS the power to file a lien against the property of any taxpayer who neglects or refuses to pay all assessed federal taxes. The lien serves to protect the interest of the federal government and as a public notice to current and potential creditors of the federal government’s interest in the taxpayer’s property. The recommendation in table 14 addresses our related finding. IRS’s actions over the years to resolve control deficiencies enabled us to close over 300 internal control–related recommendations. However, IRS also continues to face a challenge in addressing numerous other unresolved control deficiencies in several aspects of its operations that, while neither individually nor collectively representing a material weakness or significant deficiency, nonetheless merit management attention to ensure they are fully and effectively addressed. IRS now has a total of 57 open audit recommendations resulting from control deficiencies that we report in table 15. While most were identified during our recent financial audits, some were identified in our audits since 2005. It is incumbent upon IRS to effectively address these open recommendations and to improve its system of internal controls so that IRS can identify and correct potential control deficiencies before they can grow into more serious problems. Twenty-five —over 40 percent—of the 57 “other” open recommendations address control deficiencies related either directly or indirectly to physical safeguarding of tax receipts and taxpayer information, a critical element of IRS’s responsibilities. IRS processes billions of dollars annually in checks and currency, which it must safeguard and account for to prevent theft, fraud, and misuse. To do so, IRS has established physical security, accountability, and accounting policies, processes, and procedures to manage its activities involving transporting and accounting for tax receipts and for handling and storing taxpayer information. Although IRS has made substantial improvements in safeguarding taxpayer receipts and information since our financial audits first began identifying serious control deficiencies in this area, the task of ensuring ongoing control over such critical responsibilities for IRS is a difficult one and requires constant vigilance. Each year, we continue to identify control deficiencies related to IRS’s safeguarding of taxpayer receipts and information. For example, our fiscal year 2011 audit identified new control deficiencies, and we made additional recommendations that related either directly or indirectly to physically safeguarding taxpayer receipts and information. The control deficiencies encompassed in our open recommendations cover critical physical security functions, such as transporting taxpayer receipts and sensitive taxpayer information among IRS facilities and lockbox banks and maintaining physical security at IRS facilities to prevent loss, theft, or the potential for fraud regarding tax receipts and taxpayer information; conducting inspections and audits of the design and operation of IRS’s physical security processes and controls designed to safeguard tax receipts and taxpayer information; and conducting appropriate background investigations and screening of personnel, including contractors, with access to taxpayer information. In light of the volume of taxpayer receipts and sensitive taxpayer files that IRS is responsible for safeguarding, and the implications for IRS’s mission if they are lost, stolen, or the subject of fraud or misuse, it is critical that IRS fully and effectively resolve the control deficiencies we have identified and work toward continually improving its internal controls to prevent new issues from arising. In addition to the contact named above, the following individuals made major contributions to this report: William J. Cordrey, Assistant Director; Crystal Alfred; Ray B. Bush; Sunny Chang; Stephanie Chen; Jeremy Choi; Nina Crocker; Doreen Eng; Charles Fox; Ted Hu; Tuan Lam; Delores Lee; Jenny Li; Cynthia Ma; Joshua Marcus; Marc Oestreicher; Julie Phillips; James Rinaldi; John Sawyer; Christopher Spain; Cynthia Teddleton; Lien To; LaDonna Towler; Cherry Vasquez; and Gary Wiggins. | In its role as the nations tax collector, IRS has a demanding responsibility to annually collect trillions of dollars in taxes, process hundreds of millions of tax and information returns, and enforce the nations tax laws. Each year, as part of the annual audit of IRSs financial statements, GAO makes recommendations to address control deficiencies identified during the audit and follows up on the status of IRSs efforts to address the control deficiencies GAO identified in previous years audits. The purpose of this report is to (1) provide an overview of the financial management challenges still facing IRS, (2) provide the status of financial auditrelated recommendations and the actions needed to address them, and (3) highlight the relationship between GAOs recommendations and internal control activities central to IRSs mission and goals. The Internal Revenue Service (IRS) has made significant progress in improving its internal controls and financial management since its first financial statement audit in 1992, as evidenced by 12 consecutive years of clean audit opinions on its financial statements, the resolution of several material control deficiencies, and actions resulting in the closure of over 300 financial management recommendations. This progress has been the result of hard work throughout IRS and sustained commitment at the top levels of the agency. However, IRS still faces significant financial management challenges in (1) resolving its remaining material weaknesses and significant deficiency in internal control, (2) developing outcome-oriented performance metrics, and (3) correcting numerous other control deficiencies, especially those relating to safeguarding tax receipts and taxpayer information. At the beginning of GAOs audit of IRSs fiscal year 2011 financial statements, 77 recommendations from prior audits remained open because IRS had not fully addressed the underlying issues. During the fiscal year 2011 financial audit, IRS took actions that GAO considered sufficient to close 38 recommendations. At the same time, GAO identified additional control deficiencies resulting in 30 new recommendations. In total, 69 recommendations remain open. GAO has also identified numerous control deficiencies and made recommendations related to information security that have been reported separately and are not included in this report because of the sensitive nature of many of those control deficiencies. To assist IRS in evaluating and improving internal controls, GAO categorized the 69 open recommendations by various internal control activities, which, in turn, were grouped into three broad control categories. The continued existence of control deficiencies that gave rise to these recommendations represents a serious challenge for IRS. Effective implementation of GAOs recommendations could greatly assist IRS in improving its internal controls and achieving sound financial management, which are integral to effectively carrying out its tax administration responsibilities. GAO is not making any recommendations in this report. In commenting on a draft of this report, the IRS Commissioner stated that the agency is committed to implementing appropriate improvements to maintain sound financial management practices. |
To meet its diverse missions, DOE pays its contractors billions of dollars each year to implement hundreds of projects, ranging from hazardous waste cleanups at sites in the weapons complex to the construction of scientific facilities. Many of these complex, unique projects are designed to meet defense, energy research, environmental, and fissile materials disposition goals. They often rely on technologies that are unproven in operational conditions. In recent years, DOE’s budget has been dominated by the monumental task of environmental restoration and waste management to repair damage caused by the past production of nuclear weapons. DOE has long had a poor track record for developing designs and cost estimates and managing projects. We reported in 1997 that from 1980 to 1996, 31 of DOE’s 80 major projects were terminated prior to completion, after expenditures of over $10 billion; 15 of the projects were completed, but most of them were finished behind schedule and with cost overruns; and the remaining 34 ongoing projects also were experiencing schedule slippage or cost overruns. In addition, for over a decade, DOE’s Office of Inspector General, the National Academy of Sciences, and others have identified problems with DOE’s management of major construction projects. Projects were late or never finished; project costs increased by millions and sometimes billions of dollars; and environmental conditions at the sites did not significantly improve. According to the National Research Council, DOE’s construction and environmental remediation projects take much longer and cost about 50 percent more than comparable projects by other federal agencies or projects in the private sector. A 2004 assessment of departmental project management completed by the Civil Engineering Research Foundation recommended, among other things, that DOE develop a core group of highly qualified project directors and require peer reviews for first-of-a-kind and technically complex projects when the projects’ preliminary baselines are approved. To address project management issues, DOE began a series of reforms in the 1990s that included efforts to strengthen project management practices. To guide these reforms, the department formed the Office of Engineering and Construction Management in 1999. The reforms instituted to date have included planning, organizing, and tracking project activities, costs, and schedules; training to ensure that federal project managers had the required expertise to manage projects; increasing emphasis on independent reviews; and strengthening project reporting and oversight. The estimated costs of many of the DOE major construction projects we reviewed have significantly exceeded original estimates and schedules have slipped. On the basis of our analysis of independent project studies and interviews with project directors, cost growth and schedule slippage occurred principally because of ineffective DOE project oversight and poor contractor project management. Furthermore, unreliable initial cost and schedule estimates resulting from a now-defunct policy may have been a contributing factor, according to DOE project officials. Although external factors, such as additional security and safety requirements, contributed to cost growth and delays, the management of these requirements was complicated by ineffective and untimely DOE communication and decision making. Eight of the 12 DOE projects we reviewed had increases in estimates of total project cost (TPC) ranging from $79.0 million to $7.9 billion. As table 1 shows, the percentage of cost increase for these 8 projects ranged from 2 percent to over 200 percent. In addition, as shown in table 2, 9 of the 12 projects experienced schedule delays ranging from 9 months to more than 11 years. Of the 9 projects, 7 had schedule delays of at least 2 years or more. As table 3 shows, ineffective DOE project oversight and poor contractor management were frequently cited reasons for cost increases and schedule delays for the projects we reviewed, according to our review of independent studies of the 9 projects experiencing cost growth and schedule delays and our follow-up interviews with DOE project directors. Project officials, in commenting on our draft report, were concerned that table 3 might misrepresent the overall successful execution and completion of some projects, such as the Spallation Neutron Source, and that some problems may have already been addressed. Nevertheless, to clarify our main purpose for table 3, our intent is to show broad categories of major reasons for cost increases and schedule delays, regardless of when they occurred or whether they have been adequately addressed. The DOE project oversight issues mentioned in table 3 include the following: inadequate systems for measuring contractor performance; approval of construction activities before final designs were sufficiently insufficient DOE staffing and experience; inadequate use of project management controls; lack of headquarters assistance and oversight support of field project directors; failure to detect contractor performance problems, including inadequate federal inspection activities; and poor government cost estimates, including inadequate funding for contingencies. DOE’s lack of adequate systems to measure contractor performance was cited in a December 2005 DOE Inspector General review of the Mixed Oxide Fuel Fabrication Facility. The Inspector General criticized DOE’s NNSA for failing to approve a baseline against which to measure contractor performance and relying on outdated cost plans. According to the report, NNSA relied on confusing and misleading information detailed in the monthly project reports to monitor progress and track costs— reports that the contractor acknowledged as being “useless for evaluating performance or managing the project.” Furthermore, although the contractor reported unfavorable cost and schedule variances for months, these variances were inaccurate and meaningless because performance was being compared against a 2-year-old plan. NNSA, in commenting on our draft report, stated that project oversight and contractor management problems identified in previous GAO, Inspector General, and other independent assessments have led to extensive improvements to the project, and that major findings identified during a recent independent review have been successfully addressed. Similarly, DOE’s approval of construction activities before final designs were sufficiently complete has contributed significantly to project cost growth and schedule delays. As we have previously reported, the accelerated fast-track, design-build approach used for the Waste Treatment and Immobilization Plant, a highly complex first-of-a-kind nuclear facility, resulted in significant cost increases and schedule delays. DOE also allowed the contractor on another project, the Tritium Extraction Facility, to begin construction before the final design was completed to meet schedule commitments. According to a 2002 DOE Inspector General report on the project, this revised acquisition strategy of simultaneous design and construction directly resulted in at least $12 million in project overruns. The contractor management issues mentioned in table 3 include the poor management of technological challenges, among other contractor performance issues, according to DOE project directors. Cost increases and schedule delays for 6 of the 9 projects were due in part to contractors’ poor management of the development and integration of technologies used in project designs by, among other things, not accurately anticipating the cost and time that would be required to carry out the highly complex tasks involved. For example: The National Ignition Facility had over $1 billion in cost overruns and years of schedule delays, in large part because of technology integration problems. The requirements for the National Ignition Facility—the use of 192 high-power laser beams focused on a single target in a “clean room” environment—had not been attempted before on such a large scale. According to the DOE project director, early incorrect assumptions about the original facility design and the amount of work necessary to integrate the technologies and assemble the technical components contributed to about half of the project’s cost increases and schedule delays. The design of the Mixed Oxide Fuel Fabrication Facility has presented technical challenges in adapting the design of a similar plant in France to the design needs of this project. Although the technological challenge related to adopting the process designs from the French designs was not the primary contributor to the project’s cost increases and schedule delays, according to NNSA officials, it has affected the project’s complexity. The basic technology—combining plutonium oxide with depleted uranium to form fuel assemblies for use in commercial power reactors—has been previously demonstrated in France. However, the DOE project director told us that the DOE facility design must, among other things, account for processing surplus weapon-grade plutonium, a different type of material than processed in the French facility, and must be adapted to satisfy U.S. regulatory and other local requirements. In addition, the DOE facility faced the technological challenge of reducing the scale of components used in the French facility. Although definitive cost estimates are not yet available, expected costs for completing this project have grown by about $3.3 billion since 2002, and the schedule has been extended by more than 11 years, in part because the contractor did not initially understand the project’s complexity and underestimated the level of effort needed to complete the work. NNSA explained that the capability of the reference plants currently in operation in France, and by extension, the Mixed Oxide Fuel Fabrication Facility process design, is currently being demonstrated by several prototype fuel assemblies manufactured with weapon-grade plutonium oxide, which are currently being successfully used in a reactor in South Carolina. For the Waste Treatment and Immobilization Plant, a technology application used on the project had not been tested before construction. Filters, widely used in the water treatment industry, were being designed for the project to concentrate and remove radioactive particles in liquid waste, a new application for the filters. Although tests are currently under way to demonstrate the effectiveness of this application, project officials conceded that these filters may still not be appropriate for the project. Other contractor performance problems are illustrated by two examples. First, DOE cited the contractor working on the Highly Enriched Uranium Materials Facility for inadequate quality assurance that resulted in concrete work that did not meet design specifications. The subsequent suspension of construction activities and rework added to the project’s estimated cost and schedule. Second, the DOE project director of the Depleted Uranium Hexafluoride 6 Conversion Facility told us that the project was delayed 2 years because the contractor (1) did not have experience in government contracts, (2) underestimated the design effort needed, and (3) failed to properly integrate the operations of three separate organizations it managed. As table 3 shows, external factors were cited as also contributing to cost growth and schedule delays, such as additional work to implement requirements for higher levels of safety and security in project operations, among other things. For example, design rework for 4 of the projects occurred in response to external safety oversight recommendations by the Defense Nuclear Facilities Safety Board that large DOE construction projects meet a certain level of personnel safety, and that their designs be robust enough to withstand certain seismic events. In addition, owing to new security requirements implemented after September 11, 2001, project officials on the Highly Enriched Uranium Materials Facility had to redesign some aspects of the project to ensure that heightened security measures were addressed. While DOE faced additional requirements for safety and security, it did not always reach timely decisions on how to implement these requirements, which contributed significantly to cost increases and schedule delays for the Salt Waste Processing Facility. The DOE project director for this project told us the Defense Nuclear Facilities Safety Board had expressed concerns in June 2004, 5 months after the preliminary design was started, that the facility design might not ensure nuclear wastes would be adequately contained in the event of earthquakes. However, DOE did not decide how to address this concern until 17 months later, as the project continued to move forward with the existing project design. According to the project director, better and more timely discussions between site officials and headquarters to decide on the actions needed to adequately address these safety and security requirements might have hastened resolution of the problem, and up to 1 year of design rework might have been avoided. The delay, the director told us, added $180 million to the total project cost and extended the schedule by 26 months. In commenting on our draft report, EM officials noted that it is now requiring a more rigorous safety analysis earlier in the decision-making process. Other external factors also contributed significantly to cost increases and delays for 2 interrelated projects we reviewed—the Mixed Oxide Fuel Fabrication Facility and the Pit Disassembly and Conversion Facility. Project officials for these projects told us that 25 to 50 percent of the cost increases and over 70 percent of the schedule delays they experienced were the direct result of Office of Management and Budget funding constraints and restrictions resulting from international agreements with Russia. That is, work that is delayed to a subsequent year because of funding constraints and other work restrictions can delay project completion, which likely increases total project costs. Similarly, Office of Science officials, commenting on our draft report, stated that external factors caused the largest percentage cost increase and schedule delay for the Spallation Neutron Source, including a reduced level of funding appropriated at a time when project activities and costs were increasing considerably. However, congressional funding was reduced in fiscal year 2000 because of concerns about poor project oversight and management in the early stages of this project. DOE officials also explained that a now-defunct policy may have contributed to increased costs and delays for several projects we examined. Until 2000, DOE required contractors to prepare cost and schedule estimates early in the project, before preliminary designs were completed. These estimates were used to establish a baseline for measuring contractor performance and tracking any cost increases or schedule delays. However, these estimates often were based on early conceptual designs and, thus, were subject to significant change as more detailed designs were developed. To improve the reliability of these estimates, DOE issued a new order in October 2000 that required the preparation of a cost estimate range at the start of preliminary design, and delayed the requirement for a definitive cost and schedule baseline estimate until after the preliminary design was completed. Consequently, DOE officials explained, the new policy should result in improved estimates and a more accurate measure of cost and schedule performance. We also sent a survey to DOE project directors for all 12 projects asking them to identify key events that led to the greatest cost increases or schedule delays, and the major factors contributing to these key events. However, no individual factors were identified as being major contributors to the cost increases or schedule delays. In responding to our survey, DOE project directors cited several factors that affected changes in cost and schedule. However, when asked to rate the relative significance of these factors for their impact on cost and schedule changes, the project directors generally did not judge them to be significant contributors to the changes. The most frequently cited factors were an absence of open communication, mutual trust, and close coordination; changes in “political will” during project execution (e.g., project changes resulting from political decisions, both internal and external to the project); interruptions in project funding; and project managers’ lack of adequate professional experience. (For detailed survey results covering these four factors, see app. IV.) In contrast to the cost increases and schedule delays incurred on most of the projects we reviewed, 3 projects had not yet experienced cost increases or schedule delays—Microsystems and Engineering Sciences Applications, the Linac Coherent Light Source, and the Chemistry and Metallurgy Research Facility Replacement. DOE project officials identified key conditions that they believed helped avoid those cost increases and delays. These conditions included active oversight—that is, the DOE project directors were never “blindsided” by contractor issues; a lack of technological complexity; an effective system to measure contractor performance; effective communication with and integration of all stakeholders; and sustained leadership. However, we observed that the Linac Coherent Light Source and the Chemistry and Metallurgy Research Facility Replacement facilities are still in a relatively early stage in the project development process, and thus it may be too early to gauge the overall success of either project. Additionally, because none of these 3 projects are highly technologically complex, they may be less susceptible to the types of problems associated with other projects we reviewed that experienced cost increases and delays. Although DOE requires its final designs to be sufficiently complete before beginning construction, it has not systematically ensured that the critical technologies reflected in project designs are technologically ready. Recognizing that a lack of technology readiness can result in cost overruns and schedule delays, other federal agencies, such as NASA and DOD, have issued guidance for measuring and communicating technology readiness. Only 1 of the 5 projects we reviewed to determine how DOE ensures that project designs are sufficiently complete before construction—projects that were approaching or had recently begun construction—had a systematic assessment of technology readiness to determine whether the project components would work individually or collectively as expected in the intended design. Specifically, the DOE project director for the Pit Disassembly and Conversion Facility systematically measured and assessed readiness levels for each critical component of the overall project. The assessment was based on a method developed by NASA, that is, rating each technology from 0 to 10 in terms of relative maturity. Because the project has not yet begun construction, we could not determine whether the technology readiness assessment has helped project managers to avoid cost increases or schedule delays during construction. However, according to DOE and contractor officials responsible for the project, the assessment helped focus management attention during project design on critical technologies that may require additional resources to ensure that they are sufficiently ready before construction begins. In reviewing the assessment, however, we noted that project officials had not updated the assessment tool for this project for over 3 years. DOE’s project director acknowledged the delay in updating the assessment and responded that he plans to begin updating the assessment annually. The other 4 projects did not have systematic assessments of technological readiness. Therefore, the risk associated with the technology may not be clearly and consistently understood across all levels of management. Formally approving the project’s cost and schedule estimates as accurate and complete, or proceeding into construction, without having clearly assessed evidence of technology readiness can result in cost overruns and schedule delays. DOE’s experience with the Waste Treatment and Immobilization Plant is a case in point. Specifically, technology known as “pulse jet mixers” was used in the design of a subsystem intended to prepare radioactive material for processing. However, this technology had not been used previously in this application, and it did not work in tests as expected, even after construction had already begun. Consequently, DOE incurred about $225 million in redesign costs and over 1 year in schedule delays, according to the DOE project director. Over the past several years, we and others have stressed the importance of assessing technology readiness to complete projects successfully, while avoiding cost increases and schedule delays. Specifically, by 1999, we reported that organizations using best practices recognize that delaying the resolution of technology problems until production or construction can result in at least a 10-fold cost increase. Furthermore, we reported that delaying the resolution until after the start of production could increase costs by 100-fold. Reporting on similar concerns, the National Research Council has identified factors common to large construction projects—in the areas of cost, schedule, and scope—that help to ensure projects are completed successfully. Among key technical conditions for defining project scope, the council stated, is a project plan that is based on employing the best available, state-of-the-art technology, but not experimental or unproven technology. As such, employing a consistent, systematic method for measuring the extent to which technology is still experimental or unproven is of critical importance. An assessment of technology readiness is even more crucial at certain points in the life of a project—particularly as DOE decides to accept a project’s (1) preliminary design and formally approve the project’s cost and schedule estimates as accurate and complete and (2) final design as sufficiently complete so that resources can be committed toward procurement and construction. Proceeding through these critical decision points without a credible and complete technology readiness assessment can lead to problems later in the project. Specifically, if DOE proceeds with the project when technologies are not yet ready, there is less certainty that the technologies specified in the preliminary or final designs will work as intended. Project managers may then need to modify or replace these technologies to make them work properly, which can result in costly and time-consuming redesign work. Moreover, modifying the design of a facility after construction has already begun can be expensive and time consuming. First, changes to an already designed work plan are not necessarily subject to competition because the new work can occur through “change orders”—that is, modifications to existing contracts. These change orders can be expensive, according to DOE project directors. Second, worker productivity can be lost if, for example, extra downtime results from delays to interrelated construction work. Finally, tearing down and rebuilding items already constructed, such as concrete floors, walls, and doors, might be necessary to accommodate a design change. DOE’s experience in the predecessor project to the Salt Waste Processing Facility—the In-Tank Precipitation (ITP) project process—at the Savannah River Site illustrates the potential consequences of proceeding with technology that is not sufficiently ready. As we reported in 2000, the ITP project was selected in 1983 as the preferred method for separating highly radioactive material from 34 million gallons of liquid stored at the Savannah River site—a step considered necessary to effectively handle this large quantity of waste. A 1983 test using the ITP technology on a tank containing 500,000 gallons of waste resulted in a significant buildup of benzene—a highly explosive and hazardous compound. The buildup of benzene was more than the tank instruments could register. Nevertheless, project managers decided to proceed with the project. In 1985, DOE estimated that it would take about 3 years and $32 million to construct the ITP facility. After a number of delays, the ITP facility was constructed and began start-up operations in 1995, which were halted because of safety concerns about the amount of benzene that the facility generated. In 1998, after about a decade of delays and costs of almost $500 million, DOE suspended the project because it did not work as safely and efficiently as designed. This suspension put an effective remedy for treating high-level waste at the Savannah River Site years behind schedule. DOE then directed its contractor to begin a process to identify and select an alternative technology, which has developed into the current project intended to treat this waste—the Salt Waste Processing Facility project. In response to our concerns about the 4 projects without systematic assessments of technology readiness, DOE project directors explained that they have alternative methods for assessing readiness. They are required to submit a project execution plan, which includes an assessment of risks, including technological risks, and a plan for mitigating risks. They also rely upon independent reviews, including extensive design reviews, before making critical decisions to accept designs, and cost and schedule estimates, or to proceed with construction. For example, DOE’s Office of Engineering and Construction Management formally reviews major projects in an effort to ensure that the designs are sufficiently complete to begin construction. Specifically, an external independent readiness review is performed, often using the services of various independent technical experts, that, at a minimum, is intended to verify the readiness of the project to proceed into construction or to identify remedial action. Finally, several DOE project directors stated that they intentionally have avoided using fast-track, design-build approaches because of the many problems it posed for the Waste Treatment and Immobilization Plant project. The DOE project directors of the 5 DOE projects that are nearing, or have recently begun construction, told us they have completed, or expect to complete prior to construction, 85 to 100 percent of their projects’ final design. In addition to following the more standard approaches for managing projects, such as preparing risk assessment plans, some DOE offices have developed their own tools for assessing the readiness of projects. For example, DOE’s Office of Environmental Management (EM) uses a Product Definition Rating Index (PDRI) as a tool to assess how well a project is planned, and whether it is ready to proceed to the next project phase. Project elements rated include cost, schedule, scope/technical, management planning and control, and external factors. Among the 77 project elements rated, 2 involve technology—the identification of technology development requirements, and the testing and evaluation of the technology to be used. While the project technologies are collectively given a ranking with this tool, the PDRI does not represent a rigorous examination of the demonstrated readiness of each critical technology for its application in the project. Furthermore, not all EM projects we examined were using this tool. DOE’s design reviews, risk assessments, and other actions to monitor design completion are extensive and certainly have merit. However, we found that these actions alone do not provide consistent and transparent assurance that all technologies are sufficiently ready because they do not use a consistent and systematic method of measurement. DOE’s project design reviews, for example, do not always clearly distinguish between technology that has been demonstrated to work as expected in the intended design versus a judgment that the technology has potential for reaching a specific level of readiness. The external review of the technologies for the Mixed Oxide Fuel Fabrication Facility illustrates the shortfalls in DOE’s current approach to assessing technology readiness and communicating the results of those assessments. The report concluded, among other things, that the method chosen by the contractor is the most rigorous and comprehensive, and should result in the most successful technology transfer possible. Furthermore, the review team was very impressed with the rigor with which designs and design changes were being managed, finding ample evidence verifying that the exact design process used by the French was being transferred to the United States facility. Although the external reviewers seemed to be impressed with many aspects of the design transfer, and concluded that the technologies should not be problematic, they had identified some key concerns about technology readiness in the body of their final report. The reviewers did not explain how they reconciled their conclusion with their concerns. To reconcile these differences, we obtained several clarifying statements from DOE’s project director, technical experts, and one of the study’s authors. These clarifying statements appear to support the reviewers’ conclusions. However, without these statements, the level of technological readiness was not readily evident because the independent review lacked consistent, systematic criteria and a method for measuring the degree of readiness or clearly communicating assessment results, and the review was not transparent. DOE does not consistently assess technology readiness of project technologies because its project management guidance lacks comprehensive standards for systematically measuring and communicating the readiness of project technologies. Specifically, DOE lacks consistent metrics for determining technology readiness departmentwide, terminology to facilitate effective communication, and oversight protocols for reporting and reviewing technology readiness levels. DOE project management guidance is contained in two key documents—DOE Order 413.3A and Manual 413.3-1. Although the manual requires final designs to be sufficiently complete before beginning construction, it does not specify how technologies reflected in project designs are to be assessed for readiness—to determine that they have been sufficiently demonstrated to work as intended. Consequently, critical decisions made without standard measures are susceptible to varying interpretations of the actual technology readiness attained and the level needed for a project to proceed, which can easily vary among projects and among officials within a single project. Other federal agencies have recognized the importance of ensuring that technologies have been sufficiently demonstrated for their intended purpose and have issued standard guidance for measuring and communicating TRLs. In particular, recognizing the need to measure the readiness level of project technologies, NASA began using a systematic method of measurement in the mid-1990s. NASA incorporated a structured TRL approach into guidance on integrated technology planning. Similarly, to improve DOD management of risk and technology development, the Deputy Under Secretary of Defense (Science and Technology) officially endorsed, in a July 2001 memorandum, the use of TRLs in new major programs. In 2002, DOD issued mandatory procedures for major defense acquisition programs and major automated information system acquisition programs, which identified technology readiness as a principal element of program risk. The procedures require the military services’ science and technology officials to conduct a systematic assessment of critical technologies that are identified in major weapon systems programs before starting engineering and manufacturing development and production. Using TRLs is the preferred method, and approval must be obtained from the Deputy Under Secretary if an equivalent alternative method is used, according to the Deputy Under Secretary’s memorandum. Importantly, the procedures stated that TRLs are a measure of demonstrated technical maturity—they do not discuss the probability of occurrence (i.e., the likelihood of attaining required maturity) or the impact of not achieving technology maturity. Both NASA and DOD use a nine-point scale to measure technology readiness, from a low of TRL 1 (basic principles observed) to a high of TRL 9 (total system used successfully in project operations). (App. V contains the definitions of these nine TRLs.) For example, a subsystem prototype that has been successfully demonstrated in an operational environment would receive a higher TRL value (i.e., TRL 7) than a technological component that has been demonstrated in a laboratory test (i.e., TRL 4). In our previous work, we recommended to the Secretary of Defense that key project technologies used in weapons systems be demonstrated in an operational environment, reaching a high maturity level—analogous to TRL 7—before deciding to commit to a cost, schedule, and performance baseline for development and production of the weapon system. In response to our recommendation, DOD has agreed that if a technology does not achieve a score of TRL 6 or 7, project managers must develop a plan to bring the technology to the required readiness level before proceeding to the next project phase. Use of TRLs is not by itself a cure-all for managing critical technologies, but TRLs can be used in conjunction with other measures to improve the way projects are managed. For example, according to studies by NASA, DOD, and others, TRLs can provide a common language among the technology developers, engineers who will adopt/use the technology, and other stakeholders; improve stakeholder communication regarding technology development— a by-product of the discussion among stakeholders that is needed to negotiate a TRL value; reveal the gap between a technology’s current readiness level and the readiness level needed for successful inclusion in the intended product; identify at-risk technologies that need increased management attention or additional resources for technology development to initiate risk-reduction measures; and increase transparency of critical decisions by identifying key technologies that have been demonstrated to work or by highlighting still immature or unproven technologies that might result in high project risk. Two DOE headquarters offices have attempted to systematically assess technology readiness. First, under the Office of Nuclear Energy, a DOE contractor preparing a congressional report used a TRL method to compare the maturity of advanced fuel cycle technologies. In addition, in 2000, DOE’s Office of Science and Technology, under EM, issued a report that defined a process for assessing technology maturity of EM projects. However, according to an EM official, the office decided to discontinue using this assessment process because it was considered overly burdensome. As a result, DOE devolved responsibility for managing technology readiness to the contractor level. According to several DOE project directors we spoke with, a consistent, systematic method for assessing technology readiness would help achieve a number of objectives: that is, standardize terminology, make technology assessments more transparent, and improve communication among project stakeholders before they make critical project decisions. DOE project managers also acknowledged that TRLs could improve project management departmentwide, and some managers are now attempting to use this tool to assess technology maturity. The DOE project director for the Waste Treatment and Immobilization Plant told us that a senior DOE official encouraged him to begin using TRLs. He is consulting with DOD officials knowledgeable about using the TRL method and expects to develop a TRL tool and have TRL determinations for major parts of the project in 2007. (App. VI compares DOD’s product development process with DOE’s project management process for major projects.) The magnitude of the cost increases and schedule delays for DOE’s major projects is cause for serious rethinking of how DOE manages them. To its credit, DOE has completed, or expects to complete prior to construction, 85 to 100 percent of project design work for the 5 projects we reviewed that have recently begun or are nearing construction. However, DOE has not systematically addressed another key factor—the readiness level of the technologies it expects to use in these projects. DOE lacks comprehensive standards in DOE Order 413.3A and Manual 413.3-1 for systematically measuring and communicating the readiness of project technologies. Specifically, the department lacks consistent metrics for determining technology readiness departmentwide, terminology, and oversight protocols for reporting and reviewing TRLs. Without consistent measurement and communication of the readiness of technologies, DOE does not have a basis for defining the acceptable level of technological risk for each project, making critical decisions on accepting the validity of a project’s total estimated cost and schedule, or proceeding with construction. Other federal agencies have recognized the need to consistently measure and communicate technology readiness to help avoid cost increases and delays that result from relying on immature technologies. DOD, for example, requires its managers to use a TRL process to measure technology readiness and generally requires a TRL 7 (as we had recommended) before system development and demonstration. In contrast, as DOE’s poor track record for managing the technological complexity of major projects shows, DOE has not systematically measured the readiness of critical project technologies before it approves definitive cost and schedule estimates or begins construction. Furthermore, without a systematic method for measuring technological readiness, DOE cannot effectively communicate within the department and to the Congress whether projects are at risk of experiencing cost increases and schedule delays associated with technology problems. To improve decision making and oversight for major DOE construction projects, including how project technology readiness is measured and reported, we recommend that the Secretary of Energy evaluate and consider adopting a disciplined and consistent approach to assessing TRLs for projects with critical technologies that includes the following three actions: Develop comprehensive standards for systematically measuring and communicating the readiness of project technologies. At a minimum, these standards should (1) specify consistent metrics for determining technology readiness departmentwide, (2) establish terminology that can be consistently applied across projects, and (3) detail the oversight protocols to be used in reporting and reviewing TRLs. In preparing these standards, DOE should consider lessons learned from NASA and DOD, and its own experience in measuring technology readiness. If DOE’s evaluation results in the decision to adopt these standards, it should incorporate them into DOE Order 413.3A and Manual 413.3-1, and provide the appropriate training to ensure their proper implementation. Direct DOE Acquisition Executives to ensure that projects with critical technologies reach a level of readiness commensurate with acceptable risk—analogous to TRL 7—before deciding to approve the preliminary design and commit to definitive cost and schedule estimates, and at least TRL 7 or, if possible, TRL 8 before committing to construction expenses. Inform the appropriate committees and Members of Congress of any DOE decision to approve definitive cost and schedule estimates, or to begin construction, without first having ensured that project technologies are sufficiently ready (at TRL 7 or 8). This information should include specific plans for mitigating technology risks, such as developing backup technologies to offset the effects of a potential technology failure, and appropriate justification for accepting higher technological risk. We provided a draft of this report to DOE for its review and comment. DOE’s written comments are reproduced in appendix VII. DOE agreed with our recommendations but suggested revisions that would allow it to first conduct a pilot application on selected projects to better understand the technology readiness assessment process and evaluate its potential use. We revised our recommendations to give DOE this flexibility. DOE also provided detailed technical comments, which we have incorporated into our report as appropriate. DOE also expressed several specific concerns with our draft report. First, DOE stated that while our draft broadly asserts that DOE project management has led to increases in cost and schedule, our recommendations are narrowly focused on technology assessment. We agree that our draft states that DOE project management has led to cost increases and schedule delays, a conclusion we reached on the basis of our contact with DOE project directors and our review of numerous studies and reports on DOE major projects. Our recommendations address technology assessment, a critical project management activity, because they were developed primarily on the basis of our specific finding that DOE lacks a systematic approach to ensure that final project designs, including critical technologies reflected in these designs, have been demonstrated to work as intended prior to construction. This report explains that delaying resolution of technology problems until construction can potentially lead to significant cost increases and schedule delays. Second, DOE stated that our draft report inappropriately characterizes cost and schedule growth from a small sample of projects by using preliminary cost and schedule estimates that are intended for internal DOE planning. To clarify, the scope of our review included an evaluation of DOE’s major construction projects. In addition, our report explains that DOE changed its project management policy in 2000 to allow cost and schedule estimates to be prepared later in the project—at the end of preliminary design. Prior to this new policy, project directors submitted cost and schedule estimates earlier in the project development phase—at the end of conceptual design. For projects under way prior to the policy in 2000, we used post-2000 validated baseline estimates, if available. Otherwise, we used earlier estimates since these were the only estimates available and had been previously used by DOE to inform Congress of the total expected project cost and schedule while seeking initial project funding. We also note that for the five projects that were started after the new policy in 2000, we used the validated project baseline estimates recommended by DOE, if available. Third, DOE suggested we revise table 3 in our report to more clearly identify the correlation between cost and schedule growth and technology maturity. As our report states, the information in table 3 was drawn from the results of our review of independent studies involving the projects we reviewed and the results of our interviews with DOE project directors. Our report explains that cost increases and schedule delays for 6 of the 9 projects shown in the table were due in part to contractors’ poor management of the development and integration of technologies used in the project designs. Finally, DOE stated that it is unclear how the factors cited in appendix IV, such as communication, and changes in “political will,” among other things, led to our recommendation to assess technology readiness. Although not all of the factors cited in our survey have a link to our recommendation on technology readiness, one factor in particular— absence of communication—is addressed in our recommendation. Specifically, we recommended that the Secretary of Energy consider developing comprehensive standards for systematically measuring and communicating the readiness of project technologies, including the establishment of terminology that is to be consistently applied across projects. We are sending copies of the report to interested congressional committees, the Secretary of Energy, and the Director of the Office of Management and Budget. We will make copies available to others on request. In addition, the report will also be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Other staff contributing to the report are listed in appendix VIII. To determine the extent to which the Department of Energy’s (DOE) major construction projects have experienced cost increases and schedule delays and the factors that have contributed to these problems, we identified (1) active DOE major line-item construction projects that have current total project cost estimates above the $750 million threshold— DOE’s criteria for “major construction projects,” and (2) the projects with estimates above $400 million—the DOE threshold for major projects until July 2006. We also identified those projects above $300 million to account for any projects that may pass the $400 million threshold. In all, we identified the following 12 projects: Five of these 12 projects began before DOE moved its requirement for firm cost and schedule estimates to later in the project: the National Ignition Facility, the Mixed Oxide Fuel Fabrication Facility, the Pit Disassembly and Conversion Facility, the Spallation Neutron Source, and the Tritium Extraction Facility. We used the estimates at the end of conceptual design, as reported by project directors, for the initial project cost and schedule estimates. Four of the remaining 7 projects had cost and schedule estimates completed at the end of preliminary design, according to the new DOE guidelines: the Highly Enriched Uranium Materials Facility, Microsystems and Engineering Sciences Applications, the Depleted Uranium Hexafluoride 6 Conversion Facilities, and the Linac Coherent Light Source. For these projects, we considered the estimates as reported by project directors to be the initial cost and schedule estimates. One project, the Waste Treatment and Immobilization Plant, began after DOE moved the requirement for firm cost and schedule estimates to later in the project. However, DOE initially exempted the contractor from submitting firm cost and schedule estimates. Therefore, we used the estimates reported by the project director to be the initial cost and schedule estimates. The final 2 projects, although falling under the new DOE requirements, had yet to complete their preliminary design at the time of our review: the Chemistry and Metallurgy Research Facility Replacement and the Salt Waste Processing Facility. For these projects, we considered the cost and schedule estimates at the end of conceptual design reported by project directors to be the initial project cost and schedule estimates. Because we and others have previously expressed concern about the data reliability of a key DOE project management tracking database—the Project Assessment and Reporting System—we did not develop conclusions or findings based on information generated through that system. Instead, we collected information directly through surveys and interviews with project site officials. To identify cost increases and schedule delays, and the factors that may have contributed to these changes, we surveyed DOE project directors, interviewed DOE and contractor project personnel, and reviewed project management documents for 12 major projects. These 12 projects are managed by DOE’s Office of Science, Office of Environmental Management (EM), or National Nuclear Security Administration (NNSA). (See app. II for information on these projects.) Our survey asked DOE project directors of the 12 projects to identify the degree to which cost and schedule estimates may have changed and the reasons for these changes, and to describe the events and conditions that led to any changes. Eight of the 12 project directors responded that their projects had experienced cost increases and schedule delays, and 1 project director reported only a schedule delay. For these 9 projects, we asked project directors to (1) identify the top three events that led to the cost and schedule delays and (2) indicate to what extent certain factors may have contributed to the event that led to the largest percentage cost increase or schedule delay. The factors included in the survey instrument were based on the results of a National Research Council study that listed essential or important conditions needed for the successful completion of major projects. We asked project directors to identify the extent to which the lack of these conditions may have contributed to any cost and schedule delays. (App. IV shows key survey results for these 9 projects.) In addition to reviewing project documentation, we conducted site visits for the 9 projects that had experienced cost and schedule changes, and we analyzed (1) studies of these projects completed by DOE’s Office of Inspector General and (2) external independent project reviews conducted under the direction of DOE’s Office of Engineering and Construction Management in Washington, D.C. We interviewed federal project directors of the 3 projects that had not experienced cost increases or schedule delays to obtain information on factors they believe are important in avoiding such increases. To determine the extent to which DOE ensures that project designs are sufficiently complete before construction, we obtained additional information from project directors on 5 projects that were approaching, or had recently begun, construction. During our review, we obtained information on the extent project designs were, or are expected to be, complete before beginning construction, and the actions DOE had taken to ensure technologies used in these designs are sufficiently ready to begin construction. For 2 of these 5 projects, we applied a tool we previously had used to assess DOD programs—the tool enables project directors to characterize the readiness level of each technology being developed for use in aircraft and other military applications. In addition, we spoke with officials from DOE program offices and DOE’s Office of Engineering and Construction Management in Washington, D.C. We provided interim briefings to the Subcommittee on Energy and Water Development, House Committee on Appropriations, on the status of our work in May and September, 2006. We performed our work between December 2005 and January 2007, in accordance with generally accepted government auditing standards. Relocate and consolidate mission-critical analytical chemistry, material characterization, and research and development capabilities to ensure continuous national security mission support beyond 2010. Design and construct facilities at Portsmouth, Ohio, and Paducah, Kentucky, to convert the Department of Energy’s existing inventory of depleted uranium hexafluoride into a more stable form for disposal or beneficial reuse. Project will construct a highly secure, state-of-the-art facility for consolidating and storing highly enriched uranium, resulting in cost savings and an increased security posture. Provide laser-like radiation in the X-ray region of the spectrum that is 10 billion times greater in peak brightness than any existing X-ray light source. The project will apply these high-brightness X-rays to experiments in the chemical, material, and biological sciences. Provide state-of-the-art national complex that will provide for the design, integration, prototyping, and qualification of microsystems into components, subsystems, and systems within the nuclear weapons stockpile. Facility will combine surplus weapon-grade plutonium oxide with depleted uranium to form mixed oxide fuel assemblies that will be irradiated in United States commercial nuclear reactors. Once irradiated and converted into spent fuel, the resulting plutonium can no longer be readily used for nuclear weapons. Provide experimental capability to assess nuclear weapons physics, providing critical data that will allow the United States to maintain its technical capabilities in nuclear weapons in the absence of underground testing, and to advance fusion as an energy source. Eliminate surplus Russian and United States plutonium and highly enriched uranium by disassembling surplus nuclear weapons pits and converting the resulting plutonium metal to a powder form that can later be fabricated into mixed oxide fuel to produce nuclear fuel assemblies for use in commercial nuclear reactors. Meet site cleanup goals and reduce significant environmental and health/safety risk by construction of a facility to treat large quantities of waste from reprocessing and nuclear materials production operations at the Savannah River Site. Process will separate waste, solidify it in glass, and send it to federal repositories for disposal. Provide next generation, short-pulse spallation neutron source for neutron scattering, to be used by researchers from academia, national and federal labs, and industry for basic and applied research and technology development in the fields of condensed matter physics, materials sciences, magnetic materials, polymers and complex fluids, chemistry, biology, earth sciences, and engineering. To replenish the tritium needs of the nuclear weapons stockpile, the facility will extract tritium produced in a commercial nuclear reactor for use in nuclear weapons development. The plant will separate high-level from low-level radioactive waste currently stored in underground tanks, processing and solidifying all high- level waste and a substantial portion of the low-level waste, and will treat the remaining low-level waste. Department of Energy, Office of Inspector General. Audit Report: Status of the National Ignition Facility Project. DOE/IG-0598. Washington, D.C.: April 28, 2003. GAO. Department of Energy: Status of Contract and Project Management Reforms. GAO-03-570T. Washington, D.C.: March 20, 2003. GAO. Contract Reform: DOE Has Made Progress, but Actions Needed to Ensure Initiatives Have Improved Results. GAO-02-798. Washington, D.C.: September 13, 2002. GAO. Department of Energy: Follow-up Review of DOE’s National Ignition Facility. GAO-01-677R. Washington, D.C.: June 1, 2001. GAO. National Ignition Facility: Management and Oversight Failures Caused Major Cost Overruns and Schedule Delays. GAO/RCED-00-141 and GAO/RCED-00-271. Washington, D.C.: August 8, 2000. The Mitre Corporation. NIF Ignition. JSR-05-340. McLean, VA: June 29, 2005. Burns and Roe Enterprises, Inc. External Independent Review of the Mixed Oxide Fuel Fabrication Facility (MFFF) Project Critical Decision (CD) 2/3 Baseline: Performance Baseline (CD-2) and Start of Construction (CD-3) Review. BREI-L-R-06-03. Oradell, NJ: July 7, 2006. Burns and Roe Enterprises, Inc. External Independent Review of the Basis of Design for the Aqueuous Polishing Process. BREI-SLP-R-06-01. Oradell, NJ: March 27, 2006. Civil Engineering Research Foundation. Independent Research Assessment of Project Management Factors Affecting Department of Energy Project Success. Washington, D.C.: July 12, 2004. Department of Energy, Office of Inspector General. Audit Report: Status of the Mixed Oxide Fuel Fabrication Facility. DOE/IG-0713. Washington, D.C.: December 21, 2005. Department of Energy, Office of Inspector General. Audit Report: National Nuclear Security Administration’s Pit Disassembly and Conversion Facility. DOE/IG-0688. Washington, D.C.: May 3, 2005. Los Alamos National Laboratory. Options for the Development and Testing of the Pit Disassembly and Conversion Facility Government- Furnished Design. LA-UR-03-3926. Los Alamos, NM: June 11, 2003. Bechtel National, Inc. Hanford Tank Waste Treatment and Immobilization Plant, May 2006 Estimate at Completion. Hanford Site, WA: May 31, 2006. Bechtel National, Inc. Comprehensive Review of the Hanford Tank Waste Treatment and Immobilization Plant Estimate at Completion. CCN 132848. Hanford Site, WA: March 31, 2006. Bechtel National, Inc. Comprehensive Review of the Hanford Waste Treatment Plant Flowsheet and Throughput. CCN132846. Hanford Site, WA: March 17, 2006. Bechtel National, Inc. Hanford Tank Waste Treatment and Immobilization Plant, December 2005 Estimate at Completion Executive Summary. Hanford Site, WA: January 30, 2006. Department of the Army Corp of Engineers. Complete Statement of Kim Callan, to the Subcommittee on Energy and Water Development, Committee on Appropriations, United States House of Representatives. Washington, D.C.: April 6, 2006. Department of Energy. External Independent Review, Independent Cost Review, CD-3C Review of the Waste Treatment and Immobilization Plant Project. Hanford Site, WA: September 2002. Department of Energy. External Independent Review CD-3B Review of the Waste Treatment and Immobilization Plant Project. Hanford Site, WA: April 2002. GAO. Hanford Waste Treatment Plant, Contractor and DOE Management Problems Have Led to Higher Costs, Construction Delays, and Safety Concerns. GAO-06-602T. Washington, D.C.: April 6, 2006. GAO. Further Actions Are Needed to Strengthen Contract Management for Major Projects. GAO-05-123. Washington, D.C.: March 18, 2005. GAO. Nuclear Waste: Absence of Key Management Reforms on Hanford’s Cleanup Project Adds to Challenges of Achieving Cost and Schedule Goals. GAO-04-611. Washington, D.C.: June 9, 2004. GAO. Status of Contract and Project Management Reforms. GAO-03-57T. Washington, D.C.: March 20, 2003. GAO. Contract Reform: DOE Has Made Progress, but Actions Needed to Ensure Initiatives Have Improved Results. GAO-02-798. Washington, D.C.: September 13, 2002. GAO. Nuclear Waste: Hanford Tank Waste Program Needs Cost, Schedule, and Management Changes. GAO/RCED-93-99. Washington, D.C.: March 8, 1993. LMI Government Consulting. Hanford Waste Treatment and Immobilization Plant After-Action Fact-Finding Review. DE535T1. McLean, VA: January 2006. LMI Government Consulting. External Independent Review, Follow-up Review, Waste Treatment and Immobilization Plant (WTP) Out Briefing. Washington, D.C.: March 14, 2003. Civil Engineering Research Foundation. Independent Research Assessment of Project Management Factors Affecting Department of Energy Project Success. Washington, D.C.: July 12, 2004. Department of Energy, Office of Inspector General. Audit Report: Progress of the Spallation Neutron Source Project. DOE/IG-0532. Washington, D.C.: November 19, 2001. Department of Energy. Review Committee Report on the Baseline Review of the Spallation Neutron Source (SNS) Project. Washington, D.C.: July 15, 1999. Department of Energy. Technical, Cost, Schedule, and Management Review of the Spallation Neutron Source Project. Washington, D.C.: January 28, 1999. GAO. Department of Energy: Status of Contract and Project Management Reforms. GAO-03-570T. Washington, D.C.: March 20, 2003. GAO. Contract Reform: DOE Has Made Progress, but Actions Needed to Ensure Initiatives Have Improved Results. GAO-02-798. Washington, D.C.: September 13, 2002. GAO. Department of Energy: Challenges Exist in Managing the Spallation Neutron Source Project. GAO/T-RCED-99-103. Washington, D.C.: March 3, 1999. Department of Energy, Office of Inspector General. Audit Report: Salt Processing Project at the Savannah River Site. DOE/IG-0565. Washington, D.C.: August 27, 2002. Institute for Regulatory Science. Technical Peer Review Report of the Review Panel on Salt Waste Processing Facility Technology Readiness. CRTD-Vol. 75. Danvers, MA: October 31, 2003. Civil Engineering Research Foundation. Independent Research Assessment of Project Management Factors Affecting Department of Energy Project Success. Washington, D.C.: July 12, 2004. Department of Energy, Office of Inspector General. Audit Report: The Department of Energy’s Tritium Extraction Facility. DOE/IG-0560. Washington, D.C.: June 24, 2002. GAO. Department of Energy: Further Actions Are Needed to Strengthen Contract Management for Major Projects. GAO-05-123. Washington, D.C.: March 18, 2005. GAO. Department of Energy: Status of Contract and Project Management Reforms. GAO-03-570T. Washington, D.C.: March 20, 2003. GAO. Contract Reform: DOE Has Made Progress, but Actions Needed to Ensure Initiatives Have Improved Results. GAO-02-798. Washington, D.C.: September 13, 2002. GAO. Nuclear Weapons: Design Reviews of DOE’s Tritium Extraction Facility. GAO/RCED-98-75. Washington, D.C.: March 31, 1998. National Nuclear Security Administration. Program Review of the Estimate to Complete Tritium Extraction Facility (TEF) at Savannah River Site. Washington, D.C.: August 29, 2002. BWXT Y-12. Highly Enriched Uranium Materials Facility Project Causal Analysis Report. Oak Ridge, TN: March 6, 2006. Department of Energy. Limited External Independent Review for Baseline Change Proposal Review. Oak Ridge, TN: August 31, 2004. Department of Energy, Office of Inspector General. Audit Report, Design of the Uranium Storage Facility at the Y-12 National Security Complex. DOE/IG-0643. Washington, D.C.: March 19, 2004. Department of Energy, Office of Inspector General. Audit Report, Reestablishment of Enriched Uranium Operations at the Y-12 National Security Complex. DOE/IG-0640. Washington, D.C.: February 24, 2004. Department of Energy. External Independent Review – Performance Baseline Review of the Highly Enriched Uranium Materials Facility Project. Oak Ridge, TN: June 2003. Department of Energy. Report on the Independent Project Review of the Depleted Uranium Hexafluoride Conversion Project. Washington, D.C.: October 8, 2004. Department of Energy, Office of Inspector General. Audit Report: Depleted Uranium Hexafluoride Conversion. DOE/IG-0642. Washington, D.C.: March 18, 2004. GAO. Department of Energy: Status of Contract and Project Management Reforms. GAO-03-570T. Washington, D.C.: March 20, 2003. LMI Government Consulting. DUF6 Conversion Project CD-3 Corrective Action Plan Review. DE538T1. McLean, VA: October 2005. LMI Government Consulting. Construction Readiness EIR (for CD-3) of the Depleted Uranium Hexafluoride Conversion Project. DE534T1. McLean, VA: June 2005. LMI Government Consulting. DUF6 Conversion Project CD-3C Construction Readiness Review Preliminary Draft. Washington, D.C.: May 20, 2005. LMI Government Consulting. DUF6 Limited Conversion Plan Project External Independent Review for the Office of Engineering and Construction Management. DE428T1. McLean, VA: June 2004. Jupiter Corporation. External Independent Review of the Chemistry and Metallurgy Research Building Replacement Project. Approve Performance Baseline and Approve Start of Construction. CD-2A/CD-3A. Wheaton, MD: October 14, 2005. Absence of open communication, mutual trust, and close coordination Depleted Uranium Hexafluoride 6 Conversion Facility Highly Enriched Uranium Materials Facility Pit Disassembly and Conversion Facility Waste Treatment and Immobilization Plant Changes in “political will” during project execution (e.g., project changes resulting from political decisions—includes politics internal and external to the project ) Appendix V: Definitions of Technology Readiness Levels None. None. Research to prove feasibility. Desktop, “back of envelope” environment. Research to prove feasibility. None. Paper studies indicate components ought to work together. Academic environment. The emphasis here is still on understanding the science but beginning to think about possible applications of the scientific principles. Research to prove feasibility. No system components, just basic laboratory research equipment to verify physical principles. No attempt at integration; still trying to see whether individual parts of the technology work. Lab experiments with available components show they will work. Uses of the observed properties are postulated and experimentation with potential elements of subsystem begins. Lab work to validate pieces of technology without trying to integrate. Emphasis is on validating the predictions made during earlier analytical studies to ensure that the technology has a firm scientific underpinning. Demonstrate technical feasibility and functionality. Ad Hoc and available laboratory components are surrogates for system components that may require special handling, calibration, or alignment to get them to function. Not fully functional but representative of technically feasible approach. Available components assembled into subsystem breadboard. Interfaces between components are realistic. Tests in controlled laboratory environment. Lab work at less than full subsystem integration, although starting to see if components will work together. Demonstrate technical feasibility and functionality. Fidelity of components and interfaces are improved from TRL 4. Some special purpose components combined with available laboratory components. Functionally equivalent but not of same material or size. May include integration of several components with reasonably realistic support elements to demonstrate functionality. Fidelity of subsystem mock up improves (e.g., from breadboard to brassboard). Integration issues become defined. Laboratory environment modified to approximate operational environment. Increases in accuracy of the controlled environment in which it is tested. Demonstrate applicability to intended project and subsystem integration. (Specific to intended application in project.) Subsystem is high fidelity functional prototype with (very near same material and size of operational system). Probably includes the integration of many new components and realistic supporting elements/subsystems if needed to demonstrate full functionality. Partially integrated with existing systems. Components are functionally compatible (and very near same material and size of operational system). Component integration into system is demonstrated. Relevant environment inside or outside the laboratory, but not the eventual operating environment. The testing environment does not reach the level of an operational environment, although moving out of controlled laboratory environment into something more closely approximating the realities of technology’s intended use. Demonstrate applicability to intended project and subsystem integration. (Specific to intended application in project.) Prototype improves to preproduction quality. Components are representative of project components (material, size, and function) and integrated with other key supporting elements/subsystems to demonstrate full functionality. Accurate enough representation to expect only minor design changes. Prototype not integrated into intended system but onto surrogate system. Operational environment, but not the eventual environment. Operational testing of system in representational environment. Prototype will be exposed to the true operational environment on a surrogate platform, demonstrator, or test bed. Applied/Integrated into intended project application. Components are right material, size, and function compatible with operational system. Subsystem performance meets intended application and is fully integrated into total system. Demonstration, test, and evaluation completed. Demonstrates system meets procurement specifications. Demonstrated in eventual environment. Applied/Integrated into intended project application. Components are successfully performing in the actual environment— proper size, material, and function. Subsystem has been installed and successfully deployed in project systems. Operational testing and evaluation completed. Demonstrates that system is capable of meeting all mission requirements. application) application) In addition to the individual named above, Michaela Brown, Rudy Chatlos, James Espinoza, Daniel Feehan (Assistant Director), Joseph Keener, Thomas Kingham, Matthew Lea, Mehrzad Nadji, Omari Norman, Christopher Pacheco, Thomas Perry, and Carol Herrnstadt Shulman made key contributions to this report. | The Department of Energy (DOE) spends billions of dollars on major construction projects that help maintain the nuclear weapons stockpile, conduct research and development, and process nuclear waste so that it can be disposed of. Because of DOE's long-standing project management problems, GAO determined the extent to which (1) DOE's major construction projects are having cost increases and schedule delays and the major factors contributing to these problems and (2) DOE ensures that project designs are sufficiently complete before construction begins to help avoid cost increases and delays. We examined 12 DOE major projects with total costs of about $27 billion, spoke with federal and contractor officials, and reviewed project management documents. Of the 12 DOE major projects GAO reviewed, 9 exceeded their original cost or schedule estimates, principally because of ineffective DOE project oversight and poor contractor management. Specifically, 8 of the 12 projects experienced cost increases ranging from $79.0 million to $7.9 billion, and 9 of the 12 projects were behind schedule by 9 months to more than 11 years. Project oversight problems included, among other things, inadequate systems for measuring contractor performance, approval of construction activities before final designs were sufficiently complete, ineffective project reviews, and insufficient DOE staffing. Furthermore, contractors poorly managed the development and integration of the technology used in the projects by, among other things, not accurately anticipating the cost and time that would be required to carry out the highly complex tasks involved. Even though DOE requires final project designs to be sufficiently complete before beginning construction, it has not systematically ensured that the critical technologies reflected in these designs have been demonstrated to work as intended (technology readiness) before committing to construction expenses. Specifically, only one of the five DOE project directors with projects that have recently begun or are nearing construction had systematically assessed technology readiness. The other four directors also told us that they have or will have completed prior to construction, 85 to 100 percent of their projects' final design, but they had not systematically assessed technology readiness. Proceeding into construction without also demonstrating a technology's readiness can lead to cost increases and delays. For example, one technology to be used in DOE's Waste Treatment and Immobilization Plant was not sufficiently demonstrated--that is, shown to be technologically ready for its intended application--before construction began. Consequently, the technology did not perform as expected, which resulted in about $225 million in redesign costs and schedule delays of more than 1 year. To help avoid these problems, the National Aeronautics and Space Administration (NASA) pioneered and the Department of Defense (DOD) has adopted for its projects a method for measuring and communicating technology readiness levels (TRL). Using a scale from one (basic principles observed) through nine (total system used successfully in project operations), TRLs show the extent to which technologies have been demonstrated to work as intended in the project. DOE project directors agreed that such an approach would help make technology assessments more transparent and improve stakeholder communication prior to making critical project decisions, such as authorizing construction. |
ITAA, a trade association, issued a report entitled Help Wanted: The IT Workforce Gap at the Dawn of a New Century in February 1997 that focused on issues relating to the IT labor market. Responding to this report, the National Economic Council and the Departments of Commerce, Education, and Labor began to discuss the workforce requirements of the IT sector; subsequently, federal officials agreed to cosponsor a convocation on the IT worker issue. The convocation, cosponsored by the Departments of Commerce and Education, the University of California at Berkeley, and ITAA, was designed to bring together leaders from industry, academia, and government to develop new educational strategies and forge partnerships that would increase the quantity and quality of the American IT workforce. Federal officials noted that the convocation would support the administration’s goals for lifelong learning. Commerce’s Office of Technology Policy was assigned the lead federal role in working with ITAA on the IT worker issue. The Office of Technology Policy’s mission is to work with the private sector to develop and advocate national policies that maximize technology’s contribution to U.S. economic growth, the creation of high-wage jobs, and improvements in Americans’ quality of life. In preparation for the January 12-13, 1998, convocation, the Department of Commerce issued its report, America’s New Deficit: The Shortage of Information Technology Workers, examining the potential for shortages of IT workers. In its report, Commerce presented BLS projections that between 1994 and 2005 the United States would require slightly over 1 million additional IT workers. BLS projections, based on surveys conducted for the Occupational Employment Statistics program and on the Current Population Survey, estimate future occupational needs resulting from expected national growth and separations from employment over time. Although there is no single, universally accepted definition of the occupations that should be designated as IT occupations, Commerce based its analysis of demand on job growth projections for the three IT occupations used by BLS—computer programmers, systems analysts, and computer scientists and engineers. BLS projections for new IT workers over the 11 years from 1994 to 2005 include IT workers to fill newly created jobs (820,000) in the three occupational categories and to replace workers (227,000) who are leaving these fields as a result of retirement, change of profession, or other reasons. The report noted that, according to BLS, of the three IT occupations, the greatest job growth is predicted for systems analysts (92 percent). (See table 1.) The number of computer engineers and scientists is expected to grow by 90 percent, while the number of computer programmer positions is expected to grow at a much slower rate (12 percent). The projected job growth for all occupations between 1994 and 2005 is 14 percent. Since the report was issued, Commerce has issued an update with revised BLS projections showing an even stronger growth. Between 1996 and 2006, there will be over 1.3 million projected job openings as a result of growth and net replacements; about 1.1 million of these job openings will be due to growth alone. Commerce identifies the supply of potential IT workers as the number of students graduating with bachelor’s degrees in computer and information sciences. The report presents data from the Department of Education showing that 24,553 students earned bachelor’s degrees in computer and information sciences in 1994, a decline of more than 40 percent from 1986. While the Commerce report highlights the supply of IT workers as those with bachelor’s degrees in computer and information sciences, Commerce does note that IT workers may also acquire needed skills through other training paths—master’s degrees, associate degrees, or special certification programs. Commerce’s report also includes information from BLS that indicates, in the case of computer professionals, there is no universally accepted way to prepare for such a career but that employers almost always seek college graduates. Commerce’s analysis of the supply of IT workers, however, did not consider (1) the numerical data for degrees and certifications in computer and information sciences other than at the bachelor’s level when they quantify the total available supply; (2) college graduates with degrees in other areas; and (3) workers who have been, or will be, retrained for these occupations. Regarding these other sources of workers, the report sometimes acknowledges their relevance to a definition of supply but does not include estimates of workers from those sources in its overall estimate of supply. For example, Commerce reported that in 1994, 15,187 degrees and awards were earned in computer and information science programs below the bachelor’s level, but this number was not included in the supply number for IT workers when Commerce compared the IT worker demand with the available supply. Commerce also noted that, although employers almost always seek college graduates for computer professional positions, there is no universally accepted way to prepare for a career as a computer professional. According to the BLS Occupational Outlook Handbook, which defines qualifications for jobs and careers in terms of education and experience of IT workers with a bachelor’s degree, some workers have a degree in computer science, mathematics, or information systems, while others have taken special courses in computer programming to supplement their study in other fields such as accounting or other business areas. According to the National Science Foundation, only about 25 percent of those employed in computer and information science jobs in 1993 actually had degrees in computer and information science. Other workers in these fields had degrees in such areas as business, social sciences, mathematics, engineering, psychology, economics, and education. The Commerce report did not take this information into account in any way in estimating the future supply of IT workers. The report also stated that IT workers acquire needed skills through various training paths, but it provided no analysis of the extent to which companies are training and retraining workers. The Commerce report cited four pieces of evidence that an inadequate supply of IT workers is emerging—rising salaries for IT workers, reports of unfilled vacancies for IT workers, offshore sourcing and recruiting, and the fact that the estimated supply of IT workers (based on students graduating with bachelor’s degrees in computer and information sciences) is less than its estimate of the demand. However, the report fails to provide clear, complete, and compelling evidence for a shortage or a potential shortage of IT workers with the four sources of evidence presented. First, although some data show rising salaries for IT workers, other data indicate that those increases in earnings have been commensurate with the rising earnings of all professional specialty occupations. Second, the ITAA study gives some indication of a shortage of IT workers by providing information on unfilled IT jobs. However, in our view, ITAA’s survey response rate of 14 percent is inadequate to form a basis for a nationwide estimate of unfilled IT jobs. Third, although the report cites instances of companies drawing upon talent pools outside the United States to meet their demands for workers, not enough information is provided about the magnitude of this phenomenon. Finally, while the report discusses various sources of potential supply of IT workers, it used only the number of students earning bachelor’s degrees in computer and information sciences when it compared the potential supply of workers with the magnitude of IT worker demand. Commerce stated that upward movement in salaries is evidence of a short supply of IT workers and cited several surveys and newspaper articles illustrating salary increases. For example, the report cited a survey conducted by the Deloitte & Touche Consulting Group showing that salaries for computer network professionals rose an average of 7.4 percent from 1996 to 1997. The report also cited an annual survey by Computerworld, a weekly newspaper covering the computer industry and targeting IT workers and managers, showing that in 11 of 26 positions tracked, average salaries increased by more than 10 percent from 1996 to 1997. Increases in starting salaries were also reported in the Wall Street Journal and the Washington Post. These wage increases, however, may not be conclusive evidence of a long-term limited supply of IT workers, but may be an indication of a current tightening of labor market conditions for IT workers. According to BLS data, increases have been less substantial when viewed over a longer period of time. For example, the percentage changes in weekly earnings for workers in computer occupations over the 1983 through 1997 period were comparable to or slightly lower, in the case of computer systems analysts and scientists, than the percentage changes for all professional specialty occupations. Thus, salary increases for these occupations have been consistent with the salary increases for other skilled occupational categories over time. What is uncertain is whether the recent trend toward higher rates of increase will continue. Regarding unfilled jobs, Commerce cited the ITAA report, which concluded that about 190,000 U.S. IT jobs were unfilled in 1996 because of a shortage of qualified workers, and that these shortages were likely to worsen. According to the ITAA survey, 82 percent of the IT companies responding expected to increase their IT staffing in the coming year, while more than half of the non-IT companies planned IT staff increases. The Commerce report should have cautioned readers, however, that the ITAA survey has a major methodological weakness. While the ITAA study provides useful information on unfilled jobs among the firms responding to its survey, the findings cannot be generalized to the national level. ITAA surveyed a random sample of 2,000 large and midsize IT and non-IT companies about their IT labor needs and received a total of 271 responses—a response rate of about 14 percent. We consider a 14-percent response rate to be unacceptably low as a basis for any generalizations about the population being surveyed. In order to make sound generalizations, the effective response rate should usually be at least 75 percent for each variable measured—a goal used by many practitioners. Furthermore, ITAA’s estimate of the number of unfilled IT jobs is based on reported vacancies, and adequate information about those vacancies is not provided, such as how long positions have been vacant, whether wages offered are sufficient to attract qualified applicants, and whether companies consider jobs filled by contractors as vacancies. These weaknesses tend to undermine the reliability of ITAA’s survey findings. Commerce cited support for an emerging shortage in its observation that some companies are drawing upon talent pools outside the United States to meet their demands for IT workers. For example, the Commerce report stated that India has more than 200,000 programmers and, in conjunction with predominantly U.S. partners, has developed into one of the world’s largest exporters of software; in 1996 and 1997, outsourced software development accounted for 41 percent of India’s software exports. Commerce also cited a Business Week article, “Forget the Huddled Masses: Send Nerds,” to illustrate that companies are searching for IT workers in foreign labor markets such as Russia, Eastern Europe, East Asia, and South Africa. However, the Commerce report stated that some professional engineering societies believe information regarding a short supply of IT workers in the United States is exaggerated and that it is not necessary to recruit foreign workers to fill IT jobs. Additional systematic information about the magnitude of the phenomenon of companies meeting their demands for IT workers outside of the United States would be useful. The report identified the decline in the number of computer science graduates as a factor contributing to an inadequate supply of IT workers. The introduction to the report stated that evidence suggests that job growth in information technology fields now exceeds the production of talent. Commerce reported that between 1994 and 2005, an annual average of 95,000 new systems analysts, computer scientists and engineers, and computer programmers will be required to satisfy the increasing demand for IT workers and that only 24,553 students earned bachelor’s degrees in computer and information sciences in 1994. Because there is a disparity between these two numbers, Commerce concluded that it will be difficult to meet the demand for IT workers. Commerce did not adequately explain why the decline in conferred bachelor’s degrees in computer science would reflect a short supply of IT workers. As stated in the section on supply, IT workers come from a variety of educational backgrounds and have a variety of educational credentials such as master’s degrees, associate degrees, or special certifications. In addition, Commerce reported on the decline from 1986, although that year represents a peak in the number of computer science degrees conferred, which had risen steadily from the 1970s but has remained relatively stable in the 1990s. Commerce’s conclusions about the IT workforce are inconsistently reported in separate segments of its report. First, the title of the report states that America’s new deficit is a shortage of information technology workers. The introduction also states that there is substantial evidence that the United States is having trouble keeping up with the demand for new information technology workers. However, the report notes that current statistical frameworks and mechanisms for measuring labor supply do not allow for precise identification of IT worker shortages and, in its summary chapter, Commerce concludes that more information is needed to fully characterize the IT labor market. We agree with Commerce’s conclusion that more information and data are needed about the current and future IT labor market. In commenting on a draft of this correspondence, the Department of Commerce’s Acting Under Secretary for Technology said there were several inaccuracies that the Department believed should be corrected. First, he said that we had inaccurately treated the report as if it was intended to be a definitive, exhaustive analysis of the labor market for IT workers. Instead, Commerce presented the study as an initial effort to explore a potential shortage of IT workers. Second, the Acting Under Secretary said that we inaccurately characterized the report’s portrayal of the supply of new IT workers as consisting only of students graduating with bachelor’s degrees in computer and information sciences—overlooking people with degrees and certifications in computer and information sciences other than at the bachelor’s level and college graduates with degrees in other areas. Third, he said that the report included evidence indicating a tightening labor market for IT workers in addition to the four indicators cited in our correspondence. Commerce also took issue with our characterization of the report title (America’s New Deficit: The Shortage of Information Technology Workers) and statements in the introduction as reflecting Commerce’s conclusion that there is a shortage of IT workers. The Acting Under Secretary said that the report does not conclude that a shortage of IT workers exists. Instead, he said that the report’s only conclusions were those contained in the chapter entitled “Summary and Further Action.” Commerce’s comments on our draft are included in their entirety in the enclosure. We made no changes to this correspondence on the basis of Commerce’s comments. Regarding Commerce’s first point, our correspondence explains that the stated purpose of Commerce’s report was to explore the possibility of a shortage of IT workers in the United States; we did not characterize the report as a definitive analysis of the labor market for IT workers. Regarding our characterization of the supply of IT workers, we acknowledged that the report contained other information on the supply of IT workers. Our point was that Commerce did not include this information when citing the imbalance between the demand and supply of IT workers. Instead, Commerce focused on the gap between the estimated annual demand for 95,000 new IT workers and the supply of 24,553 students earning bachelor’s degrees in computer and information sciences, not including the 15,187 students who earned degrees and awards in computer and information sciences below the bachelor’s degree in 1994. Regarding the third point, our analysis considered all of the factors Commerce reported as evidence that a potential shortage of IT workers may be emerging in the report’s chapter entitled “Is There an Adequate Supply of IT Workers?” While the report contained other information indicating there was a tightening labor market for IT workers, that information was presented elsewhere in the report and only as anecdotal information reflecting the experiences of individual companies, not the industry as a whole. Finally, we believe the report’s title and the statements about the magnitude of the IT worker supply and demand imbalance contained in the report’s introduction could reasonably be interpreted as reflecting a conclusion that there is an IT worker shortage. We believe it is useful to now have Commerce’s clarification that it does not believe its report demonstrated that a shortage of IT workers exists. As this correspondence states, the Commerce report appears to appropriately establish that the demand for IT workers is expected to grow, but it did not adequately describe the likely supply of IT workers. For that reason, we agreed with the Department’s conclusion that more needs to be known about the demand and supply of IT workers. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this correspondence until 30 days from its issue date. At that time, we will send copies to the Chairmen of the Committee on Commerce and the Committee on Science. We will also make copies available to other interested parties upon request. If you have any questions about this correspondence, please contact me at (202) 512-7014. Major contributors to this correspondence include Sigurd R. Nilsen, Assistant Director; Betty S. Clark, Evaluator-in-Charge; and Gene G. Kuehneman, Jr., Senior Economist. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO provided information on the Department of Commerce's analysis of the information technology (IT) labor market, focusing on: (1) Commerce's analysis of IT worker supply and demand; and (2) the basis for its conclusion that a shortage of IT workers exists in the United States. GAO noted that: (1) Commerce's report has serious analytical and methodological weaknesses that undermine the credibility of its conclusion that a shortage of IT workers exists; (2) however, the lack of support presented in this one report should not necessarily lead to a conclusion that there is no shortage; (3) instead, as the Commerce report states, additional information and data are needed to more accurately characterize the IT labor market now and in the future; (4) the report appears to appropriately establish that the demand for IT workers is expected to grow, but it does not adequately describe the likely supply of IT workers; (5) although Commerce reported that only 24,553 U.S. students earned bachelor's degrees in computer and information sciences in 1994, Commerce also stated that the Bureau of Labor Statistics projects increasing job growth--an annual average of 95,000 new computer programmers, systems analysts and computer scientists and engineers will be required to satisfy the increasing demand for IT workers between 1994 and 2005; (6) pointing to the disparity between these two numbers and referring to evidence from other sources, Commerce concludes in the report's title and introduction that there is a shortage of IT workers; (7) Commerce did not, however, consider other likely sources of workers, such as college graduates with degrees in other areas; and (8) as a result, rather than supporting its conclusion that a shortage of IT workers exists, the data and analysis support the report's observation that more needs to be known about the supply and demand for IT workers. |
All 45 million elderly and disabled Medicare beneficiaries, regardless of income, may enroll in the Part D drug benefit. As of February 2009, CMS reported that 26.7 million beneficiaries were enrolled in Part D plans, of which 17.5 million were enrolled in PDPs and 9.0 million were enrolled in MA-PD plans. Of the 26.7 million beneficiaries, about 36 percent, or 9.6 million, received assistance with premiums and cost sharing through Medicare’s LIS. Part D plan sponsors offer plans with either a defined standard benefit or an actuarially equivalent alternative, and can also offer plans with enhanced benefits. In 2009, plans offering the defined standard benefit required non-LIS beneficiaries to pay out-of-pocket costs during the initial coverage period of: a deductible equal to the first $295 in drug costs, followed by 25 percent coinsurance for all drugs—with the plan paying the remaining 75 percent—until total drug costs reached $2,700, with beneficiary out-of-pocket costs accounting for $896.25 of that total. (See fig. 1.) This initial coverage period is followed by a coverage gap—the so-called doughnut hole—in which beneficiaries pay 100 percent of their drug costs. In 2009, the coverage gap lasted until total drug costs reached $6,153.75, with beneficiary out-of-pocket costs accounting for $4,350 of that total. This point is referred to as the catastrophic coverage threshold and is in addition to any monthly premiums required by beneficiaries’ Part D plans. After reaching the catastrophic coverage threshold, non-LIS beneficiaries in a defined standard benefit plan taking a specialty tier– eligible drug pay 5 percent of total drug costs for each prescription for the remainder of the year, while the drug plan pays 15 percent and Medicare pays the remaining 80 percent. In addition to cost sharing for prescription drugs, many Part D plans also charge a monthly premium. In 2009, premiums across all Part D plans averaged about $31 per month, an increase of 24 percent from 2008. Beneficiaries are responsible for paying these premiums except in the case of beneficiaries who receive the LIS, whose premiums are subsidized by Medicare as long as they enroll in an eligible plan. When Medicare Part D was established, it replaced Medicaid as the primary source of drug coverage for beneficiaries with coverage under both programs—referred to as dual-eligible beneficiaries. Part D provides substantial premium and cost-sharing assistance through the LIS for dual- eligible beneficiaries and some other low-income beneficiaries. Instead of paying the cost-sharing amounts established by each plan for covered drugs, these beneficiaries—referred to as full subsidy beneficiaries—pay a small copayment (between $1.10 and $6.00 in 2009) and Medicare pays the difference between these amounts and the cost sharing required by the plans (see fig. 2). Medicare also provides somewhat lower levels of assistance for other beneficiaries who have low incomes and modest assets, making them eligible for the LIS, but who do not meet the eligibility requirements for Medicaid. Instead of paying the cost-sharing amounts established by each plan for covered drugs, these beneficiaries—referred to as partial subsidy beneficiaries—pay 15 percent coinsurance during the initial coverage period and coverage gap. Medicare pays the difference between these amounts and the cost sharing required by the plans (see fig. 3). About 9.6 million Medicare beneficiaries were receiving the LIS as of February 2009; of this total, more than 80 percent were full subsidy beneficiaries. In order to manage drug spending and utilization, plans may establish tiers with different levels of beneficiary cost sharing. For example, a plan may establish separate tiers for generic drugs and brand name drugs—with the generic drug tier requiring a lower level of cost sharing than the brand- name drug tier. The Medicare Payment Advisory Commission (MedPAC) has reported that most Part D beneficiaries are in plans that use different drug tiers. CMS also allows plans participating in Part D to use a specialty tier in their formulary for high-cost drugs with negotiated prices exceeding a certain threshold, set at $500 per month in 2007 and $600 permonth in 2008 through 2010. MedPAC estimated that more than 80 percent of Part D beneficiaries in 2009 were in plans that use a specialty tier for high-cost drugs, with the median beneficiary in such a plan required t o pay 33 percent coinsurance for those drugs during the initial coverage period . Specialty tier–eligible drugs represent a limited number of drugs used by a small proportion of beneficiaries and commonly include immunosuppressant drugs, those used to treat cancer, and antiviral drugs. Although Part D beneficiaries using a drug on a nonpreferred brand-name drug tier may seek an exception to obtain the drug at the lower cost- sharing terms applicable to drugs in another tier, plans are not obligated to provide an exception for drugs placed on a plan’s specialty tier even if no other drug is available to treat a beneficiary’s condition. In addition to establishing different cost-sharing tiers, Part D plan sponsors have several options available to them to help contain drug spending. For example, plan sponsors can negotiate prices with drug companies and pharmacies. Plan sponsors may use pharmacy benefit managers (PBM) to negotiate with drug manufacturers and retail pharmacies for the prices of the drugs that each plan covers. Discounts negotiated with pharmacies are typically reflected in the price that a beneficiary pays at the pharmacy, while price concessions negotiated with drug manufacturers are typically in the form of rebates that are provided to plan sponsors and ultimately passed on to the program. Furthermore, plans may place utilization management requirements on the use of certain drugs on their formulary, such as requiring beneficiaries to obtain prior authorization from their plan before being able to fill a prescription, requiring beneficiaries to first try a preferred drug to treat a medical condition before being able to obtain an alternate drug for that condition, or limiting the quantity of drugs that they cover over a certain period of time. (See table 1.) We found that specialty tier–eligible drugs accounted for about 10 percent, or $5.6 billion, of the $54.4 billion in total prescription drug spending under Part D MA-PD and PDP plans in 2007. Additionally, even though only 41 percent of prescriptions for nonspecialty tier–eligible drugs filled under Part D MA-PD and PDP plans in 2007 were for LIS beneficiaries, more than 75 percent of prescriptions for specialty tier–eligible drugs were for LIS beneficiaries. Prescriptions for LIS beneficiaries accounted for about 70 percent, or about $4.0 billion, of the $5.6 billion spent on specialty tier– eligible drugs under MA-PD and PDP plans that year. (See fig. 4.) The fact that spending on specialty tier–eligible drugs in 2007 was largely accounted for by LIS beneficiaries is noteworthy because their cost sharing is largely paid by Medicare. Specifically, of the $4.0 billion in spending on specialty tier–eligible drugs for LIS beneficiaries, about 79 percent, or $3.1 billion, was paid by Medicare, 21 percent was paid by plans, and 0.2 percent was paid by beneficiaries. Of the $3.1 billion paid by Medicare for LIS beneficiaries, $1.0 billion was for the LIS and $2.1 billion was for catastrophic coverage. In contrast, of the $1.7 billion spent on specialty tier–eligible drugs in 2007 for non-LIS beneficiaries, Medicare was responsible for 42 percent, plans were responsible for 38 percent, and beneficiaries were responsible for 20 percent. While only 8 percent of Part D beneficiaries in MA-PD and PDP plans who did not use specialty tier–eligible drugs reached the catastrophic coverage threshold of the Part D benefit in 2007, 55 percent of beneficiaries who used at least one specialty tier–eligible drug reached the threshold. Specifically, among those beneficiaries who used at least one specialty tier–eligible drug in 2007, 67 percent of LIS beneficiaries and 31 percent of non-LIS beneficiaries reached the catastrophic coverage threshold. Most (62 percent) of the $5.6 billion in total Part D spending on specialty tier– eligible drugs under MA-PD and PDP plans occurred after beneficiaries reached the catastrophic coverage phase of the Part D benefit. Based on our review of typical cost-sharing structures, we found that, for non-LIS beneficiaries who use a given specialty tier–eligible drug, different cost-sharing structures can be expected to result in varying out-of-pocket costs during the benefit’s initial coverage period. However, as long as beneficiaries reach the catastrophic coverage threshold in a calendar year, their annual out-of-pocket costs for that drug are likely to be similar regardless of their plans’ cost-sharing structures. LIS beneficiaries’ out-of- pocket costs for all drugs, including specialty tier–eligible drugs, are not significantly affected by different plans’ cost-sharing structures because Medicare has established fixed cost-sharing levels for all LIS beneficiaries, regardless of the plans in which they are enrolled. For non-LIS beneficiaries who use a given specialty tier–eligible drug, different cost-sharing structures can be expected to result in varying out- of-pocket costs during the benefit’s initial coverage period. However, as long as beneficiaries reach the catastrophic coverage threshold in a calendar year—as 31 percent of non-LIS beneficiaries using at least one specialty tier–eligible drug did in 2007—their annual out-of-pocket costs for that drug are likely to be similar regardless of their plans’ cost-sharing structures. During the initial coverage period, non-LIS beneficiaries’ estimated out-of- pocket costs for a given specialty tier–eligible drug are likely to vary because some Part D plans may place the drug on a tier with coinsurance while other plans may require a flat copayment for the drug. For example, estimated 2009 out-of-pocket costs during the initial coverage period, excluding any deductibles, for a drug with a monthly negotiated price of $1,100 would range from $25 per month for a plan with a flat $25 monthly copayment to $363 per month for a plan with a 33 percent coinsurance rate. Non-LIS beneficiaries’ out-of-pocket costs eventually become similar for a given specialty tier–eligible drug regardless of their plan cost-sharing structure because these beneficiaries are generally responsible for 100 percent of their drug costs during the coverage gap. The coverage gap begins once total drug costs in a calendar year— including the amount paid by the plan and the beneficiary—reach a fixed amount, which, in 2009, was $2,700 under the standard benefit. Once non - LIS beneficiaries reach the catastrophic coverage threshold, which, in 2009, was $4,350 in beneficiary out-of-pocket costs for all Part D plans, they generally pay only 5 percent of the negotiated drug price for the remaind er of the calendar year. (See fig. 5.) Plan sponsors must maintain the catastrophic coverage threshold set by CMS pursuant to law ($4,350 in 2009). LIS beneficiaries’ out-of-pocket costs for all drugs, including specialty tier– eligible drugs, are not significantly affected by different plans’ cost-sharing structures because Medicare has established fixed limits on the cost- sharing amounts for all LIS beneficiaries, regardless of the plans in which they are enrolled. Medicare pays the difference between the LIS beneficiaries’ out-of-pocket costs and the cost-sharing amounts that are required by the plans. As is the case with non-LIS beneficiaries, LIS beneficiaries reach the catastrophic coverage threshold if they take any specialty tier–eligible drug for the entire calendar year, but actual out-of-pocket costs for specialty tier–eligible drugs can vary greatly depending on the level of assistance an LIS beneficiary receives. In 2009, full subsidy LIS beneficiaries, regardless of the plan in which they were enrolled, paid a copayment between $1.10 and $6.00 per drug per month until the total of their low-income subsidy amount paid by Medicare and their out-of-pocket costs reached the catastrophic coverage threshold of $4,350 for the calendar year. From this point forward, Medicare paid all beneficiary out- of-pocket costs for prescription drugs for the remainder of the calendar year. For a full subsidy LIS beneficiary who took any one specialty tier– eligible drug in 2009, these copayments resulted in a maximum of $72 in out-of-pocket costs over the course of the calendar year—or $6.00 per month, and for plans that charged a deductible, the beneficiary’s out-of- pocket costs may have been lower. Partial subsidy LIS beneficiaries in 2009, regardless of the plan in which they were enrolled, paid up to a $60 deductible followed by up to 15 percent coinsurance until the total of their LIS amount paid by Medicare and their out-of-pocket costs reached the catastrophic coverage threshold of $4,350 in the calendar year. From this point forward, these beneficiaries paid either a $2.40 or $6.00 monthly copayment per drug for the remainder of the calendar year. For a partial subsidy LIS beneficiary who took any one specialty tier–eligible drug in 2009, this coinsurance may have resulted in over $900 in out-of-pocket costs by the time he or she reached the catastrophic coverage threshold and then payments of up to $6.00 per month for the remainder of the calendar year. Variations in negotiated drug prices affect non-LIS beneficiaries’ out-of- pocket costs during the initial coverage phase if their plans require them to pay coinsurance. Additionally, negotiated drug prices will affect all non- LIS beneficiaries’ out-of-pocket costs during the coverage gap and the catastrophic coverage phase. Differences in negotiated drug prices do not affect out-of-pocket costs for full subsidy LIS beneficiaries, and affect out- of-pocket costs for partial subsidy LIS beneficiaries only until they reach the catastrophic coverage threshold. Variations in negotiated drug prices affect non-LIS beneficiaries’ out-of- pocket costs during the initial coverage phase if their plan requires them to pay coinsurance, which all 35 of our selected plans did in 2009 for at least some of the 20 specialty tier–eligible drugs in our sample. Additionally, negotiated drug prices will affect all non-LIS beneficiaries’ out-of-pocket costs during the coverage gap and the catastrophic coverage phase because beneficiaries generally pay the entire negotiated price of a drug during the coverage gap and 5 percent of a drug’s negotiated price during the catastrophic coverage phase. Negotiated prices for specialty tier–eligible drugs can vary in three ways that affect out-of-pocket costs for non-LIS beneficiaries. These are variations between drugs, variations across plans for the same drug, and variations from year to year. First, variations in negotiated drug prices between different drugs have a significant effect on out-of-pocket costs throughout the benefit for non-LIS beneficiaries. For example, in 2009—across our sample of 35 plans—non- LIS beneficiaries who took the cancer drug Gleevec for the entire year could have been expected to pay about $6,300 out-of-pocket because Gleevec had an average negotiated price of about $45,500 per year, while beneficiaries could have been expected to pay about $10,500 out-of-pocket over the entire year if they took the Gaucher disease drug Zavesca, which had an average negotiated price of about $130,000 per year. Second, negotiated prices across plans for the same drug generally vary less dramatically than prices for different drugs but can still affect non-LIS beneficiary out-of-pocket costs even for plans with the same cost-sharing structure. For example, in 2009, the negotiated price for the human immunodeficiency virus (HIV) drug Truvada varied from about $10,900 to about $11,400 per year across different plans with a 33 percent coinsurance rate, resulting in out-of-pocket costs that could be expected to range from about $4,600 to $4,850 for non-LIS beneficiaries taking the drug over the entire year. Third, changes in negotiated drug prices over time also affect non-LIS beneficiaries’ annual estimated out-of-pocket costs. Since 2006, average negotiated prices for the specialty tier–eligible drugs in our sample have risen across our sample of plans; the increases averaged 36 percent over the 3-year period. These increases, in turn, led to higher estimated beneficiary out-of-pocket costs for these drugs in 2009 compared to 2006. For example, the average negotiated price for a 1-year supply of Gleevec across our sample of plans increased by 46 percent, from about $31,200 in 2006 to about $45,500 in 2009. Correspondingly, the average out-of-pocket cost for a non-LIS beneficiary taking Gleevec for an entire year could have been expected to rise from about $4,900 in 2006 to more than $6,300 in 2009. In contrast to the situation for non-LIS beneficiaries, differences in negotiated drug prices do not affect out-of-pocket costs for full subsidy LIS beneficiaries, and affect out-of-pocket costs for partial subsidy LIS beneficiaries only until they reach the catastrophic coverage threshold. Negotiated drug prices do not affect out-of-pocket costs for full subsidy LIS beneficiaries because they pay a flat monthly copayment (between $1.10 and $6.00 per drug in 2009) until they reach the catastrophic coverage threshold and pay no out-of-pocket costs for the remainder of the calendar year. On the other hand, partial subsidy LIS beneficiaries are affected by negotiated drug prices until they reach the catastrophic coverage threshold, because they pay 15 percent of a drug’s negotiated cost. Therefore, variations in the negotiated price between drugs, across plans for the same drug, and from year to year affect the amount that partial subsidy LIS beneficiaries pay out of pocket. However, once these beneficiaries reach the catastrophic coverage threshold, their out-of- pocket costs are no longer affected by negotiated drug costs because they pay a flat monthly copayment (between $2.40 and $6.00 per drug in 2009) for the remainder of the calendar year. All of the Part D plan sponsors we interviewed, including the seven that provided price concession data for our sample of specialty tier–eligible drugs, reported having a limited ability to negotiate price concessions with manufacturers of specialty tier–eligible drugs. The reasons they gave included a lack of competitors for many of these drugs, CMS formulary requirements that may limit plan sponsors’ ability to exclude drugs from their formularies in favor of competing drugs, and low utilization for some drugs, which limits incentives for manufacturers to provide price concessions. However, plan sponsors are able to employ practices, such as prior authorization, to manage beneficiaries’ utilization of specialty tier– eligible drugs, and they employ these practices somewhat more often for specialty tier–eligible drugs than for other drugs. The eight Part D plan sponsors we interviewed told us that they have little leverage in negotiating price concessions for most specialty tier–eligible drugs. All seven of the plan sponsors we surveyed reported that they were unable to obtain price concessions from manufacturers on 8 of the 20 specialty tier–eligible drugs in our sample between 2006 and 2008. For most of the remaining 12 drugs in our sample, plan sponsors who were able to negotiate price concessions reported that they were only able to obtain price concessions that averaged 10 percent or less, when weighted by utilization, between 2006 and 2008. (See app. III for a drug-by-drug comparison of the average price concessions negotiated by the plan sponsors we surveyed, for our sample of 20 drugs, from 2006 to 2008.) The plan sponsors we interviewed often cited three main reasons why they have typically had a limited ability to negotiate price concessions for specialty tier–eligible drugs. First, they stated that pharmaceutical manufacturers have little incentive to offer price concessions when a given drug has few competitors on the market, as is the case for drugs used to treat cancer. For Gleevec and Tarceva, two drugs in our sample that are used to treat certain types of cancer, plan sponsors reported that they were not able to negotiate any price concessions between 2006 and 2008. In contrast, plan sponsors told us that they were more often able to negotiate price concessions for drugs in classes where there are more competing drugs on the market—such as for drugs used to treat rheumatoid arthritis, multiple sclerosis, and anemia. The anemia drug Procrit was the only drug in our sample for which all of the plan sponsors we surveyed reported that they were able to obtain price concessions each year between 2006 and 2008. Second, plan sponsors told us that even when there are competing drugs, CMS may require plans to include all or most drugs in a therapeutic class on their formularies, and such requirements limit the leverage a plan sponsor has when negotiating price concessions. When negotiating price concessions with pharmaceutical manufacturers, the ability to exclude a drug from a plan’s formulary in favor of a therapeutic alternative is often a significant source of leverage available to a plan sponsor. However, many specialty tier–eligible drugs belong to one of the six classes of clinical concern for which CMS requires Part D plan sponsors to include all or substantially all drugs on their formularies, eliminating formulary exclusion as a source of negotiating leverage. We found that specialty tier–eligible drugs were more than twice as likely to be in one of the six classes of clinical concern compared with lower-cost drugs in 2009. Additionally, among the 8 drugs in our sample of 20 specialty tier–eligible drugs for which the plan sponsors we surveyed reported they were unable to obtain price concessions between 2006 and 2008, 4 drugs were in one of the six classes of clinical concern. Plan sponsors are also required to include at least two therapeutic alternatives from each of the other therapeutic classes on their formularies. Third, plan sponsors told us that they have limited ability to negotiate price concessions for certain specialty tier–eligible drugs because they account for a relatively limited share of total prescription drug utilization among Part D beneficiaries. For some drugs in our sample, such as Zavesca, a drug used to treat a rare enzyme disorder called Gaucher disease, the plan sponsors we surveyed had very few beneficiary claims between 2006 and 2008. None of the plan sponsors we surveyed reported price concessions for this drug during this period. Plan sponsors told us that utilization volume is usually a source of leverage when negotiating price concessions with manufacturers for Part D drugs. For some specialty tier–eligible drugs like Zavesca, however, the total number of individuals using the drug may be so limited that plans are not able to enroll a significant enough share of the total users to entice the manufacturer to offer a price concession. Plan sponsors employ various practices to manage beneficiaries’ utilization of Part D drugs. According to plan sponsors that we interviewed and our analysis of CMS data, these practices are somewhat more common for specialty tier–eligible drugs than for lower-cost drugs. For example, based on our analysis of certain drugs and plans, one or more plans placed at least one utilization management requirement on 99 percent of specialty tier–eligible drugs in 2007, while they placed at least one utilization management requirement on a smaller percentage— 89 percent—of nonspecialty tier–eligible Part D drugs. According to the plan sponsors we interviewed, prior authorization is the most common of the various utilization management practices employed for specialty tier– eligible drugs. Based on our analysis, one or more plans placed a prior authorization requirement on 95 percent of specialty tier–eligible drugs in 2007. Quantity limits and step therapy were used less often, with one or more plans placing quantity limits on 58 percent of specialty tier–eligible drugs and a step therapy requirement on 14 percent of specialty tier– eligible drugs. Most of the plan sponsors we interviewed described utilization management as a strategy for promoting patient safety and limiting inappropriate use of Part D drugs, including specialty tier–eligible drugs. One plan sponsor explained that specialty tier–eligible drugs often have a more serious side-effect profile than other drugs covered under Part D and, as a result, plans may employ prior authorization to minimize the potential for adverse effects among beneficiaries who are prescribed these drugs. Plan sponsors also told us that they often use prior authorization to ensure that beneficiaries who have been prescribed specialty tier–eligible drugs are using them for a medically-accepted indication. Some plan sponsors explained that it is more difficult to employ certain utilization management practices, like quantity limits and step therapy, with specialty tier–eligible drugs than with other Part D drugs, which is why these practices are used less often than prior authorization. For example, plan sponsors said that because there are often few, if any, therapeutic equivalents or alternatives for specialty tier–eligible drugs, plans do not have many opportunities to promote the use of less costly drugs through a step therapy protocol. Plan sponsors also told us that they are less likely to employ quantity limits for specialty tier–eligible drugs. The Department of Health and Human Services (HHS) provided us with CMS’s written comments on a draft version of this report. These comments are reprinted in appendix IV. CMS agreed with portions of our findings, took issue with the amount of a deductible we present in one of our figures, and suggested additional information for us to include in our report. In its written comments, CMS agreed with our finding that specialty tier– eligible drugs accounted for about 10 percent of total prescription drug spending under Part D in 2007. Also, consistent with our finding that different cost-sharing structures used by plans can initially affect beneficiary out-of-pocket costs, CMS noted that a plan requiring 25 percent coinsurance plus a $295 deductible would initially result in higher beneficiary out-of-pocket costs than a plan requiring 33 percent coinsurance with no deductible. CMS did not agree with the $295 deductible we included in figure 5 of our draft report to illustrate certain cost-sharing scenarios. In its comments, CMS pointed out that a $295 deductible does not apply in scenarios in which plans charge 33 percent coinsurance, because CMS has a requirement that plans cannot charge such a deductible when using 33 percent coinsurance for specialty tier drugs. Although CMS does have such a requirement, we included the $295 deductible in our scenario because plans may also place specialty tier–eligible drugs on nonspecialty tiers that include both a $295 deductible and a coinsurance rate above 25 percent (e.g., 33 percent or 42 percent). Our analysis identified a number of plans requiring such cost- sharing combinations for the 20 specialty tier–eligible drugs in our sample. We included the $295 deductible for illustrative purposes to clearly demonstrate how differences in the coinsurance percentage or copayment amount would affect beneficiary out-of-pocket costs. However, using different deductible amount—for example, $0—for one or more scenarios would not change our overall finding: different cost-sharing structures can be expected to result in out-of-pocket costs that vary initially but become similar once beneficiaries reach the catastrophic coverage threshold. In its written comments, CMS suggested that we report changes in negotiated drug prices over time in the context of changes to the drug’s average wholesale price (AWP). However, we chose to report changes to actual negotiated prices as reported to CMS by plan sponsors because they are a better reflection of prices paid by beneficiaries, who may pay a percentage of the negotiated price during the initial coverage period and often pay the entire negotiated price during the coverage gap. Additionally, CMS questioned our statement comparing the proportion of specialty tier– eligible drugs and lower-cost drugs that belong to one of the six classes of clinical concern and requested more information about our methodology. We modified our report to include an expanded discussion of the methodology for this analysis. Finally, CMS clarified that it permits plan sponsors to cover drugs for any medically-accepted indication, which in some cases can include off-label uses not approved by the Food and Drug Administration. We also provided excerpts of the draft report to the eight plan sponsors who were interviewed for this study. The plan sponsors provided technical comments, which we incorporated as appropriate. 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 after its issue date. At that time, we will send copies of this report to the Secretary of Health and Human Services and interested congressional 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 questions about this report, please contact John E. Dicken at (202) 512-7114 or [email protected]. Contact points for our Office 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 V. Utilization rank (2007) 1. Glatiramer acetate (Copaxone) 2. Interferon beta-1a (Avonex) Rheumatoid arthritis, psoriasis, Crohn’s disease 3. Adalimumab (Humira) 4. Anakinra (Kineret) 5. Etanercept (Enbrel) Human immunodeficiency virus (HIV) 6. Atazanavir sulfate (Reyataz) 7. Emtricitabine and tenofovir disoproxil fumarate (Truvada) 8. Lamivudine and zidovudine (Combivir) 9. Lopinavir and ritonavir (Kaletra) 10. Erlotinib (Tarceva) 11. Imatinib mesylate (Gleevec) 12. Interferon alfa-2b (Intron-A) 13. Peginterferon alfa 2a (Pegasys) 14. Darbepoetin alfa (Aranesp) 15. Epoetin alfa (Procrit) 16. Miglustat (Zavesca)—Gaucher disease drug 17. Ambrisentan (Letairis) 18. Bosentan (Tracleer) To determine spending o Part D in 2007, we examined 2007 Prescription Drug Event (PDE) claims data from the Centers for Medicare & Medicaid Services (CMS) for Medicare Advantage prescription drug (MA-PD) plans and stand-alone prescription drug plans (PDP). At the time our study began, the 2007 PDE data were the most recent available. Specifically, we analyzed 2007 PDE data at the nine-digit national drug code (NDC) level to identify all drugs having ceeding $500 for a at least one claim with a cost equal to or ex 30-day supply. We then aggregated all claims—regardless of cost—for the relevant NDCs to determine the median cost of a 30-day supply of each drug. For the purposes of this study, we considered specialty tier–eligi e drugs to be all drugs with claims reimbursed under Part D in 2007 with a median negotiated cost of at least $500 per 30-day supply (i.e., where at least half of the claims for these drugs in 2007 met or exceeded the CMS cost threshold of $500 per month). For the resulting list of specialty tier– eligible drugs, we determined the total amount of Part D spending for specialty tier–eligible drugs by Medicare, MA-PD and PDP plans, and baries through MA-PD and PDP plans in 2007 for these specialty enefici tier–eligible drugs. We also used 2007 PDE data to determine the utilization, in the aggregate, of the specialty tier–eligible drugs we identified—based on the number of 30-day prescriptions and the number ories taking the drug. Finally, we determined the number of f beneficia beneficiaries taking the drug who reached the catastrophic coverage threshold of the Part D benefit—after which Medicare assumes at least 80 percent of total drug costs. We also conducted each of these analyses n specialty tier–eligible drugs covered under separately for low-income subsidy (LIS) and non-LIS beneficiaries. Weperformed the same analyses for all Part D covered drugs, regardless of cost, in order to compare spending and utilization for specialty tier– eligible drugs to spending and utilization for all Part D covered drugs. To determine how the different cost-sharing structures used by Part D plans for specialty tier–eligible drugs could be expected to affect beneficiary out-of-pocket costs, we examined out-of-pocket costs unde $50 flat monthly copayment and different coinsurance rates (25 percent and 33 percent) for a hypothetical drug with a monthly negotiated cost o $1,100. We selected these cost-sharing structures because some plans charge a flat monthly copayment for specialty tier–eligible drugs while others charge a coinsurance rate. We selected the 25 percent coinsuranc rate to represent the standard benefit design and the 33 percent coinsurance rate because it was the rate required of the median enrollee in plans with specialty tiers in 2009. We analyzed the effect of each of these typical cost-sharing structures on beneficiary out-of-pocket costs in ea phase of the Part D benefit. The results of this analysis can be generalize to Part D beneficiaries taking any specialty tier–eligible drug acro plans. To determine the ability of Part D plans to negotiate price concessions for specialty tier–eligible drugs and the approaches plans reported using from 2006 through 2009 to manage utilization of these drugs compared to othe r covered Part D drugs, we conducted interviews with representative s from eight of the largest PDP and MA-PD plan sponsors. To determine the largest MA-PD and PDP plan sponsors, we examined 2008 Part D enrollment data and selected all MA-PD plan sponsors with at least 20 beneficiaries (7 plan sponsors) and all PDP plan sponsors with at least 500,000 beneficiaries (8 plan sponsors). As a result of overlap between the two lists, there were 11 plan sponsors in total, of which 8 were intervi and 7 provided specific price concession data for our sample of The 7 plan 20 specialty tier–eligible drugs for 2006 through 2008. sponsors that provided price concession data represented 51 perc MA-PD enrollment and 67 percent of all PDP enrollment in 2008. The results of our interviews and data-collection instrument cannot be generalized beyond the selected plan sponsors or drugs. In addition, we analyzed Medicare Part D Formulary, Pharmacy Network, and Pricing Information files to determine utilization management approaches reported by all Part D plans in 2007 and the number of Part D drugs in one of the six classes of clinical concern for 2007 through 2009. To test the internal consistency and reliability of the data we used in our review, we discussed our data sources with knowledgeable officials, performed data reliability checks such as manually and electronically checking the data for missing values and obvious errors, interviewed C MS officials about concerns we uncovered, and reviewed the internal controlsCMS uses to ensure that data are complete and accurate. We checked the negotiated price data provided by the plan sponsors through the data- collection instrument for internal consistency by comparing these dat when possible, to data the plan sponsors had previously provided to C We determined that the data were sufficiently reliable for our purposes. We conducted our work from March 2009 through December 2009 in a, MS. accordance with all sections of GAO’s quality assurance framework that are relevant to our objectives. 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. Average price per 30- day supply, after price , weighted concessions by utilization (dollars) ) Drugs (including strength and dosage form), by indication Inflammatory conditions (e.g., rheumatoid arthritis, psoriasis, Crohn’s disease Human immunodeficiency virus (HIV) Emtricitabine and tenofovir disoproxil fumarate (Truvada) 200 mg/300 mg tablet 1,561 Average price per 30- day supply, after price concessions, weighted y utilization (dollars) by utilization (dollars) Enzyme disorders (e.g., Gaucher disease) Other (selected based on high utilization) eyed. s (rhe s. W electede s tis, psoriasis, and ur mple. -year period wsmall to allow us to reaintaininas too onfidevalues whiport le mntiality. g c One of the seven plan sponsors we surveyed did not submit any da listed for this drug are based on data submitted by six plan sponsors, rather than seven plan sponsors. r this drug. Therefore, values veyed re orted uti ation of a sca in 2 6. by the FDA on June 07. The efore, none of the plan onsors w 2006. In addition to the contact named above, major contributors to this report In addition to the contact named above, major contributors to this report were Will Simerl, Assistant Director; Karen Howard; Alexis MacDonald; were Will Simerl, Assistant Director; Karen Howard; Alexis MacDonald; Cleo Samuel; and Michael Zose. Martha Kelly and Suzanne Worth provided Cleo Samuel; and Michael Zose. Martha Kelly and Suzanne Worth provided technical support in design, methodology, and data analysis; George technical support in design, methodology, and data analysis; George Bogart provided legal support; and Krister Friday assisted in the message Bogart provided legal support; and Krister Friday assisted in the message and report development. and report development. | The Centers for Medicare & Medicaid Services (CMS) allows Part D plans to utilize different tiers with different levels of cost sharing as a way of managing drug utilization and spending. One such tier, the specialty tier, is designed for high-cost drugs whose prices exceed a certain threshold set by CMS. Beneficiaries who use these drugs typically face higher out-of-pocket costs than beneficiaries who use only lower-cost drugs. GAO was asked to provide information about high-cost drugs eligible for a specialty tier. This report provides information on these drugs including spending under Medicare Part D in 2007, the most recent year for which claims data were available; how different cost-sharing structures could be expected to affect beneficiary out-of-pocket costs; how negotiated drug prices could be expected to affect beneficiary out-of-pocket costs; and information Part D plan sponsors reported on their ability to negotiate price concessions and to manage utilization. GAO examined CMS data, including 2007 claims data, negotiated price and out-of-pocket cost data for selected drugs--including the 10 highest-utilization specialty tier-eligible drugs in 2007--and plans from 2006 through 2009, and formulary information provided to CMS by plan sponsors. GAO interviewed officials from CMS and 8 of the 11 largest plan sponsors, based on enrollment in 2008. Seven of the 11 plan sponsors provided data including price concessions for selected drugs for 2006 through 2008. High-cost drugs eligible for a specialty tier commonly include immunosuppressant drugs, those used to treat cancer, and antiviral drugs. Specialty tier-eligible drugs accounted for 10 percent, or $5.6 billion, of the $54.4 billion in total prescription drug spending under Medicare Part D plans in 2007. Medicare beneficiaries who received a low-income subsidy (LIS) accounted for most of the spending on specialty tier-eligible drugs--$4.0 billion, or 70 percent of the total. Among all beneficiaries who used at least one specialty tier-eligible drug in 2007, 55 percent reached the catastrophic coverage threshold, after which Medicare pays at least 80 percent of all drug costs. In contrast, only 8 percent of all Part D beneficiaries who did not use a specialty tier-eligible drug reached this threshold in 2007. Differences in plans' cost-sharing structures--flat copayments or coinsurance rates--can be expected to result in varying out-of-pocket costs for non-LIS beneficiaries only until they reach the catastrophic coverage threshold, which 31 percent of non-LIS beneficiaries did in 2007. After that point, non-LIS beneficiaries' annual out-of-pocket costs for a given drug are likely to be similar regardless of their plans' cost-sharing structures. LIS beneficiaries' out-of-pocket costs are generally not affected by their plans' cost-sharing structures because Medicare sets fixed limits on the cost-sharing amounts for these beneficiaries and pays any difference between these fixed amounts and the amount required under the plans' cost-sharing structures. Variations in negotiated drug prices--between different drugs, across plans for the same drug, and over time--can affect out-of-pocket costs. For example, the average negotiated price for Gleevec across our sample of plans increased by 46 percent between 2006 and 2009, from about $31,200 per year to about $45,500 per year. Correspondingly, the average out-of-pocket cost for a non-LIS beneficiary taking Gleevec for the entire year could have been expected to rise from about $4,900 in 2006 to more than $6,300 in 2009. Plan sponsors reported having little leverage to negotiate price concessions from manufacturers for most specialty tier-eligible drugs, although sponsors were more often able to negotiate price concessions for drugs with more competitors on the market--such as for drugs used to treat rheumatoid arthritis. One factor sponsors cited for this limited leverage was CMS requirements limiting sponsors' ability to exclude drugs from their formularies in favor of competing drugs. Finally, plan sponsors employ practices such as prior authorization to manage beneficiaries' utilization of specialty tier-eligible drugs, and sponsors reported employing those practices somewhat more frequently for these drugs than for lower-cost Part D drugs. GAO provided a draft of this report to CMS. CMS agreed with portions of GAO's findings and suggested additional information for us to include in our report, which we incorporated as appropriate. |
AOC has implemented 21 of 54 recommendations that span seven areas— strategic management, human capital management, project management, worker safety, recycling, financial management, and IT management. The agency is making progress primarily in the areas of strategic management, human capital management, project management (covered in the next section), worker safety, and recycling. For example, to improve strategic management, AOC released accountability reports in fiscal years 2003 and 2004, developed a summary document to track key performance goals, established processes for obtaining employee and customer feedback, and initiated several new methods for communicating with employees. However, AOC has not implemented a key recommendation related to communicating with external stakeholders—to develop protocols that establish and clarify service and expectation levels with congressional stakeholders. AOC’s Acting COO recognizes the importance of communication with congressional members and staff. Since October 2005, the Acting COO has met regularly with congressional stakeholders, including Appropriations Committee staff, and is developing further strategies to improve communication with congressional stakeholders. AOC is also hiring a Director of Congressional and External Relations who will be responsible for developing and maintaining positive relations with congressional members and staff. In addition, to strengthen human capital management, AOC has, among other things, linked its employee evaluation system to mission-critical goals, established monthly management meetings to share and assess data from employee relations offices, and identified a number of ways to collect, report, and analyze workforce data. However, with a large portion of employees with knowledge in specific trades eligible for immediate retirement, AOC leadership needs to ensure progress continues to identify current and future workforce gaps and develop strategies to address these gaps. To improve worker safety, AOC has made progress in developing safety policies, implementing a system to track investigations of incidents and follow up, completing a job hazard analysis process to report hazards, and establishing a safety-training curriculum that fully supports the goals of the safety policies. From fiscal year 2000 to 2005, AOC’s injury and illness rate declined from 17.9 to 5.7 injuries or illnesses per 100 employees. However, until AOC’s safety policies are fully implemented, the agency will not have a comprehensive picture of safety hazards. To improve recycling, AOC has significantly expanded the recycling program; developed a clear mission, goals, and performance measures for the program; and issued an environmental program plan. However, the agency still needs to evaluate the impact of the new performance measures on its current evaluation criteria and make any necessary changes. While AOC has made progress in financial management, substantial work remains to fulfill recommendations related to this area. For example, AOC had independent audits of its balance sheets for fiscal years 2003 and 2004 conducted. AOC received an unqualified or “clean” opinion of the balance sheets, but the audits identified a number of material weaknesses related to internal controls. For example, the audit for fiscal year 2004 found that AOC’s procurement system lacked controls to ensure that contract modifications were properly executed prior to initiation of the work, project costs were properly classified, and contract executed amounts were compared to contract value. Similarly, our separate, ongoing monitoring of the CVC project showed that AOC needed to take additional steps to ensure that it was: (1) receiving reasonable prices for proposed contract modifications, (2) obtaining adequate support for contractors’ requests for reimbursement of incurred costs, (3) adequately overseeing its contractors’ performance, and (4) taking appropriate steps to see that contractors were not doing work before it was appropriately authorized under approved contractual arrangements. AOC is working to correct these weaknesses. To further improve financial management, AOC is developing an agencywide internal control framework and a cost accounting system, which are essential to improving accountability across all AOC operations. The internal control framework initiative is scheduled to be implemented by June 30, 2006, while the cost accounting system is scheduled to be implemented by September 30, 2006. However, this schedule is likely to be delayed by a lack of funding and qualified staffing resources. At the beginning of fiscal year 2006, AOC requested the contractors leading these initiatives to significantly scale back their development efforts, citing a lack of fiscal year 2006 funding resources. At that time, the Office of the CFO estimated that 10 positions—including senior manager level positions to help lead these initiatives—would be needed to implement the initiatives on schedule. AOC recently transferred authority to fill some of the positions from within AOC and reprogrammed funds to help continue these initiatives; as of January 2006, the contractors have resumed their development efforts. However, AOC transferred authority for only 4 of the estimated 10 positions, none of which were at the senior manager level. As of February 8, 2006, AOC had posted vacancy announcements to fill three of the four positions, but filling these positions could take several months. Leadership support—especially from the Architect, COO, and CFO—is critical to ensure that these important initiatives are appropriately funded, staffed, and monitored. Until these initiatives are implemented and operating effectively, AOC faces substantial risk in financial management. AOC also has begun several initiatives to improve IT management, but substantial work remains, particularly in information security. To improve information security, AOC has issued a policy and a plan for performing risk assessments, issued and implemented an IT security training policy, and developed a plan to monitor and evaluate the effectiveness of IT security policies and controls. However, AOC has yet to establish and implement key information security practices, such as completing risk assessments on all of its major applications, documenting the identified risks in system security plans, and developing and implementing appropriate security controls to mitigate the risks—including developing contingency plans for all systems and applications. Until AOC implements key information security practices, it will be challenged to effectively safeguard its data and information assets. As part of our review of AOC’s progress in responding to previous recommendations, we followed up on our recommendation related to the COO action plan—issued by AOC’s previous COO in December 2003. In August 2004, we found that the plan was not sufficiently detailed to guide and communicate the agency’s performance and progress and recommended that the Architect of the Capitol and the COO consult with members of Congress and key committees on the specific information regarding AOC’s plans, policies, procedures, actions, and proposed organizational changes in order to enhance the usefulness of the COO action plan. The COO subsequently departed AOC and, despite the absence of a permanent COO, the agency has been continuing to follow the steps laid out in the action plan. For example, AOC has made progress in addressing elements of AOC project management that were recommended to be included in the action plan and has consulted with congressional stakeholders on project management initiatives, such as prioritizing projects and establishing a new project management organization. According to AOC officials, the action plan will be updated when a permanent COO is in place. Appendix I provides a more complete summary of AOC’s progress in responding to recommendations. Appendix IV lists all 54 recommendations from previous reports—as well as recommendations from the recent project management and facilities management reviews—and details AOC’s progress on each recommendation. According to AOC, 84 major construction projects (all 41 projects that were completed since January 1, 2003, in addition to all 43 active projects) were meeting budget targets as of September 2005. However, in some cases, AOC’s budget targets included higher construction contingency allowances than are typical for industry or AOC’s guidance. Furthermore, the budget status of projects constructed “in house” by AOC’s Construction Branch (rather than by contractors) could not be accurately determined because overhead costs for the branch may not have been charged to the appropriate project. AOC officials believe they are using appropriate contingency allowances, but acknowledged that estimating and accounting for the costs of projects could be improved. AOC also reported that about half of the projects were behind schedule based on the original estimated contract completion date, in part because of scope changes and unforeseen conditions. However, additional measures that reflect the customer’s needs, such as the “beneficial occupancy date,” could provide a more complete picture of AOC’s schedule performance. AOC has initiatives—such as establishing an organization dedicated to managing major construction projects and reinstating a quarterly report on the budget and schedule progress of projects—that should improve project management and related communications with congressional stakeholders. However, AOC’s major construction projects generally take between 5 and eight years to complete, so it is too early to determine the results of AOC’s initiatives to improve project management. Meanwhile, better internal controls are needed to improve management and accountability, particularly in establishing and tracking budget targets, revising guidance manuals, and implementing controls concerning the quality of reports. We made recommendations aimed at improving internal controls in these areas, and AOC has made progress on these recommendations since we provided the briefings in September 2005. For example, AOC has begun an internal review of its Construction Branch operations and included a “beneficial occupancy date” in tracking project schedules. Appendix II provides a more complete summary of AOC’s progress in improving project management. AOC tracks performance measures for the quality and timeliness of its facilities management services, but does not track comprehensive cost measures or evaluate (“benchmark”) its performance against that of any similar facilities management organizations. AOC’s current measures show that AOC’s customers are satisfied with the quality of AOC’s services and that AOC is meeting or exceeding the targets for its timeliness measures. However, the timeliness measures could be improved to better represent the amount of time required for—and spent on—specific tasks. Industry best practices that would improve accountability and provide useful information on trends in costs include developing and tracking cost performance measures and benchmarking performance against that of other organizations. AOC officials plan to develop cost measures after the completion of the new cost accounting system and the installation of a new CAFM system. To improve facilities management, AOC has several initiatives, including assessing the condition of its facilities to develop a comprehensive plan for facility maintenance and building renewal and switching to a new CAFM system that should enhance AOC’s tracking and reporting capabilities. These initiatives can help improve AOC’s ability to develop facilities management cost measures to facilitate the benchmarking of performance, as well as improve overall facilities management. However, assessing facility conditions has brought to light the magnitude of AOC’s deferred maintenance and other projects—at least $2.6 billion over nine years as initially estimated by an AOC contractor (and now being validated by AOC)—and the challenge of funding these projects. In addition, the new CAFM system will not be fully effective until, among other things, it is linked to the planned cost accounting system, the development and implementation of which has been delayed. In our briefings in December 2005 and January 2006, we made recommendations aimed at improving AOC’s facilities management performance measures and the effectiveness of the new computer system. Appendix III provides a more complete summary of AOC’s progress in improving facilities management. We provided the Architect of the Capitol a draft of this report for review and comment. We received oral comments from AOC officials stating that they generally agreed with the content of the information presented in this report—including the implementation status of recommendations made to AOC in our previous reports and recommendations based on our recent reviews of project and facilities management. AOC officials emphasized that GAO’s findings regarding project management largely reflected past problems and that AOC’s new Project Management Organization (now a division within AOC) is proceeding with a number of initiatives that are targeted to correct past problems and has plans to start additional initiatives. AOC officials also provided technical corrections to the report, which we have incorporated, as appropriate. We are sending copies of this report to the appropriate congressional committees. We are also sending this report to the Architect of the Capitol. We will make copies available to others upon request. In addition, this report will be available at no cost on the GAO Web site at http://www.gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. If you or your staff have any questions about this report, you may contact me at (202) 512-2834 or at [email protected], or Sara Vermillion at (202) 512- 9913 or at [email protected]. Major contributors to this report are listed in appendix V. Under the congressional mandate to monitor the Architect of the Capitol’s (AOC) progress, we evaluated AOC’s response to 54 recommendations in seven areas: strategic management, human capital management, project management, worker safety, recycling, financial management, and information technology (IT) management. We provided briefings on our work in September 2005. Appendix IV lists all 54 recommendations and details AOC’s progress on each recommendation. Appendix IV also includes the most recent recommendations resulting from our review of AOC’s project management and facilities management. AOC has implemented 21 of 54 recommendations and is making progress primarily in the areas of strategic management, human capital management, project management (discussed in detail in app. II), worker safety, and recycling, although work remains in all of these areas. While AOC has also made progress in financial management and IT management, substantial work remains to fulfill recommendations related to these areas, particularly in financial management. Many of the recommendations that have not been implemented require significant organizational changes; leadership support for these changes is vital to ensure their success as well as the continued success of initiatives that AOC has in place. Strategic management recommendations were designed to help AOC improve strategic planning efforts and organizational alignment, establish meaningful performance measures, obtain feedback from employees and customers, improve internal and external communications, and strengthen the relationship between AOC and congressional stakeholders. In response, AOC released accountability reports for fiscal years 2003 and 2004 and developed a summary document to track performance for each of its strategic goals. The agency has also established processes for obtaining feedback from employees and customers, which should improve communications with these groups. To further improve communication with employees, AOC has implemented a variety of communication methods to convey information to employees, including a weekly newsletter on project updates, policy announcements, management and communication tips, and other agencywide messages. However, AOC still needs to improve communication with external stakeholders. For example, AOC has not fully implemented protocols to establish and clarify service and expectation levels with congressional stakeholders. Without such protocols, neither AOC nor congressional stakeholders can be assured that agency efforts and resources are targeted to their highest priorities. The Acting Chief Operating Officer (COO) recognizes the importance of communication with congressional members and staff. Since October 2005, the Acting COO has been meeting regularly with congressional stakeholders, including Appropriations Committee staff, and is developing further strategies to improve communication with congressional stakeholders. AOC is also in the process of hiring a Director of Congressional and External Relations who will be responsible for developing and maintaining positive relations with congressional members and staff. In addition, AOC has not developed a comprehensive set of outcome-based and performance-based measures that would enable AOC and Congress to assess AOC’s progress. AOC has developed a document— the “AOC dashboard”—that includes several high-level indicators to track performance for each of its strategic goals as well as a target goal for each indicator. The dashboard is a positive step that needs further development as AOC revises its goals and objectives and assign measures to each area in fiscal year 2006. Human Capital Management Human capital management recommendations were aimed at strengthening AOC’s human capital policies and performance. In response, AOC implemented a performance management approach by developing strategic goals and measuring performance and linked its employee evaluation system to mission-critical goals. In addition, AOC management has improved the way it gathers and assesses data from employee relations offices by holding monthly meetings to share and discuss data, make recommendations, and take action. AOC has also identified a number of ways to collect, report, and analyze workforce data and has developed a report that forecasts future workforce needs. However, with a large portion of employees with knowledge in specific trades eligible for immediate retirement, AOC leadership needs to ensure progress continues to complete ongoing efforts to identify gaps in current and future workforce needs and develop strategies to address these gaps. Completing these efforts should further improve its employee evaluation system and AOC’s ability to strategically plan for future workforce needs. Worker safety recommendations were designed to enhance AOC’s ongoing efforts to establish a strategy for the worker safety program by developing performance measures for safety goals and objectives, establish policies for reporting hazards, establish a system for conducting investigations and follow-up, and implement a safety-training curriculum. In response, AOC has developed 23 of 35 specialized safety policies; implemented a system to track investigations of incidents and follow-up; completed a job hazard analysis process to report hazards; and established training that supports the goals of the safety policies. Overall, AOC’s injury and illness rate declined from 17.9 in fiscal year 2000 to 5.7 in fiscal year 2005. However, until AOC fully implements the specialized safety policies, particularly a policy on hazard assessment and control, the agency will not be able to develop a comprehensive picture of AOC hazards. During our Capitol Visitor Center (CVC) monitoring work, we noted that worker injury rates for the CVC construction site were higher than the rates for comparable sites and that gaps existed in the management of worker safety at the CVC site. AOC has taken action to address this issue; the injury and illness rate for the CVC project declined from 9.1 in 2003 and 12.2 in 2004, to 5.9 for the first 10 months of 2005—below the 2003 industry average of 6.1. Recycling recommendations were designed to help AOC adopt a strategic approach to recycling by developing a mission and goals for the recycling program, establishing performance measures for the program, examining the roles and responsibilities of recycling staff, and holding staff accountable for achieving goals. In response, AOC has developed a clear mission, goals, and performance measures for AOC’s recycling program and issued an environmental program plan. AOC has also included recycling tasks in recycling staff position descriptions and recycling objectives in AOC’s evaluation system for recycling managers. However, AOC still needs to evaluate the impact of the new performance measures on its current evaluation criteria and make any necessary changes. According to AOC officials, the AOC recycling program has undergone significant expansion over the past five years, while at the same time becoming more efficient. Initially consisting of recycling of paper, cans, bottles, and scrap metal, the AOC recycling program has now been expanded to include items such as toner cartridges, carpeting, concrete, ceiling tiles, batteries, pallets, wooden spools, hard plastics, and electronic wastes such as computers. The program has also been expanded by increasing the number of locations at which recycling is taking place. The paper recycling program has maintained a “zero percent off-specification” (formerly referred to as “contamination”) rate for the past two years, down from historical contamination rates as high as 50 percent. Financial management recommendations were aimed at helping AOC improve financial management by institutionalizing sound financial management practices; strengthening accountability and control through senior management’s visible support for efforts to prepare auditable financial statements and implement internal controls; and enhancing the successful development of appropriate cost accounting and meaningful financial, cost, and performance reporting. AOC made progress in financial accountability by issuing its initial agencywide accountability reports in December 2004 and February 2006, in which the results of audits covering AOC’s fiscal year 2003 and 2004 balance sheets, respectively, were presented; requesting a full-scope audit of a complete set of its financial statements and related note disclosures for fiscal year 2005; and beginning development of an AOC-wide internal control framework and a cost accounting system. While these initiatives reflect progress, until they are implemented AOC will continue to face significant risk in financial management and program operations. The AOC received an unqualified or “clean” opinion on its balance sheet for fiscal year 2003 and its comparative balance sheet for fiscal years 2003/2004. However, the Independent Auditor’s Report on Internal Control for fiscal year 2003 noted a number of internal control weaknesses that AOC has been working to correct, including weaknesses in the areas of: capitalizing work-in-process expenses, allocating overhead to project costs, accounts payable cutoff, capital and operating leases, payroll record retention, and IT controls. As reported in AOC’s 2004 Accountability Report, the AOC has fully addressed six out of seven material weaknesses identified in the fiscal year 2003 auditor’s report. The fiscal year 2004 auditor’s report identified weaknesses in the areas of: internal control assessments, annual leave processing, timekeeping controls, procurement system controls for contracts, procurement processes for capital and operating leases, and IT security. To further improve financial management, AOC is developing an agencywide internal control framework and a cost accounting system, which are essential to improving accountability across all AOC operations; however, it is unlikely that these initiatives will be completed by their scheduled implementation dates of June 30, 2006, and September 30, 2006. During fiscal year 2005, AOC approved the establishment of an AOC-wide internal control framework. AOC began developing a process to formally evaluate, document, and recommend improvements on the effectiveness of the design and operations of its internal control structure. In developing this framework, AOC has begun to identify key financial and operational processes, updating process documentation and flowcharts, perform risk analyses, update and benchmark controls, and document any identified deficiencies. In addition, in an effort to move AOC’s financial system from a budget-based system to a performance-based system, AOC is developing a cost accounting system, which would align goals, activities, and outputs; it would also improve systems and reporting across the agency, including project management and facilities management. AOC plans to implement the new performance-based system in phases to make an orderly transition from the current budget-based financial system. Those plans include pilot deployment of an interim cost structure for managers through fiscal year 2006, followed by the development of a structure for general and administrative cost reporting, and the development of a structure for jurisdictional services in fiscal year 2007. However, AOC’s schedule for implementing these key initiatives is likely to be delayed by a lack of funding and qualified staff resources. At the beginning of fiscal year 2006, AOC requested the contractors leading the internal control and cost accounting initiatives to significantly scale back their development efforts, citing a lack of fiscal year 2006 funding resources. At that time, the Office of the Chief Financial Officer (CFO) estimated that 10 positions—including senior manager level positions to help lead these initiatives—would be needed to implement the initiatives on schedule. AOC recently transferred authority to fill some of the positions from within AOC and reprogrammed funds to help continue these initiatives; as of January 2006, the contractors have resumed their development efforts. However, AOC transferred authority for only four of the estimated 10 positions—none were at the senior manager level. As of February 8, 2006, AOC had posted three of the four vacancy announcements (two Senior Accountant positions and one Junior Accountant position), but filling these positions could take several months. Leadership support—especially from the Architect of the Capitol, COO, and CFO—is critical to ensure that these important initiatives are appropriately funded, staffed, and monitored. Until these initiatives are implemented and operating effectively, AOC faces substantial risk in financial management. In total, the extent of progress on the financial management reporting improvement efforts has been limited. Successful completion of the development and implementation of these important financial management initiatives will require additional AOC funding and qualified staff, close monitoring, and strong and visible support of these initiatives by AOC leadership. AOC will continue to face significant risk in financial management and its program operations until these key accountability and management control initiatives are fully implemented. IT management recommendations were designed to help AOC adopt an agencywide approach to information management by: developing and implementing IT investment management processes to support informed executive decision making; developing, implementing, and maintaining an enterprise architecture to guide and constrain IT investments throughout AOC; and establishing and implementing an information security program. In response, AOC established a Director of the Office of Information and Resource Management to manage IT across the agency. AOC has also taken important initial steps to address the management and structure needed to establish a sound IT investment management process, such as assigning roles, responsibilities, and the authority needed to manage its IT investment portfolio. AOC, moreover, is in the process of instituting an approval process and mechanism to screen all proposed IT projects using standardized criteria. Further, AOC has established the management structure for developing, implementing, and maintaining an enterprise architecture, such as designating a chief enterprise architect to guide architecture development and maintenance and developing an updated version of its architecture that was approved by the senior policy committee, which includes senior representatives from across the agency. In addition, AOC has established some aspects of an effective information security program, such as issuing a policy and a plan for performing risk assessments; issuing and implementing an IT security training policy; and developing a plan to monitor and evaluate the effectiveness of IT security policies and controls. However, more work remains to be done to fully implement our recommendations. In particular, AOC has yet to fully develop and implement important key steps in their IT investment management process, such as developing an overall approach to portfolio management that incorporates existing and proposed projects into the investment decision making process and documenting and implementing a sound investment control process to monitor all current and proposed IT investments. Furthermore, AOC has yet to establish and implement key practices associated with developing, implementing, and maintaining an enterprise architecture, such as ensuring that the architecture addresses security and ensuring that metrics are used to measure progress, quality, compliance, and return on investment. Moreover, as stated above, the agency has yet to establish and implement key information security practices, such as completing risk assessments on all of its major applications, documenting the identified risks in system security plans, and developing and implementing appropriate security controls to mitigate the risks—including developing contingency plans for all systems and applications. Until AOC completes and implements plans for improvement that are consistent with all our recommendations, it will be challenged in its ability to effectively use IT to optimize mission performance. As part of our progress review, we followed up on our recommendation related to the COO action plan—issued by AOC’s previous COO in December 2003—which recommended that the Architect of the Capitol and the COO consult with members of Congress and key committees on the specific information regarding AOC’s plans, policies, procedures, actions, and proposed organizational changes in order to enhance the usefulness of the COO action plan. The agency has been continuing to follow the steps laid out in the action plan, despite the absence of a permanent COO. For example, AOC has made progress in addressing elements of AOC project management that were recommended to be included in the action plan. According to AOC officials, the action plan will be updated when a permanent COO is in place. To evaluate AOC’s efforts to improve project management, we (1) determined the extent to which AOC is meeting it original budget and schedule targets for major construction projects (projects costing over $250,000, not including four construction projects—building the CVC, modernizing the Supreme Court, expanding the West Refrigeration Plant, and increasing Perimeter Security) and (2) identified initiatives that AOC is implementing to improve project management and challenges that remain. We provided briefings on this work in September 2005. At the time of our briefings, AOC reported that all recent major projects were meeting budget targets. However, AOC’s budget targets are based on cost estimates that include construction contingencies that are sometimes 5 percent higher than both industry standards and AOC’s own guidance. Although higher budget targets reduce the need for AOC to request additional funds to complete projects, higher targets could also reduce the incentive for AOC to prudently manage project funds and tie up excess funds that could be used for other capital projects. For example, 41 projects completed from January 2003 to April 2005 had excess funding totaling about $5.5 million. In addition, the overhead costs of projects constructed “in house” by AOC’s Construction Branch (rather than by contractors) may not have been accurately charged to the correct project because these charges do not receive the same level of review as those of outside contractors. According to AOC officials, using a contingency higher than 10 or 15 percent requires documented rationale for why the percentage is higher than prescribed by AOC guidance. AOC officials stated that they believe that their contingency allowances are appropriate for the environment in which AOC operates, but acknowledged that estimating and accounting for the costs of projects could be improved. AOC also reported that about half of recent projects were behind schedule based on the original estimated contract completion date, in part because of scope changes, unforeseen conditions, and changes in jurisdictions’ (the customers’) priorities. However, additional measures that reflect the customers’ needs, such as the “beneficial occupancy date” could provide a more complete assessment of AOC’s schedule performance. Since our briefings, AOC has tracked the beneficial occupancy date, as well as the original estimated contract completion date. AOC has initiatives in several areas—planning, project management organization and accountability, and communication—that are designed to improve project management. For example, AOC continues to refine its planning process to identify, develop, and prioritize capital projects. The most recent refinements include adding the results of completed facility condition assessments and using two new criteria to evaluate projects— “urgency” and “type of project.” AOC also implemented a Project Management Organization to align project and construction management to provide “cradle to grave” project oversight. Under this new organization, AOC is: using “jurisdictional executives” as liaisons with jurisdictions; tracking performance measures for budget and completion dates and quality of project design; using a governmentwide system to evaluate and record contractor maintaining central files for key project documentation to improve access and accountability; and enforcing liquidated damages against contractors on delayed projects to motivate them to meet contract commitments. Finally, AOC has reinstated a quarterly report to Congress to communicate the budget and schedule status of ongoing projects. While these initiatives are promising, AOC faces the challenge of developing better internal controls to improve management oversight and accountability. Meeting this challenge will improve the chances of success for AOC’s initiatives. For example, AOC’s planning process would benefit from more complete information on the initial scope of projects. For the new Project Management Organization, AOC has not implemented a customer satisfaction survey to track the quality of construction services, fully clarified staff roles and responsibilities, or updated guidance manuals. The quarterly report does not accurately reflect the performance of projects constructed by AOC’s Construction Branch because the agency does not have a method for calculating current working estimates for this branch. Furthermore, the quarterly report must be compiled manually because AOC’s information systems do not adequately support project management and reporting needs. To improve internal controls related to project management, we recommended that AOC: develop a method to establish and track more accurate budget targets, which could include tracking and reporting on the accuracy of cost estimates compared with bids, the accuracy of project budgets compared with final project costs, the amount of excess project funds and how these funds are used, and cost data for the Construction Branch; expedite the development of a customer satisfaction survey for clarify the roles and responsibilities of staff in the new Project revise project management guidance manuals; and develop or modify information systems to provide needed cost and schedule data on projects and track reasons for changes across all projects. AOC generally agreed with our recommendations and, since September 2005, has made progress in addressing these recommendations by developing and tracking new cost measures on a monthly basis, piloting the use of a project closeout sheet to verify reallocation of initiating an internal review of AOC's Construction Branch’s operations, initiating the development of a customer satisfaction survey for communicating and clarifying staff roles through regular staff meetings, analyzing the Project Management Organization’s information needs to determine the requirements for a new or revised information system. To evaluate AOC’s efforts to improve facilities management, we reviewed (1) the extent to which AOC tracks facilities management performance and (2) the initiatives AOC is implementing to improve facilities management and the challenges that remain. We provided briefings on our work in December 2005 and January 2006. AOC tracks performance measures for quality and timeliness of facility management services; these measures indicate that AOC’s customers are satisfied with the quality of AOC’s services and that AOC is providing the services in a timely manner. For example, in 2004, all but one of AOC’s quality ratings were above 80 percent and almost half were above 90 percent. AOC is also meeting or exceeding its timeliness targets. For example, in September 2005, AOC closed 88 percent of the demand work orders that were closable that month and completed 95 percent of the orders in less than 30 days. However, AOC’s timeliness measures could be improved to better represent the amount of time required for specific tasks. AOC uses a standard timeliness measure of 30 days for all tasks, even though many tasks take less time to complete. For example, the Senate jurisdiction allots 24 hours for decorative paint repair, 1 week to paint an entire area, and 2 weeks to refinish furniture. The Smithsonian Institution, an organization with characteristics similar to AOC, tracks multiple time frames that are more relevant for specific tasks, such as 24 hours, 3 days, and within 30 days. Not tracking more specific timeliness measures hinders AOC in accurately determining whether tasks are completed in a timely manner, and identifying which tasks may need additional resources. AOC does not track comprehensive cost performance measures or evaluate (or “benchmark”) its performance with that of similar facilities management organizations. While AOC has the capability to track a limited number of annual complex-wide cost measures, it does not comprehensively and routinely track specific cost measures, such as the cost per square foot of cleaning or maintenance and repairs. By not tracking these performance measures, AOC cannot understand how those costs compare with those of similar institutions, or identify how its costs may be increasing or decreasing over time. However, to track cost performance measures, AOC must first develop and implement a cost accounting system. As discussed earlier in this report, development and implementation of this cost accounting system has been delayed due to lack of adequate resources and personnel. Furthermore, while AOC internally compares the performance of individual jurisdictions in areas such as customer satisfaction and timeliness, the agency does not benchmark its performance against that of external organizations. Even though AOC’s facilities are somewhat unusual, benchmarking could help identify areas where costs may be high or cost trends differ. AOC officials told us that the agency has implemented cost accounting pilot initiatives in several jurisdictions and acknowledge that benchmarking performance against that of comparable external organizations would be beneficial. AOC has several initiatives under way that should help improve its ability to develop and track cost performance measures and benchmark performance. Conducting facility assessments to develop a comprehensive plan for facility maintenance and building renewal: The Facility Condition Assessment (FCA) initiative establishes an ongoing process for monitoring facility conditions and enables AOC to develop a comprehensive plan for facility maintenance and building renewal. FCAs help AOC prioritize projects for budget requests and increase AOC’s accountability, since they enable AOC to directly link facility needs and budget plans. AOC has completed all but two FCAs—for the Library of Congress Building and Grounds and the Supreme Court. While FCAs have enabled AOC to develop a comprehensive plan for facility maintenance and building renewal, the assessments have also documented the magnitude of AOC’s deferred maintenance and other projects—$2.6 billion over nine years—and the challenge of funding these projects. Funding for only a limited number of these projects has been integrated into AOC’s Capital Improvement Plan process. According to AOC officials, they plan to discuss funding needs with appropriators as part of the Capital Improvement Plan process, using the FCA results to help appropriators better understand the funding needs. Switching to a new Computer-Aided Facility Management (CAFM) system to enhance tracking and reporting capabilities: AOC uses its current CAFM system to track demand work orders, but does not consistently track preventive maintenance work orders (even though the current system is capable of tracking these work orders). By not tracking preventive maintenance work orders, AOC cannot compare how much preventive maintenance jurisdictions are performing with how much is recommended. AOC is replacing its existing CAFM system because the vendor is phasing out support for that system. According to AOC officials, the new system will have improved tracking and reporting capabilities, which will make it easier for the jurisdictions to use the system to track preventive maintenance work orders, as well as develop cost performance measures. However, the new CAFM system must be used in conjunction with a new cost accounting system (as noted above, development and implementation of this system has been delayed) before AOC will be able to fully utilize data provided by the new CAFM system. Consolidating service contracts to save money on contract administration: AOC jurisdictions consolidate contracts for some services, such as elevator maintenance and hazardous waste disposal. Currently, 20 percent of services conducted in multiple jurisdictions are under consolidated contracts. Contract consolidation can save money because the administrative functions for the contract are centralized; AOC could also gain from additional economies of scale. AOC officials acknowledge that there are additional opportunities for consolidation, including window cleaning and fire alarm testing and certification. Standardizing facility inspection practices to make inspections consistent across jurisdictions: AOC has a comprehensive, jurisdictionwide inspection program. For example, over 95 percent of AOC’s assets are being inspected through modes such as FCAs and Night Custodial Inspections. Although jurisdictions currently conduct inspections independently using their own procedures, AOC plans to evaluate the inspections and merge them into a comprehensive inspection manual that standardizes the preferred inspection procedures across jurisdictions. According to AOC officials, the standardization of inspections across jurisdictions will help ensure that inspections are performed consistently across jurisdictions and that they are completed as efficiently as possible using a minimum of resources. To improve how AOC measures its performance in the areas of timeliness and cost, the agency should: develop and track more specific timeliness measures that more accurately reflect the amount of time required to complete tasks; develop the capability to comprehensively and routinely track cost benchmark appropriate existing and new performance measures against those of similar institutions, such as the Smithsonian Institution and state capitols. AOC should use the new CAFM system to track preventive maintenance and demand work orders across all jurisdictions, including the time taken to complete work orders. AOC generally agreed with our findings and the areas identified for improvement, such as developing cost measures, benchmarking, and tracking preventive maintenance work orders. AOC officials noted that they also had identified these areas and have taken steps toward implementing improvements. The following table includes all recommendations made as part of our general management review. In addition, the table includes new recommendations resulting from our reviews of project management and facilities management. For recommendations that have been implemented, the “status” column includes the month and year of the GAO report that acknowledges the completion of that recommendation. | The Architect of the Capitol (AOC) is responsible for the maintenance, renovation, and new construction of the Capitol Hill complex, which comprises more than three dozen facilities and consists of nine jurisdictions, such as the U.S. Capitol and the Senate and House Office Buildings. In 2003, at the request of Congress, GAO issued a management review of AOC that contained recommendations in seven areas to help AOC become more strategic and accountable. GAO reported on AOC's progress in implementing those recommendations in January and August 2004. In 2005 and 2006, GAO briefed Congress on AOC's recent progress in implementing GAO's recommendations and on issues related to AOC's project and facilities management. This report summarizes GAO's (1) assessment of AOC's progress in implementing previous GAO recommendations and in improving project and facilities management and (2) delineation of remaining management challenges. Overall, AOC is making progress in implementing GAO's previous recommendations and in improving project and facilities management. For example, AOC has implemented 21 of 54 recommendations, established a central organization for managing major projects, and completed assessments of nearly all of the agency's facilities, for use in developing a comprehensive facility maintenance and building renewal plan. AOC has also begun initiatives to develop meaningful performance measures and to restructure its project management information systems to provide better data for monitoring and reporting. These initiatives, though encouraging, are in their early stages, and it is too early to determine their success. In recent briefings provided to AOC management and congressional staff, GAO made additional recommendations to improve the accountability and effectiveness of AOC's project and facilities management initiatives. AOC has made progress in some areas, but still has a significant amount of work ahead to achieve its ultimate goal of establishing a strong strategic management and accountability framework. Specifically, it has not completed initiatives to address two critical issues--communication with external stakeholders and development of internal controls--identified in previous GAO recommendations or in independent audits of AOC's 2003 and 2004 balance sheets. These issues affect a wide range of AOC operations. For example, communication with congressional stakeholders is essential to establish and clarify service and expectation levels. Internal controls, such as reliable cost account system, sound procurement practices, and a comprehensive information security program, are necessary to, respectively, improve project and facilities management, strengthen the integrity of AOC's procurement processes, and effectively safeguard AOC's data and information access. Leadership support is vital to ensure that needed improvements are given urgent attention; this support is also essential to ensure that improvements that have already been made are continuously evaluated and refined as needed. However, the key leadership positions of Chief Operating Officer, Chief Financial Officer, Chief Administrative Officer, Director of the Capitol Power Plant, Director of Congressional and External Relations, and Director of Planning and Project Management are currently vacant. Furthermore, the term for the current Architect of the Capitol will expire in less than a year. AOC is at a critical juncture in its efforts to become more strategic and accountable. Quickly filling the vacant management positions with qualified people is essential for AOC to sustain and extend its recent improvement and to have a cohesive management team in place in the event of a turnover in the Architect of the Capitol position. AOC is now attempting to fill the vacant leadership positions, and, to mitigate the impact of these vacancies, it recently appointed an Acting Chief Operating Officer--who is also temporarily serving as the Acting Chief Financial Officer--and an Acting Chief Administrative Officer to help guide the agency's improvement efforts. |
In late 2003, recognizing that the current approach to managing air transportation is becoming increasingly inefficient and operationally obsolete, Congress created JPDO to plan NGATS, a system intended to accommodate the threefold increase in air traffic demand expected by 2025. JPDO’s scope is broader than that of traditional ATC modernization in that it is “airport curb to airport curb,” encompassing such issues as security screening and environmental concerns. Additionally, JPDO’s approach will require unprecedented collaboration and consensus among many stakeholders—federal and nonfederal—about necessary system capabilities, equipment, procedures, and regulations. Each of JPDO’s partner agencies will play a role in the transformation to NGATS. For example, the Department of Defense has deployed “network centric” systems, originally developed for the battlefield, that are being considered as a conceptual framework to provide all users of the national airspace system—FAA and the Departments of Defense and Homeland Security— with a common view of that system. Vision 100 required the Secretary of Transportation to establish JPDO within FAA to manage work related to NGATS. The Director of JPDO reports to the FAA Administrator and to the Chief Operating Officer within ATO. JPDO began operating in early 2004. JPDO has developed a framework for planning and coordination with its partner agencies and nonfederal stakeholders that is consistent with the requirements of Vision 100 and with several practices that our work has shown can facilitate federal interagency collaboration and enterprise architecture development. This framework includes an integrated plan, an organizational structure, and an enterprise architecture. Vision 100 calls for the development of an integrated plan for NGATS and annual updates on the progress of that plan. JPDO’s partner agencies developed an integrated plan and submitted it to Congress on December 12, 2004. The plan includes a vision statement for meeting the predicted threefold increase in demand for air transportation by 2025 and eight strategies that broadly address the goals and objectives for NGATS. In March 2006, JPDO published its first report to Congress on the progress made in carrying out the integrated plan. The integrated plan is consistent with effective collaboration practices we have identified. According to our research on federal interagency collaborations, agencies must have a clear and compelling rationale for working together to overcome significant differences in their missions, cultures, and established ways of doing business. In working together to develop JPDO’s integrated plan, the partner agencies agreed on a vision statement to transform the air transportation system and on broad statements of future system goals, performance characteristics, and operational concepts. Vision 100 includes requirements for JPDO to coordinate and consult with its partner agencies, private sector experts, and the public. Accordingly, JPDO established an organizational structure to involve federal and nonfederal stakeholders throughout the organization. This structure includes a federal interagency policy committee, an institute for nonfederal stakeholders, and integrated product teams (IPT) that bring together federal and nonfederal experts to plan for and coordinate the development of technologies that will address JPDO’s eight broad strategies. JPDO’s senior policy committee was formed and is headed by the Secretary of Transportation, as required in Vision 100. The committee includes senior-level officials from JPDO’s partner agencies and has met three times since its inception. The NGATS Institute (the Institute) was created by an agreement between the National Center for Advanced Technologies and FAA to incorporate the expertise and views of stakeholders in private industry, state and local governments, and academia. The NGATS Institute Management Council, composed of top officials and representatives from the aviation community, oversees the policy and recommendations of the Institute and provides a means for advancing consensus positions on critical NGATS issues. In March 2006, the Institute held its first public meeting to solicit information from the public and other interested stakeholders who are not involved in the council or the IPTs. These types of meetings are designed to address the Vision 100 requirement that JPDO coordinate and consult with the public. The IPTs are headed by representatives of JPDO’s partner agencies and include more than 190 stakeholders from over 70 organizations, whose participation was arranged through the Institute. Figure 1 shows JPDO’s position within FAA and the JPDO structures that bring together federal and nonfederal stakeholders, including the Institute and the IPTs. JPDO’s organizational structure incorporates some of the practices we have found effective for federal interagency collaborations. For example, our work has shown that mutually reinforcing or joint strategies can help align partner agencies’ activities, core processes, and resources to accomplish a common outcome. Each of the eight IPTs is aligned with one of the eight strategies outlined in JPDO’s integrated plan, and each is headed by a partner agency that has taken the lead on a specific strategy. Our research has also found that collaborating agencies should identify the resources needed to initiate or sustain their collaborative effort. To leverage human resources, JPDO has staffed the various levels of its organization—including JPDO’s board, the IPTs, and technical divisions— with partner agency employees, many of whom work part time for JPDO. Finally, our work has shown that involving stakeholders can, among other things, increase their support for a collaborative effort. The Institute provides for involving nonfederal stakeholders, including the public, in planning NGATS. Vision 100 requires JPDO to coordinate NGATS-related programs across the partner agencies. To address this requirement, JPDO conducted an initial interagency review of its partner agencies’ research and development programs during July 2005 to identify work that could support NGATS. Through this process, JPDO identified early opportunities that could be pursued during fiscal year 2007 to coordinate and minimize the duplication of research programs across the partner agencies and produce tangible results for NGATS. For example, one identified opportunity is to align aviation weather research across FAA, NASA, and the Departments of Commerce and Defense; develop a common weather capability; and harmonize and incorporate into NGATS those agency programs designed to seamlessly integrate weather information and aircraft weather mitigation systems. In addition, the Automatic Dependent Surveillance-Broadcast (ADS-B) and System Wide Information System (SWIM) programs at FAA were identified as opportunities for accelerated funding to produce tangible results for NGATS. JPDO is currently working with the Office of Management and Budget to develop a systematic means of reviewing the partner agencies’ budget requests so that the NGATS- related funding in each request can easily be identified. Such a process would help the Office of Management and Budget consider NGATS as a unified federal investment, rather than as disparate line items distributed across several agencies’ budget requests. JPDO’s effort to leverage its partner agencies’ resources for NGATS demonstrates another practice important to sustaining collaborations. Our work on collaborations has found that collaborating agencies, by assessing their relative strengths and limitations, can identify opportunities for leveraging each others’ resources and thus obtain benefits that would not be available if they were working separately. JPDO’s first interagency review of its partner agencies’ research and development programs has facilitated the leveraging of technological resources for NGATS. The budget process under development with OMB provides a further opportunity to leverage resources for NGATS. Vision 100 requires JPDO to create a multiagency research and development roadmap for the transition to NGATS. To comply with Vision 100, JPDO has been working on an enterprise architecture and expects to complete an early version of the architecture by September 2006. Many of JPDO’s future activities will depend on the robustness and timeliness of this architecture development. The enterprise architecture will describe FAA’s operation of the current national airspace system, JPDO’s plans for NGATS, and the sequence of steps needed for the transformation to NGATS. The enterprise architecture will provide the means for coordinating among the partner agencies and private sector manufacturers, aligning relevant research and development activities, and integrating equipment. JPDO has taken several important steps to develop the enterprise architecture—one of the most critical planning documents in the NGATS effort. For example, JPDO has drafted a concept of operations—a document that describes the operational transformations needed to achieve the overall goals of NGATS. JPDO has used this document to identify key research and policy issues for NGATS. For example, the concept of operations identifies several issues associated with automating the ATC system, including the need for a backup plan in case automation fails, the responsibilities and liabilities of different stakeholders during an automation failure, and the level of monitoring needed by pilots when automation is ensuring safe separation between aircraft. As the concept of operations matures, it will be important for air traffic controllers and other affected stakeholders to provide their perspectives on this effort so that needed adjustments can be made in a timely manner. JPDO officials recognize the importance of obtaining stakeholders’ comments on the concept of operations and are currently incorporating stakeholders’ comments into the concept of operations. JPDO expects to release its initial concept of operations by the end of July. Another step that JPDO has taken to develop the enterprise architecture is to form an Evaluation and Analysis Division (EAD), composed of FAA and NASA employees and contractors. This division is assembling a suite of models to help JPDO refine its plans for NGATS and iteratively narrow the range of potential solutions. For example, EAD has used modeling to begin studying how possible changes in the duties of key personnel, such as air traffic controllers, could affect the workload and performance of others, such as airport ground personnel. According to JPDO officials, the change in the roles of pilots and controllers is the most important human factors issue involved in creating NGATS. JPDO officials noted that the Agile Airspace and Safety IPTs include human factors specialists and that JPDO’s chief architect has a background in human factors. However, EAD has not yet begun to model the effect of the shift in roles on pilots’ performance because, according to an EAD official, a suitable model has not yet been incorporated into the modeling tool suite. According to EAD, addressing this issue is necessary, but will be difficult because data on pilot behavior are not readily available for use in creating such models. Furthermore, EAD has not yet studied the training implications of various NGATS-proposed solutions because further definition of the concept of operations for these solutions is needed. As the concept of operations and enterprise architecture mature, EAD will be able to study the extent to which new air traffic controllers will have to be trained to operate both the old and the new equipment. To develop and refine the enterprise architecture for NGATS, JPDO is following an effective technology development practice that we identified and applied to enterprise architecture development. This phased, “build a little, test a little” approach is similar to a process we have advocated for FAA’s major system acquisition programs. This phased approach will also allow JPDO to incorporate evolving market forces and technologies in its architecture and thus better manage change. Consequently, additional refinements are expected to be made to the enterprise architecture. Vision 100 requires JPDO to identify the anticipated expenditures for developing and deploying NGATS. To begin estimating these expenditures realistically, JPDO is holding a series of investment analysis workshops with stakeholders to obtain their input on potential NGATS costs. The first workshop, held in April 2006, was for commercial and business aviation, equipment manufacturers, and ATC systems developers. The second workshop is planned for August for operators of lower-performance aircraft used in both commercial and noncommercial operations. The third workshop, planned for early September, will focus on airports and other local, state, and regional planning bodies. Although these workshops will help JPDO develop a range of potential costs for NGATS, a mature enterprise architecture is needed to provide the foundation for developing NGATS costs. Several unknown factors will drive these costs. According to JPDO, one of these drivers is the technologies expected to be included in NGATS. Some of these technologies are more complex and thus more expensive to implement than others. A second driver is the sequence for replacing current technologies with NGATS technologies. A third driver is the length of time required for the transformation to NGATS, since a longer period would impose higher costs. JPDO’s first draft of its enterprise architecture, expected in September 2006, could reduce some of these variables, thereby allowing improved, albeit still preliminary, estimates of NGATS’ costs. Although the enterprise architecture for NGATS is not yet complete, both FAA and its Research, Engineering and Development Advisory Committee (REDAC) have developed preliminary cost estimates, which officials of both organizations have emphasized are not yet endorsed by any agency. FAA estimates that the facilities and equipment cost to maintain the ATC system and implement the transformation to NGATS will be about $66 billion, or about $50 billion in constant 2005 dollars. The annual cost would average $2.7 billion per year in constant 2005 dollars from fiscal year 2007 through fiscal year 2025, or about $200 million more each year than FAA’s fiscal year 2006 facilities and equipment appropriation. REDAC’s Financing NGATS Working Group has developed a $15 billion average annual cost estimate for NGATS that includes costs not only for facilities and equipment but also for operations; airport improvement; and research, engineering, and development—the remaining three components of FAA’s appropriation. As table 1 indicates, the working group began with FAA’s facilities and equipment estimate and went on to calculate the remaining costs for FAA to maintain the current ATC system and implement the transformation to NGATS. REDAC’s estimate for NGATS’s total cost averages about $1 billion more annually than FAA’s total appropriations for fiscal year 2006. Besides being preliminary, these estimates are incomplete—FAA’s more than REDAC’s because FAA’s does not include any costs other than those for facilities and equipment. An FAA official acknowledged that the agency would likely incur additional costs, such as for safety certifications or operational changes responding to new NGATS technologies. Additionally, FAA’s facilities and equipment cost estimate assumes that the intermediate technology development work, performed to date by NASA, has been completed. As I will discuss shortly, it is currently unclear who will now perform this work, but if FAA assumes responsibility for the work, REDAC has estimated additional FAA funding needs of at least $100 million a year. Furthermore, neither FAA’s nor REDAC’s estimate includes the other partner agencies’ costs to implement NGATS, such as those that the Department of Homeland Security might incur to develop and implement new security technologies. Finally, these estimates treat NGATS’s development and implementation period as an isolated event. Consequently, the costs drop dramatically toward 2025. In reality, officials who developed these estimates acknowledge that planning for the subsequent “next generation” system will likely be underway as 2025 approaches and the actual modernization costs could therefore be higher in this time frame than these estimates indicate. JPDO faces several challenges in planning for NGATS, including addressing leadership vacancies, leveraging resources and expertise from its partner agencies, and convincing nonfederal stakeholders that the government is fully committed to NGATS. JPDO has not had a permanent director since January 2006 and, with the recent resignation of the Secretary of Transportation, the senior policy committee is without a permanent chairperson. Our work has shown that, to overcome barriers to interagency coordination, committed leadership by individuals at the top of all involved organizations is critical. Leadership will also be important to provide a “champion” for JPDO and to sustain the partner agencies’ focus on and contributions to the transformation to NGATS. Moreover, without a chairperson of the senior policy committee, no one within JPDO is responsible for sustaining JPDO’s collaboration and overseeing its work. These vacancies raise concerns about the continued progress of JPDO and NGATS. After ATO was authorized, we reported that without a chief operating officer, FAA was unable to move forward with the new air traffic organization—that is, to bring together the ATC system’s acquisition and operating functions, as intended, into a viable performance-based organization (PBO). This PBO was designed to be part of the solution to the chronic schedule delays, cost overruns, and performance shortfalls in FAA’s ATC modernization program. We believe that filling the two vacant positions is critical to ensure continued progress for JPDO and NGATS. JPDO officials view leveraging the partner agencies’ resources and expertise as one of their most significant challenges. According to JPDO officials, leveraging efforts have worked well so far, but JPDO’s need for resources and expertise will increase with the development of NGATS, and for at least two reasons, JPDO may have difficulty meeting this need. First, JPDO’s partner agencies have a variety of missions and priorities in addition to NGATS, and their priorities may change. Recently, for example, NASA reduced its aeronautics budget and decided to focus on fundamental research, in part because the agency believes such research is more in keeping with its mission and unique capabilities. These changes occurred even though NASA’s current reauthorization act requires the agency to align its aviation research projects to directly support NGATS goals. In light of the changes, it is unclear what fundamental research NASA will perform to support NGATS and who will perform the development steps for that research—that is, the validation and demonstration that must take place before a new technology can be transferred to industry and incorporated into a product. JPDO and FAA officials said that not enough is understood about NASA’s plans to assess the impact of NASA’s action on NGATS, but many experts told us that NASA’s new focus on fundamental research creates a gap in the technology development continuum. Some believe that FAA has neither the research and development infrastructure nor the funding to do this work. As I previously mentioned, REDAC, in a draft report, estimated that FAA would need at least $100 million annually in increased funding to perform this research and development work. REDAC further estimated that establishing the necessary infrastructure within FAA could delay the implementation of NGATS by 5 years. Second, JPDO may have difficulty leveraging its partner agencies’ resources and expertise because it does not yet have formal, long-term agreements with the agencies on their roles and responsibilities in creating NGATS. According to JPDO officials, they are working to establish memorandums of understanding (MOU) signed by the heads of the partner agencies that will broadly define the partner agencies’ roles and responsibilities at a high level. JPDO is also developing more specific MOUs with individual partner agencies that lay out expectations for support on NGATS components, such as information sharing through network-centric operations. Obtaining the specialized expertise of some stakeholders poses an additional challenge for JPDO. Air traffic controllers, for example, will play a key role in NGATS, but their union is not participating in JPDO. Currently, the ATC system relies primarily on air traffic controllers to direct pilots to maintain safe separation between aircraft. Under NGATS, this premise could change and, accordingly, JPDO has recognized the need for human factors research on issues such as how tasks should be allocated between humans and automated systems and how the existing allocation of responsibilities between pilots and air traffic controllers might change. The input of current air traffic controllers who have recent experience controlling aircraft is important in considering human factors and safety issues because of the controllers’ familiarity with existing operating conditions. The air traffic controllers’ labor union, the National Air Traffic Controllers Association (NATCA), has not participated in NGATS since June 2005, when FAA terminated a labor liaison program that assigned air traffic controllers to major system acquisition program offices and to JPDO. FAA had determined that the benefits of the program were not great enough to justify its cost. The NGATS Institute Management Council includes a seat for the union, but a NATCA official told us that the union’s head had been unable to attend the council’s meetings. According to JPDO officials, the council has left a seat open in hopes that the controllers will participate in NGATS as the new labor-management agreement between NATCA and FAA is implemented. Convincing nonfederal stakeholders that the government is fully committed to NGATS poses a challenge because, in the past, the government has stopped some modernization efforts, including one in which an airline had already invested in supporting technologies. Specifically, FAA developed a datalink communications system that transmitted scripted e-mail-like messages between controllers and pilots. One airline equipped some of its aircraft with this new technology, but because of funding cuts, among other things, FAA canceled the program. Moreover, as we have reported, some aviation stakeholders have expressed concern that FAA may not follow through with its airspace redesign efforts and are hesitant to invest in equipment unless they are sure that FAA will remain committed to its efforts. One expert suggested that the government might mitigate this issue by making an initial investment in a specific technology before requesting that airlines or other industry stakeholders purchase equipment. Stakeholders’ belief that the government is fully committed to NGATS will be important as efforts to implement NGATS technologies move forward. Achieving many of the benefits of NGATS will require users of the system—airlines and general aviation—to purchase NGATS-compatible technologies, such as ADS-B. This new air traffic surveillance system, which JPDO has identified as one of the early core technologies for NGATS, requires aircraft to be equipped with components that will be implemented in two phases. FAA anticipates significant cost savings from the implementation of the first phase, but the airlines do not expect to benefit until the second phase is complete. The technology should then allow pilots to fly more precise routes at night and in poor visual conditions. Another early core technology for NGATS, SWIM, is also intended to produce benefits for users, but again, it is not expected to do so for many years. Nonfederal stakeholders’ support for these and other NGATS technologies will be important, and their support will depend, in part, on their assurance of the government’s full commitment. FAA faces challenges in implementing NGATS, including institutionalizing recent improvements in its management and acquisition processes, acquiring expertise to implement highly complex systems, and achieving cost savings to help fund NGATS technologies. With the establishment of ATO and the appointment of a Chief Operating Officer (COO) for it, FAA put a new management structure in place and established more businesslike management and acquisition processes to address the cost, schedule, and performance shortfalls that have plagued ATC modernization over the years. Under the new structure, FAA is a flatter organization, with fewer management layers, and managers are in closer contact with the services they deliver. FAA has also taken some steps to break down the vertical lines of authority, or organizational stovepipes, that we found hindered communication and coordination across FAA. For example, the COO holds daily meetings with the managers of ATO’s departments and holds the managers collectively responsible for the success of ATO through the performance management system. FAA has revised its management processes to increase accountability. For example, it has established a cost accounting system and made the units that deliver services within each department responsible for managing their own costs. Thus, each unit manager develops an operating budget and is held accountable for holding costs within specific targets. Managers track the costs of their unit’s operations, facilities and equipment, and overhead and use this information to determine the costs of the services their unit provides. Managers are evaluated and rewarded according to how well they hold their costs within established targets. Our work has shown that it is important, when implementing organizational transformations, to use a performance management system to assure accountability for change. Finally, FAA is revising its acquisition processes, as we recommended, and taking steps to improve oversight, operational efficiency, and cost control. To ensure executive-level oversight of all key decisions, FAA has revised its Acquisition Management System to incorporate key decision points in a knowledge-based product development process. Moreover, as we have reported, an executive council now reviews major acquisitions before they are sent to FAA’s Joint Resources Council. To better manage cost growth, this executive council also reviews breaches of 5 percent or more in a project’s cost, schedule, or performance. FAA has issued guidance on how to develop and use pricing, including guidelines for disclosing the levels of uncertainty and imprecision that are inherent in cost estimates for major ATC systems. Additionally, FAA has begun to base funding decisions for system acquisitions on a system’s expected contribution to controlling operating costs. Finally, FAA is creating a training framework for its acquisition workforce that mirrors effective human capital practices that we have identified, and the agency is taking steps to measure the effectiveness of its training. Since 2004, FAA has met its acquisitions performance goal—to have 80 percent of its system acquisitions on schedule and within 10 percent of budget. To sustain this record, FAA will need to institutionalize its reforms—that is, provide for their duration beyond the current administration at FAA and ATO by ensuring that the reforms are fully integrated into the agency’s structure and processes at all levels and have become part of its organizational culture. Our work has shown that successfully institutionalizing change in large public and private organizations can take 5 to 7 years or more. In the past, a lack of expertise contributed to shortfalls in FAA’s management of ATC modernization projects. Although the personnel flexibilities that Congress authorized in 1995 allowed FAA to establish criteria for outstanding performance and match industry pay scales for needed expertise, industry experts have questioned whether FAA will have the technical expertise needed to implement NGATS—a task of unprecedented complexity, according to JPDO, FAA, and other aviation experts. In 2004, we found that FAA could not ensure that its own best practices were consistently used in managing acquisitions and, as a result, its major acquisitions were still at risk of cost overruns, schedule slippages, or performance shortfalls. These findings are consistent with concerns about the expertise of acquisition managers governmentwide. According to a 2005 study by the Merit Systems Protection Board, at least 50 percent of the government personnel who currently manage technical contracts reported needing training in areas such as contract law, developing requirements, requesting bids, developing bid selection criteria and price determinations, and monitoring contractor performance. Recognizing the complexity of the NGATS implementation effort and the possibility that FAA may not have the in-house expertise to manage it without assistance, we have identified potential approaches for supplementing FAA’s capabilities. One of these approaches is for FAA to contract with a lead systems integrator (LSI). Generally, an LSI is a prime contractor that would help to ensure that the discrete systems used in NGATS will operate together and whose responsibilities may include designing system solutions, developing requirements, and selecting major system and subsystem contractors. The government has used LSIs before for programs that require the integration of multiple complex systems. Our research indicates that although LSIs have certain advantages, such as the knowledge, understanding, skills, and ability to integrate functions across various systems, their use also entails certain risks. For example, because an LSI may have significantly more responsibility than a prime contractor usually does, careful oversight is necessary to ensure that the government’s interests are protected and that conflicts of interest are avoided. Consequently, selecting, assigning responsibilities to, and managing an LSI could pose significant challenges for JPDO and FAA. Another approach that we have identified involves obtaining technical advice from federally funded research and development corporations to help the agency oversee and manage prime contractors. These nonprofit corporations are chartered to provide long-term technical advice to government agencies in accordance with various statutory and regulatory rules to ensure independence and prevent conflicts of interest. FAA officials indicated that they are considering at least these two approaches to help address any possible gaps the agency may have in its technical expertise. Given the complexity of implementing NGATS, we believe that FAA’s consideration of these approaches to filling any gaps in its technical expertise is appropriate. We believe that either of these approaches could reduce the risks associated with implementing NGATS. The cost of operating and maintaining the current ATC system while implementing NGATS will be another important challenge in transitioning to NGATS—a system that, as noted, is broader in scope than the current ATC system and will require funding for security technologies and environmental activities as well as ATC technologies. Although additional funding for the current ATC system and for NGATS may come from increased congressional appropriations, some industry analysts expect that most of the funds for implementing NGATS will have to come from savings in operating and maintaining the current ATC system. FAA is currently seeking to reduce costs by introducing infrastructure and operational efficiencies and expects to use the savings from these efforts to help fund the implementation of NGATS. For example, FAA has begun to decommission ground-based navigational aids, such as compass locators, outer markers, and nondirectional radio beacons, as it begins to move toward a satellite-based navigation system. In fiscal year 2005, FAA decommissioned 177 navigational aids, claiming savings of $2.9 million. According to one expert, FAA could additionally generate revenue from these sites by leasing them for warehouses or cell phone towers. FAA also expects to reduce costs by streamlining its operations. For example, it is consolidating its administrative activities, currently decentralized across its nine regions, into three regions, and anticipates an annual savings of up to $460 million over the next 10 years. Our work analyzing international air navigation service providers has shown that additional cost savings may be possible by further consolidating ATC facilities such as terminal radar approach control (TRACON) facilities and ATC centers. According to one estimate of potential FAA savings, consolidating the existing 21 air route traffic control centers into 6 centers could save approximately $600 million per year. Finally, FAA expects to save costs through outsourcing. For example, it outsourced its automated flight service stations to a private contractor and expects to achieve savings of $1.7 billion over 10 years. In addition, it expects savings of $0.5 billion from 400 staffing reductions that occurred between the time the outsourcing began and the time the new contract was actually implemented. The agency expects to receive $66 million—the first installment of these cost savings—in fiscal year 2007. Until FAA has completed its estimates of both NGATS costs and the cost savings it will be able to achieve between now and 2025, it will not be able to determine how far these cost savings will go toward financing NGATS. Nonetheless, one analyst has preliminarily estimated that FAA’s expected savings through infrastructure and operational efficiencies will fall far short of the amount needed to finance NGATS. While more information is needed to estimate the amount of any shortfall with greater confidence, these preliminary and incomplete estimates signal the extent of the resource challenge. Mr. Chairman, this concludes my statement. We would be pleased to answer any questions that you and Members of the Subcommittee may have. For further information on this testimony, please contact Gerald Dillingham at (202) 512-2834 or [email protected]. Individuals making key contributions to this statement include Kevin Egan, Elizabeth Eisenstadt, David Hooper, Heather Krause, Elizabeth Marchak, Edmond Menoche, Faye Morrison, Taylor Reeves, and Richard Scott. 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. | The health of our nation's air transportation system is critical to our citizens and economy. However, the current approach to managing air transportation is becoming increasingly inefficient and operationally obsolete. In 2003, Congress created the Joint Planning and Development Office (JPDO) to plan for and coordinate, with federal and nonfederal stakeholders, a transformation from the current air traffic control (ATC) system to the "next generation air transportation system" (NGATS). Housed within the Federal Aviation Administration (FAA), JPDO has seven partner agencies that make up JPDO's senior policy committee: the Departments of Transportation, Commerce, Defense, and Homeland Security; FAA; the National Aeronautics and Space Administration (NASA); and the White House Office of Science and Technology Policy. This testimony, which provides preliminary results from GAO's ongoing work on JPDO, provides information on (1) the status of JPDO's efforts to plan for NGATS, (2) the key challenges facing JPDO as it moves forward with its planning efforts, and (3) the key challenges facing FAA as it implements the transformation while continuing its current operations. The statement is based on GAO's analysis of JPDO documents, interviews, and the views of a panel of experts, as well as on past GAO work. JPDO has developed a framework for planning and coordination with its federal partner agencies and nonfederal stakeholders that is consistent with the requirements of its authorizing legislation--Vision 100--and with several practices that our previous work has shown can facilitate federal interagency collaboration and the development of an enterprise architecture (i.e., system blueprint). JPDO's framework includes an integrated plan that provides a vision for NGATS, an organizational structure and processes for leveraging the resources and expertise of federal and nonfederal stakeholders, and an enterprise architecture that defines the specific requirements for NGATS. As JPDO moves forward, it will face leadership, leveraging, and commitment challenges. Currently, JPDO lacks a permanent director and a permanent chairperson of its senior policy committee to provide the leadership needed to overcome barriers to interagency coordination. In addition, despite early successes, JPDO may have difficulty continuing to leverage its partner agencies' resources and expertise for NGATS because these agencies have missions and priorities in addition to NGATS and JPDO does not yet have signed, long-term agreements with the partner agencies on their respective roles and responsibilities. Finally, JPDO faces the challenge of convincing nonfederal stakeholders that the government is fully committed to implementing NGATS, given that, in some instances, it has discontinued work on new technologies for the national airspace system. FAA faces challenges in institutionalizing recent improvements in its management and acquisition processes, as well as in obtaining the expertise and resources necessary to implement NGATS. First, institutionalizing FAA's process improvements is critical to successfully implementing NGATS. Second, FAA may lack the expertise needed to manage the NGATS effort. GAO has identified two potential approaches for FAA to supplement its capabilities that FAA is considering. Third, achieving cost savings is critical to funding the implementation of NGATS. |
Individual taxpayers generally realize gains or losses when they sell capital assets, which are generally defined as properties owned for investment or personal purposes and outside the normal course of a taxpayer’s trade or business. In recent years, IRS studies show that the majority of capital asset transactions and capital gains and losses were for securities transactions, including sales of corporate stock, mutual funds, bonds, options, and capital gain distributions from mutual funds. For example, in 1999, the latest year for which IRS published data on capital assets sales, an estimated 91 percent of capital asset transactions, 62 percent of capital gains, and 79 percent of capital losses were from securities transactions. Also, over the past two decades, individual ownership of securities assets held outside of retirement accounts has increased. According to the Federal Reserve Board, the percentage of families that own stock, mutual funds, and bonds outside of retirement accounts increased from 25 percent in 1983 to a high of 42 percent in 2001, before falling to 38 percent in 2004. When taxpayers sell or otherwise receive income from securities, they must report the transactions on their federal income tax returns. For securities sales, taxpayers are to report the dates they acquired and sold the asset; sales price, or gross proceeds from the sale; cost or other basis of the sold asset; and resulting gains or losses on Schedule D to the individual tax return—Form 1040. Taxpayers are to report this information separately for short-term transactions and long-term transactions. Taxpayers also are to report the total amount of their capital gain distributions from mutual funds, which are always considered to be long-term transactions. Taxpayers are to report their overall gains or losses from securities sales, capital gain distributions, and other capital gains on the Form 1040 tax return itself. Generally, a taxpayer’s gain or loss from a securities sale is simply the difference between the gross proceeds from the sale and the original purchase price, or original cost basis. However, before taxpayers can determine any gains or losses from securities sales, they must determine if and how the original cost basis of the securities must be adjusted to reflect certain events, such as stock splits, nontaxable dividends, or nondividend distributions. For example, figure 1 shows how a taxpayer would need to adjust the basis of a stock following a stock split to accurately determine the resulting capital gain or loss when the stock is sold. In this example, if the taxpayer fails to properly adjust the basis of the stock to account for the split, he or she will incorrectly report a capital loss from the sale. Taxpayers who buy and sell the same stock or mutual fund shares at various times can determine basis in a number of ways. Taxpayers can specifically identify the groups of shares they want to sell. For example, if a taxpayer buys a group of 10 shares of stock in one year for $1 per share and another group of 10 shares of the same stock in the next year for $2 per share, and then sells 10 shares of the stock, the taxpayer can choose to sell the stocks with either the $1 or $2 cost basis. If taxpayers cannot identify which shares they sold among many they bought on varying occasions, they must report the basis of the securities they purchased first as the basis of the sold shares. Except for mutual fund shares, taxpayers cannot use the average cost of securities they purchased at various times to determine basis. When taxpayers sell securities through a broker, that broker is required to file Form 1099-B with IRS and the taxpayers to report a description of the security, sales date, number of shares sold, and gross proceeds from the sale, along with other information. Brokers are not required to report the cost or other basis of the sold security or, with the exception of regulated futures contracts, the resulting gain or loss from a security sale. Capital gain distributions from mutual funds are to be reported on Form 1099- DIV. The rate at which income from securities is taxed depends on how long taxpayers held a security before sale and taxpayers’ regular income tax rates. Securities assets sold after being held for 1 year or less are considered short-term and taxed at the taxpayers’ regular income tax rates. Assets sold after being held for more than 1 year are considered to be long- term and are generally taxed at maximum rates of 5 percent or 15 percent, depending on the taxpayer’s regular income tax rates. Capital gain distributions from mutual funds are always taxed as long-term gains. Taxpayers can deduct capital losses against their capital gains, and any excess losses can be deducted against ordinary income up to a limit of $3,000 ($1,500 for married taxpayers filing separately), beyond which the losses can be carried over to offset capital gains or ordinary income in future tax years. Thirty-eight percent of individual taxpayers who had securities transactions misreported their securities gains or losses for tax year 2001. A greater percentage of taxpayers misreported their securities sales (36 percent) than misreported their capital gain distributions (13 percent), and most of the misreported securities transactions exceeded $1,000 of capital gain or loss. Taxpayers often misreported their capital gains or losses from securities sales because they failed to accurately report the securities’ basis. For tax year 2001, individual taxpayers frequently misreported their capital gains or losses from the securities they sold. Overall, an estimated 8.4 million of the estimated 21.9 million taxpayers with securities transactions misreported their gains or losses. Table 1 shows the estimated percentages of taxpayers who misreported their securities sales and capital gain distributions, overall and by the securities’ holding period. Table 1 shows that a higher estimated percentage of taxpayers misreported a securities sale than a capital gains distribution. Overall, an estimated 7.3 million out of an estimated 20.3 million taxpayers misreported their securities sales compared to the estimated 1.2 million out of an estimated 9.1 million taxpayers who misreported their capital gain distributions. One reason taxpayers may misreport securities sales more frequently is that taxpayers must compute the portion of their sales proceeds that constitutes a gain or loss, whereas taxpayers need only add up their capital gain distributions from information returns they receive and enter the amounts on their tax returns. Table 1 also shows that individual taxpayers are estimated to have misreported their short-term securities sales about as often as their long-term sales. In addition, our analyses showed the following: Of those taxpayers who misreported securities sales, an estimated 97 percent misreported gains or losses from the sales of stocks and mutual funds while an estimated 5 percent misreported bonds, options, or futures. Individual taxpayers misreported securities sales more frequently than other types of income, such as wages and salary, dividend income, and interest income. Respectively, an estimated 10 percent, 17 percent, and 22 percent of taxpayers with these types of income misreported the income. We were not able to estimate the capital gains tax gap for securities because the cases we reviewed included too few misreported securities transactions and taxpayers misreported a wide range of dollar amounts from the transactions, among other reasons (see app. I). However, we were able to determine the direction of the misreporting. For securities sales, an estimated 64 percent of taxpayers underreported their income from securities (i.e., they understated gains or overstated losses) compared to an estimated 33 percent of taxpayers who overreported income (i.e., they overstated gains or understated losses). For both underreported and overreported income, some taxpayers misreported over $400,000 in gains or losses. Also, as shown in table 2, around half of taxpayers who did not accurately report their securities sales were estimated to have misreported at least $1,000 of capital gains or losses (that is, taxpayers not in the less than $1,000 categories). In terms of income levels, the distribution of taxpayers who misreported gains or losses from securities sales and capital gain distributions did not vary greatly from the income level for all individual taxpayers for tax year 2001, as shown in table 3. Based on information in the files we reviewed, a primary type of noncompliance that caused taxpayers to inaccurately report their capital gains or losses from securities sales in tax year 2001 was misreporting the basis of the securities they sold. Table 4 shows the estimated frequency of the types of noncompliance that caused taxpayers to misreport capital gains or losses from their securities sales. For taxpayers who misreported basis, a greater percentage failed to accurately report basis for long-term securities holdings (35 percent of taxpayers who misreported securities sales) than for short-term holdings (21 percent). Taxpayers who failed to report securities sales altogether did not report short-term and long-term securities sales at a similar rate (20 percent and 22 percent, respectively, of taxpayers who misreported securities sales). Although we were able to determine the percentage of taxpayers who failed to accurately report their securities sales because they misreported basis (49 percent), we could not develop reliable estimates on the reasons for this type of misreporting because most of the NRP examination case files did not provide sufficiently descriptive information. However, of the 133 taxpayers who misreported basis from the 849 case files we reviewed, we were able to determine that 32 taxpayers misreported basis for the following reasons: Taxpayers did not have records of their securities purchases (16 taxpayers). Although during examinations, IRS was able to obtain basis records for some of these taxpayers from their brokers, for 9 taxpayers, basis records could not be obtained. For these taxpayers, IRS examiners considered basis to be zero and treated all gross proceeds amounts as capital gains. Taxpayers used original cost basis instead of adjusted cost basis (6 taxpayers). Taxpayers did not understand how to determine basis (5 taxpayers). Taxpayers reported basis information that was incorrectly determined by a tax return preparer (4 taxpayers). One taxpayer reported inaccurate basis information provided by a broker. Of taxpayers who failed to report their securities sales altogether, an estimated 28 percent were estimated to have failed to report capital losses. By not reporting losses, these taxpayers potentially failed to offset other capital gains or deduct their losses against other types of income they reported. Likewise, some of these taxpayers who failed to report capital losses exceeding $3,000 did not carry over these losses to offset capital gains or other income in future tax years. Although in most cases we could not determine why taxpayers did not report these losses, some taxpayers told IRS examiners that they did not know they had to report losses. In addition, IRS officials said some taxpayers might not report their capital losses because they worry that their returns will be examined if they overstate their losses. Also, the officials told us that taxpayers might want to avoid the burden of filing a Schedule D or the cost of paying someone to prepare their returns in cases where filing Schedule D would make the difference between self preparing and using a paid preparer. As also shown in table 4, taxpayers failed to accurately report their securities sales because they misreported the amount of their sale proceeds (12 percent) or misclassified the securities’ holding period (9 percent). However, the case files did not contain enough information to explain why taxpayers made these errors. Also, the responsible officials we interviewed at IRS could not provide explanations for why taxpayers might have made these errors. IRS uses both enforcement and taxpayer service programs in attempting to reduce the individual capital gains tax gap for securities. IRS checks the accuracy of tax returns through its enforcement programs and contacts taxpayers who may have inaccurately reported their securities gains or losses. IRS also offers service programs to provide taxpayers with assistance in fulfilling their capital gains tax obligations. However, these programs face challenges that limit their impact on reducing the capital gains tax gap for securities. Although IRS assesses additional taxes for securities income through its enforcement efforts, neither IRS nor we know the extent to which these assessments reduced the 2001 capital gains tax gap for securities. Consistent with its overarching philosophy that a combination of enforcement and service efforts are essential to tax compliance, IRS attempts to reduce the individual capital gains tax gap for securities through its programs that enforce the tax laws and that seek to help taxpayers voluntarily comply with the laws. IRS uses its enforcement programs to check the accuracy of filed tax returns and contacts taxpayers who have potentially made errors or inaccurately reported capital gains information on their returns. Aspects of IRS’s enforcement programs related to capital gains income for securities appear in table 5. Math Error, AUR, and ASFR are automated enforcement programs. IRS uses the Math Error program to check filed tax returns for internal inconsistencies or mathematical errors, and contacts taxpayers, including when the errors result in a tax change. Through AUR, IRS computers match the amounts of capital gains proceeds that taxpayers report on their tax returns and that brokers report on information returns. If this matching indicates that taxpayers may have underreported their sale proceeds for securities and IRS cannot resolve the discrepancies based on available information, IRS may send notices asking taxpayers to explain the discrepancies or pay any taxes assessed. When IRS determines through ASFR that taxpayers for whom IRS received information returns on the sale proceeds for securities failed to file tax returns, it may create tax returns for the taxpayers and assess tax liabilities. During examinations, IRS uses information from third parties as well as from taxpayers to determine if taxpayers have accurately reported their capital gains or losses. Examiners also may use other resources, such as online services, to help them determine the basis of taxpayers’ securities. IRS assesses additional taxes if it determines that taxpayers have underreported their capital gains income from securities. IRS’s taxpayer service programs provide taxpayers with information, support, and assistance to help them understand and fulfill their capital gains tax obligations for securities. For example, IRS produces publications that explain how to report capital gains or losses and provide examples of how to determine adjusted basis. IRS also provides Web- based information and telephone, written, or face-to-face assistance at Taxpayer Assistance Centers on how to accurately report capital gains and losses. IRS’s enforcement and taxpayer service programs face limitations in reducing the individual capital gains tax gap for securities. In addition to resource constraints that limit how many cases of potential noncompliance are pursued, table 6 summarizes the main limitations each program faces. As table 6 shows, IRS cannot use its automated programs to fully verify the reported capital gains or losses from securities sales because it does not receive basis information from brokers. Also, according to IRS officials, a lack of basis information reduces productivity because IRS spends resources contacting taxpayers for whom it ultimately does not assess additional taxes. For example, for tax year 2002, the latest year for which IRS has complete data, IRS did not assess additional taxes for around 46 percent of the taxpayers it contacted through AUR to address potentially misreported securities sales. By comparison, this “no tax change” percentage was around 20 percent for AUR contacts for all other types of income for 2002. For ASFR, IRS officials said that the lack of basis information hampers IRS’s ability to determine which taxpayers with gross proceeds from securities sales should have filed tax returns and to productively pursue those taxpayers who did not file. Given that IRS does not receive basis information from brokers, it can only verify the accuracy of the basis and gains and losses that taxpayers report for their securities sales by examining these individuals’ tax returns. IRS does not examine these taxpayers’ returns through correspondence because it believes the returns are too difficult and would take too much time to examine. IRS can only verify the accuracy of the reported basis and gains and losses from securities sales through face-to-face examinations. However, these examinations are resource intensive and only cover a small percentage of individual taxpayers. For example, in fiscal year 2004, IRS conducted approximately 200,000 face-to-face examinations for the 130 million individual taxpayers that filed tax returns in 2003, including the estimated 22.7 million taxpayers that filed a Schedule D with their tax returns. Even when IRS selects individual taxpayers to examine face-to- face, IRS often places a greater focus on issues it believes are more productive than securities sales, such as business income or the sale of personal or business real property, according to an IRS official responsible for examination planning. In providing taxpayer services, IRS faces challenges in communicating information to taxpayers on complying with capital gains reporting requirements. Taxpayers may not use the services IRS offers or may not understand the information that IRS provides. For example, IRS recently changed the instructions for filing Schedule D to include language that specifies taxpayers must include the details of all their capital gains transactions when filing their tax returns. Although IRS included this language to clarify an existing reporting requirement, some taxpayers and tax practitioners perceived that the instructions required taxpayers to report each capital asset transaction on Schedule D itself and not on attached brokerage statements, as otherwise allowed. This misconception required IRS to clarify on its Web site that taxpayers could continue to report the details of their transactions on attached statements as long as all transactions were included and they reported aggregate information on Schedule D. Through its enforcement programs, IRS assessed additional taxes for taxpayers who misreported their securities gains and losses for tax year 2001; however, neither IRS nor we know the extent to which these assessments reduced the securities tax gap for that year. IRS has not estimated the portion of the capital gains tax gap attributed to securities for tax year 2001, and we were not able to estimate this portion of the tax gap from our review of NRP case files. Likewise, IRS does not have complete information on the amount of additional taxes it assessed for taxpayers who underreported their income from securities sales for 2001. Through AUR for tax year 2001, IRS assessed around $190 million in additional taxes for securities sales and around another $5 million for capital gain distributions, and refunded over $8 million to taxpayers who overreported securities income. For tax year 2001 examinations, IRS does not have complete data for the amount of taxes it assessed for misreported capital gains or losses. IRS maintains a database that tracks examination results by the type of issue examined, such as capital gains or losses. However, prior to October 2004, the database only captured examination results for around 60 percent of individual examinations, according to IRS officials.As such, the database does not include all capital gains noncompliance that IRS identified in tax year 2001 examinations. Even when it includes such noncompliance, the database does not distinguish between misreported capital gains income from securities versus other capital assets. Likewise, the database does not specify the portion of additional tax assessments that is attributable to misreported capital gains income versus other types of noncompliance. Finally, IRS does not maintain data on additional taxes assessed and collected because of capital gains noncompliance through the Math Error or ASFR programs. Expanded reporting of cost basis information has the potential to reduce the individual capital gains tax gap for securities. Making administrative changes to IRS’s compliance programs that address capital gains also has some potential to reduce the tax gap, but enforcement programs can be resource intensive and taxpayers do not always use IRS’s taxpayer service programs. With such limitations, these changes likely would not significantly boost taxpayers’ voluntary compliance involving securities sales. Information reporting of adjusted cost basis to taxpayers and IRS would likely help reduce the tax gap from securities sales by improving taxpayers’ voluntary compliance and IRS’s ability to cost effectively address noncompliant taxpayers. Consistent reporting of basis information would involve challenges that would need to be, and to some extent can be, mitigated. IRS could seek to reduce the capital gains tax gap for securities by increasing examination coverage of taxpayers with gains or losses from securities, either by considering them when selecting taxpayers to examine through correspondence or by increasing face-to-face examinations of these taxpayers. Conducting more of each type of examination could increase the amount of taxes assessed for misreporting securities income. However, absent an increase in resources or access to basis information, which would help IRS better target its resources toward truly noncompliant taxpayers, focusing on taxpayers with securities gains or losses would divert IRS’s examination resources away from other productive areas of noncompliance, according to IRS officials. An increased focus on securities sales could reduce the capital gains tax gap, but a diversion of resources could result in greater noncompliance for other types of income. Moreover, although increasing examination coverage could induce taxpayers who are misreporting willfully to voluntarily comply, expanded coverage would not significantly affect voluntary compliance for taxpayers who make mistakes while trying to comply, such as taxpayers who made errors calculating basis, according to an IRS research official who has studied the impact of enforcement on taxpayer compliance. Addressing capital gains tax noncompliance for securities sales by enhancing IRS’s taxpayer service efforts might improve taxpayers’ voluntary compliance by helping them to better understand and fulfill their capital gains tax obligations for securities. However, the effects of any additional guidance that IRS might develop, for example on reporting losses or on resources for determining basis, would be tempered by challenges similar to those previously discussed, such as taxpayers not using or understanding information IRS provides. Although IRS attempts to generally ensure tax compliance through its service efforts, IRS researchers have found it difficult to determine the extent to which taxpayer services improve compliance among taxpayers who want to comply. As such, it is hard to know if these improvements to IRS’s service efforts would have a substantial impact on taxpayer’s reporting compliance for securities sales. Regardless, IRS’s instructions for reporting capital gains and losses and related guidance do not contain some information related to the causes for taxpayers misreporting the basis of securities they sold or failing to report sales at all—the leading types of noncompliance when taxpayers erred in reporting capital gains and losses. In many cases, we could not determine and IRS did not know exactly why taxpayers made these errors. However, some taxpayers did not know they had to report gains or losses and others did not understand how to determine basis. One counterintuitive situation existed among the cases we reviewed, that is some taxpayers did not report losses, which generally help them by lowering their tax liabilities. IRS’s instructions for filing Schedule D direct taxpayers to report their capital gains or losses but the instructions do not clarify the appropriate use of capital losses to offset capital gains or other income. Further, although IRS provides guidance on how to calculate basis for a variety of securities transactions, the instructions to Schedule D do not contain guidance on resources available to taxpayers and tax practitioners to determine basis for securities. Some examples of resources taxpayers might use to determine the basis of their securities holdings include brokers, tax preparers, or Web sites for companies that issue stocks or other information. Providing taxpayers more information on the benefits of reporting losses and resources available to them on calculating basis would be consistent with IRS’s responsibility to ensure that taxpayers pay the right amount of tax. Further, compared to other steps such as enforcement actions, providing additional guidance to taxpayers would be a low cost option to potentially increase their capital gains reporting compliance. Finally, any improvement in taxpayers’ compliance due to better guidance would reduce IRS’s enforcement expenses related to capital gains. According to IRS officials and some representatives related to the securities industry, taxpayers would likely report their gains or losses from securities sales more accurately and at a reduced burden if brokers consistently provided them with the adjusted basis of the securities they sold. Likewise, basis reporting would allow IRS to verify taxpayers’ securities gains and losses through its automated enforcement programs and take more efficient enforcement actions to address noncompliant taxpayers, according to IRS compliance officials. The likely increase in taxpayers’ voluntary compliance and in the productiveness of IRS enforcement actions resulting from basis reporting would likely substantially reduce the capital gains tax gap for securities. Taxpayers would benefit from basis reporting because, in many cases, they would not have to track and compute the adjusted basis of the securities they sold. Therefore, basis reporting would likely reduce the chance that taxpayers who had not been tracking their adjusted basis would misreport it for securities they sold. Also, if taxpayers received basis information from their brokers for the securities they sold, they would enjoy a reduced burden in filing Schedule D with their tax returns because, in many cases, they would not need to make basis calculations on their own. For taxpayers, the greater accuracy and reduced burden of reporting basis that would result from basis reporting would likely improve their voluntary compliance. As shown in figure 2, taxpayers tend to accurately report income that third parties report on information returns because the income is transparent to taxpayers as well as to IRS. For example, individual taxpayers misreport nearly twice the percentage of their income from sources subject only to some information reporting, which is the case with income from securities sales now, compared to income subject to substantial information reporting, such as income from dividends and interest, and which would be close to the case for securities sales if basis were consistently reported, according to an IRS research official. Also, as discussed previously, based on our file review, taxpayers were much less likely to misreport capital gain distributions (13 percent), which are similar to dividends and are subject to substantial information reporting, compared to income from securities sales (36 percent), for which information reporting only covers gross proceeds but not cost basis. The smallest percentage of misreporting is for wage and salary income, for which substantial information reporting exists and taxes are withheld by taxpayers’ employers. Cost basis reporting would also benefit IRS, to the extent the reporting was complete and accurate. IRS could use basis information to verify securities gains and losses through its automated enforcement programs and could more effectively allocate its enforcement resources to focus on the most noncompliant taxpayers. For AUR and ASFR, IRS officials told us that basis information would allow it to more precisely determine taxpayers’ income for securities sales and would allow it to identify which taxpayers who misreported securities income have the greatest potential for additional tax assessments. IRS’s examination program could similarly benefit. Specifically, IRS officials told us that receiving cost basis information might enable IRS to examine noncompliant taxpayers through correspondence because it could productively select tax returns to examine. Also, having cost basis information could help IRS identify the best cases to examine face-to-face, making the examinations more productive while simultaneously reducing the burden imposed on compliant taxpayers who otherwise would be selected for examination. As a result of all these benefits, basis reporting would allow IRS to better allocate its resources that focus on securities misreporting across its enforcement programs. IRS has endorsed the concept of matching information returns to tax returns for the purpose of identifying unreported income since the 1960s and Congress has created a number of statutes requiring information reporting for various types of income or taxpayer information. The related GAO products section at the end of this report provides references to selected GAO reports related to information reporting. We previously discussed the notion of basis reporting to help reduce capital gains tax noncompliance in our May 1994 report on the tax gap. Also, based on discussions we had with officials from IRS’s Taxpayer Advocate Service when we initiated our review, the National Taxpayer Advocate recommended that brokers be required to track and report cost basis for stocks and mutual funds in her 2005 Annual Report to Congress. In March 2006 a bill was introduced in the U.S. Senate and in April and May 2006 bills were introduced in the House of Representatives that would require brokers to report taxpayers’ basis for their securities transactions. Expanding information reporting on securities sales to include basis information would involve challenges for brokers and IRS. There are various ways to mitigate each challenge. Tables 7 and 8 list some major challenges for brokers and IRS, respectively, as well as some ways to start mitigating the challenges. Discussion after the tables covers some issues to consider when evaluating these mitigation strategies. Although not all inclusive, the strategies discussed above could help mitigate many of the challenges facing brokers and IRS if information reporting were expanded to include cost basis. However, the strategies also involve a number of trade-offs that would need to be considered in terms of the costs and burdens associated with basis reporting for taxpayers, IRS, and brokers, and the impact on reducing the capital gains tax gap for securities. Representatives from the securities industry we interviewed said that brokers would incur additional costs to develop and maintain systems to track and report basis, although they did not provide precise costs. However, we were also told that almost all of the largest brokers directly provide basis information to a significant portion of their clients, and many smaller brokers provide basis to a significant portion of their clients through outsourcing. Also, representatives of the mutual fund industry estimated that 80 to 90 percent of mutual funds provide average cost basis information to their shareholders. Likewise, from a societal perspective, the cost that brokers would incur in reporting basis information would be offset to some extent by the reduced costs to taxpayers in researching, calculating, and reporting basis, or paying a return preparer to perform such services. However, some brokers may pass on the costs of reporting basis information to their customers. Further, decisions about the scope and details of basis reporting, as further discussed below, could constrain how much brokers’ costs would increase. Also, representatives from the securities industry told us that their ability to provide taxpayers and IRS with accurate basis information would be challenged when taxpayers move their securities holdings from one broker to another. Some brokers use a system to transfer basis among one another, but the system is not used by all brokers. In addition, brokers do not always track and transfer basis in a consistent manner; that is, some track original cost basis while others track adjusted cost basis. Without a system through which all brokers transfer standardized basis information, the effectiveness of basis reporting would be limited. Additionally, brokers do not always know or may be challenged in determining the basis of taxpayers’ holdings. For example, some taxpayers may hold securities that they purchased long ago or received as a gift, for which neither they nor their brokers know the original purchase dates. In these cases, brokers cannot know the basis of the securities. However, this challenge could be mitigated to a large extent if brokers were to track and report basis prospectively, that is, only for securities purchased after a specified future date. The trade-off to prospective basis reporting, however, is that it would not help some taxpayers report basis for securities they owned before brokers began to report basis, which for a period of time would limit the impact basis reporting would have on reducing the tax gap. Also, prospective reporting would be complicated in cases where a taxpayer held a security prior to the specified date and then purchased additional shares of the same security after the specified date. Brokers would likely incur some additional costs to separately account for shares of stock purchased before and after the specified date for prospective reporting on information returns. Likewise, it is difficult for brokers to determine basis for some complicated securities transactions, according to representatives of the securities industry. For example, when taxpayers sell stock for a loss and then buy shares of the same stock within 30 days, they are prohibited from claiming a loss on the original sale. For these sales, known as wash sales, basis is difficult for the broker to determine because the taxpayer is required to add the disallowed loss from the wash sale to the basis of the subsequently purchased stock. The difficulty in determining basis for wash sales is compounded when taxpayers sell a stock at a loss through one broker and then buy the same stock within 30 days from another broker. In this case, the second broker would not know of the wash sale the taxpayer executed through the first broker and would not know to adjust the taxpayer’s basis accordingly. We only found two cases through our file review where taxpayers had misreported basis because of wash sales. Regardless, transactions such as wash sales may be too complex for brokers to feasibly report basis. Excluding these transactions from basis reporting, however, would further reduce the impact of basis reporting on closing the securities tax gap. For IRS, having basis information, along with gross proceeds information, for each of a taxpayer’s securities sales would best enable the agency to check whether taxpayers properly reported their capital gains and losses. However, storing and making use of such information would be challenging because of the costs and difficulty involved in storing and computer matching the large volume of information that transactional reporting would entail. However, if brokers were to report only aggregate basis amounts to IRS for all of a taxpayer’s transactions, the costs and difficulties of storing and using the information for matching would be reduced. Aggregate reporting would also reduce the costs to brokers of reporting basis to IRS, although they could still report basis for all transactions to taxpayers. Another complication for IRS and brokers is that taxpayers can choose among various methods for reporting basis in cases where they sell some of their shares of a security they purchased on multiple occasions. Taxpayers may choose to report basis in a different way than brokers would otherwise choose because taxpayers can (1) specifically identify which shares they sell among many they hold and report basis for those shares; (2) use the basis of the first shares they bought; or (3) in the case of mutual funds, use the average cost of the shares they own. Taxpayers could indicate the method they chose to determine basis when they sell their securities, and brokers then could report the method selected and the related basis amount on information returns. However, this additional layer of tracking would likely add to costs to taxpayers, brokers, and IRS. Although this challenge could be alleviated if taxpayers were required to report basis in a consistent manner, this requirement would end taxpayers’ ability to determine basis in the most advantageous manner for their particular tax situations. Given the number of decisions that would need to be made in conjunction with basis reporting, IRS may not be able to require such reporting given its current authority. Although IRS has long had the authority to require information reporting related to securities, an official from IRS’s Office of Chief Counsel told us that IRS may not have the authority to require all of the actions that would be needed to implement cost basis information reporting, such as regulating a system through which brokers transfer standardized basis information. Therefore, it may be difficult for IRS to implement cost basis information reporting without further statutory authority. Representatives from the securities industry told us that in order to implement basis reporting, a set of rules would need to be developed to clearly establish, for example, what types of securities transactions would be covered by any requirement and how a system to transfer basis would be standardized. These representatives thought their input could be helpful in designing any set of rules. Although neither IRS nor we know the size of the tax gap related to securities sales, tens of millions of taxpayers hold securities outside of their retirement accounts and, according to our analysis of IRS data, an estimated 36 percent of taxpayers who sold securities in 2001 erred in reporting their gains and losses (an estimated 7.3 million out of an estimated 20.3 million taxpayers). Of those erring, an estimated 64 percent underreported their income and 33 percent overreported income. Also, an estimated 9 percent of individual taxpayers who sold securities misclassified their holding periods, either reporting short-term holdings as long-term, or vice versa. Enhancing IRS’s current enforcement and service efforts is an option for addressing these compliance problems, but the most effective tool for improving taxpayers’ compliance levels has long been information reporting and tax withholding. Individual taxpayers misreport nearly twice the percentage of their income from sources subject only to some information reporting—which is the case for securities income now—compared to income subject to substantial information reporting. Also, given that the tax consequences associated with the holding period of securities are significant, broker reporting on this specific issue, whether as part of basis reporting or separately, would help taxpayers apply the proper tax rules to their gains or losses and help IRS in identifying compliance problems. Extending information reporting for securities sales to include basis information is not a simple and straightforward proposition. The manner in which basis reporting is designed would affect how the costs of basis reporting are distributed among taxpayers, brokers, and IRS, and the extent to which basis reporting would close the securities-related tax gap. In addition, although IRS has the general authority to require basis reporting, IRS officials were not certain the agency had sufficient authority to regulate how such reporting is implemented, such as regulating a system through which brokers transfer standardized basis information. In the event that brokers were required to report basis for securities purchased as of a specific future date, some taxpayers may continue to misreport their gains and losses from the securities holdings they currently hold. For these taxpayers, additional guidance on reporting basis and gains or losses for securities sales could be a low cost way to help them voluntarily comply with their tax obligations. For example, an estimated 28 percent of taxpayers who failed to report their securities sales had losses. Clarification of IRS’s instructions for Schedule D on the appropriate use of capital losses to offset capital gains or other income could be a means to help ensure that taxpayers do not disadvantage themselves when they experience losses from their investments. Also, given the complexity involved in determining some securities’ basis because of events such as stock splits, guidance on the resources available to taxpayers on determining basis, such as utilizing brokers, or services offered by companies that issue stocks or other information available on Web sites, could help improve taxpayers’ ability to determine their securities’ basis. In order to reduce the capital gains tax gap for securities, Congress may want to consider requiring brokers to report to both taxpayers and IRS the adjusted basis of securities that taxpayers sell and ensuring that IRS has sufficient regulatory authority to implement the requirement. Either in connection with requiring basis reporting or separately, Congress could also require brokers to report to taxpayers and IRS whether the securities sold were short-term or long-term holdings. Additionally, Congress could direct IRS to work with brokers and related parties to develop rules that seek to mitigate some of the challenges associated with requiring basis reporting. To assist taxpayers in accurately reporting their capital gains and losses from securities, in the instructions to Schedule D the Commissioner of Internal Revenue should (1) clarify the appropriate use of capital losses to offset capital gains or other income and (2) provide guidance on resources available to taxpayers to determine their basis. In written comments on a draft of this report, which are reprinted in appendix II, the Commissioner of Internal Revenue agreed with our recommendations. He also concurred that for some securities, basis reporting involves unique challenges and noted that IRS is committed to working with industry stakeholders to develop cost effective methods to mitigate such reporting challenges. IRS also provided comments on several technical issues, which we incorporated in this report where appropriate. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies to the Chairman and Ranking Minority Member, House Committee on Ways and Means; the Secretary of the Treasury; the Commissioner of Internal Revenue; and other interested parties. Copies will be made available to others upon request. This report will also be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions, please contact me at (202) 512-9110 or [email protected]. 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 III. To provide information on the extent of and primary types of noncompliance that cause individual taxpayers to misreport capital gains from securities, we performed a number of activities that relied on data from IRS’s National Research Program (NRP). Through NRP, IRS selected and reviewed a stratified random sample of 45,925 individual income tax returns from tax year 2001. The NRP sample is divided across 30 strata by the type of individual tax return filed and income levels. IRS accepted as filed some of the NRP returns, accepted others with minor adjustments, and examined the remainder of returns either through correspondence or face-to-face meetings with taxpayers. If IRS examiners determined that taxpayers misreported income for any aspect of the selected tax returns, they adjusted the taxpayers’ income accordingly and assessed additional taxes. IRS captured data from taxpayer returns and examination results in the NRP database, including capital gains income. However, the data on capital gains do not indicate the type of capital asset for which taxpayers reported gains or losses or for which examiners made income adjustments. Therefore, to obtain information on the extent and primary types of capital gains tax noncompliance specific to securities, we selected a statistical sample of NRP examination files to review. The sample we selected contained 1,017 cases spread across 90 substrata, defined by replicating each of the 30 NRP strata across 3 GAO substrata. The first GAO substratum consisted of examination cases for which the adjustments to capital gain income the examiners made had the largest impact on the total amount of these adjustments for all taxpayers when weighted for the entire population of individual taxpayers. We focused on cases with the largest adjustments, in weighted terms, because including these cases would improve the level of confidence of any estimates of the total amount of capital gains income adjustments for securities. Because our sample is a subsample of the NRP sample and is subject to sampling error, we added cases, when applicable, to ensure that each of the 30 NRP strata in this GAO substratum contained a minimum of 5 cases. In total, we selected 290 cases for the first GAO substratum, and these cases accounted for around 75 percent of the total capital gains adjustments in NRP when weighted for the population of individual taxpayers. The second substratum consisted of 187 cases for which IRS did not identify misreported capital gains income when it reviewed or examined the tax returns. We included these returns as part of our sample to verify that the NRP examinations had correctly recorded when taxpayers were compliant with respect to reporting capital gains and losses. We selected these cases at random and in proportion to the NRP sample through an iterative process, ensuring that a minimum of 5 cases and a maximum of 15 cases was included in each of the 30 NRP strata. The remaining 540 cases that constitute the third GAO substratum were selected from cases for which IRS examined taxpayers’ capital gain income. We selected these cases at random and in proportion to the number of NRP returns for which IRS examined capital gains income, ensuring that we selected a minimum of 5 cases for each NRP stratum. For one stratum, we only included 2 cases because they were the only cases in the corresponding NRP stratum. Of the 1,017 cases we selected for our sample, we reviewed 849 cases. We did not review the remaining 168 cases because either IRS did not provide the files in time to include in our review (164 cases) or the files did not contain examination workpapers essential to determining if examiners made adjustments to taxpayers income from securities (4 cases). Based on an analysis of the response rates by the 90 GAO substrata, we concluded that the missing cases did not bias our analyses. We requested the cases at two points, in late-December 2005 and late-January 2006, and periodically checked on the status of our requests with IRS. We were only able to review cases that arrived by April 21, 2006 in order to meet our agreed upon issue date for the report. We reviewed each selected case file to determine if the taxpayers reported securities transactions on their returns or if examiners discovered any misreported securities transactions. For returns where examiners discovered misreported income from securities transactions, we determined, when possible, the related security type, holding period, adjustment amount, and reason for the adjustment, along with other information. We recorded all determinations on a data collection instrument (DCI) that we developed. To ensure that our data collection efforts conformed to GAO’s data quality standards, each DCI that a GAO analyst completed was reviewed by another GAO analyst. The reviewers compared the data recorded on the DCI to the data in the corresponding case file to determine whether they concurred with how the data were recorded. When the analysts differed on how the data were recorded, they met to reconcile any differences. We input the data we recorded on the DCIs into a computer data collection program. To ensure the accuracy of the transcribed data, each electronic DCI entry was compared to its corresponding paper DCI by analysts other that those that electronically entered the data. If the reviewers found any errors, changes were made to the electronic entries, and the entries were reviewed again to ensure that all data were transcribed accurately. The estimates we included in this report were based on the NRP database and the data we collected through our file review and were generated using statistical software. All computer programming for the resulting statistical analyses were checked by a second, independent analyst. Our final sample size was large enough to generalize the results of our review or had margins of error small enough to produce meaningful estimates in terms of percentages of taxpayers who were noncompliant in reporting capital gains from securities transactions. However, we could not produce meaningful estimates of the total amount of net misreported capital gain income from securities or determine the securities tax gap, in part because (1) in selecting our sample, we could not distinguish which cases included misreported securities transactions as opposed to misreported transactions for other types of capital assets, (2) some cases with large amounts of misreported capital gains or losses were due to noncompliance for assets other than securities, (3) 53 of the cases we requested from IRS from our first substratum, which represented a large percentage of the total amounts of misreported capital gains or losses, were not provided in time to include in our review, and (4) taxpayers misreported a wide range of dollar amounts from the transactions. We discussed our estimates with IRS officials to obtain their perspectives on the results of our analysis. Because we followed a probability procedure based on random selection, our sample is only one of a large number of samples that we might have selected. Since each sample could have resulted in different estimates, we express our confidence in the precision of our particular sample’s results as a 95 percent confidence interval, plus or minus the margin of error indicated along with each estimate in the report. This interval would contain the actual population value for 95 percent of the samples we could have selected. We assessed whether the examination results and data contained in the NRP database were sufficiently reliable for the purposes of our review. For this assessment, we interviewed IRS officials about the data, collected and reviewed documentation about the data and the system used to capture the data, and performed electronic testing of relevant data fields for obvious errors in accuracy and completeness. We compared the information we collected through our case file review to corresponding information in the NRP database to identify inconsistencies. Based on our assessment, we determined that the NRP database was sufficiently reliable for the purposes of our review. We also used IRS’s Statistics of Income (SOI) file for individual taxpayers, which relies on a stratified probability sample of individual income tax returns, to develop estimates for categories of individual taxpayers on adjusted gross income, the percentage of individual taxpayers that used paid tax preparers, and the number of taxpayers that filed a Schedule D with their tax returns for tax year 2003. We compared our analyses against published IRS data to determine that the SOI database was sufficiently reliable for the purposes of our review. To provide information on actions IRS takes in attempting to reduce the individual capital gains tax gap for securities and on challenges that IRS faces with these actions, we reviewed documents from IRS compliance programs as they related to capital gains and interviewed IRS officials knowledgeable about the subject. We reviewed documentation for IRS’s enforcement programs that address capital gains and reviewed IRS publications and other documents that provided information on how to accurately report capital gains and losses. To provide additional information on IRS’s compliance programs and identify challenges IRS faces in using these programs to reduce the individual capital gains tax gap for securities, we interviewed IRS officials from various areas of the agency, including the enforcement, taxpayer service, and research functions. To identify options with the potential to improve taxpayers’ voluntary compliance for reporting securities gains and losses and IRS’s ability to find noncompliance related to the individual capital gains tax gap for securities, we reviewed prior GAO reports and other documents on capital gains reporting and compliance such as those from IRS compliance programs and industry reports on securities holdings and information reporting. We also spoke with IRS officials and numerous representatives from, and related to, the securities industry. At IRS, we spoke with officials from various areas of the agency, including the enforcement, taxpayer service, and research functions. Additionally, we spoke with officials from the Taxpayer Advocate Service and members of IRS’s Information Return Program Advisory Committee (IRPAC). We also spoke with representatives of the Securities Industry Association; Investment Company Institute, which represents the mutual fund industry; Bond Market Association; American Banking Association Securities Association; American Institute of Certified Public Accountants; and the American Bar Association to get their perspectives on capital gains tax noncompliance, ways to reduce noncompliance, and any challenges related to reducing noncompliance and how those challenges could be mitigated. In addition to the contact named above, Wes Phillips and Tom Short, Assistant Directors; Jeff Arkin; Susan Baker; Candace Carpenter; Keira Dembowski; Fred Jimenez; Matthew Keeler; Donna Miller; John Mingus; Franklin Ng; Karen O’Conor; Cheryl Peterson; Sam Scrutchins; Jay Smale; and Jennifer Li Wong made key contributions to this report. Tax Gap: Making Significant Progress in Improving Tax Compliance Rests on Enhancing Current IRS Techniques and Adopting New Legislative Actions. GAO-06-453T. Washington, D.C.: February 15, 2006. Tax Gap: Multiple Strategies, Better Compliance Data, and Long-term Goals Are Needed to Improve Taxpayer Compliance. GAO-06-208T. Washington, D.C.: October 26, 2005. Tax Compliance: Better Compliance Data and Long-term Goals Would Support a More Strategic IRS Approach to Reducing the Tax Gap. GAO-05- 753. Washington, D.C.: July 18, 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. Tax Administration: More Can Be Done to Ensure Federal Agencies File Accurate Information Returns. GAO-04-74. Washington, D.C.: December 5, 2003. Tax Administration: IRS Should Continue to Expand Reporting on Its Enforcement Efforts. GAO-03-378. Washington, D.C.: January 31, 2003. Tax Administration: IRS Can Improve Information Reporting for Original Issue Discount Bonds. GAO/GGD-96-70. Washington, D.C.: March 15, 1996. Reducing the Tax Gap: Results of a GAO-Sponsored Symposium. GAO/GGD-95-157. Washington, D.C.: June 2, 1995. Options Reporting to IRS. GAO/GGD-95-145R. Washington, D.C.: May 5, 1995. Tax Gap: Many Actions Taken, But a Cohesive Compliance Strategy Needed. GAO/GGD-94-123. Washington, D.C.: May 11, 1994. Tax Administration: Computer Matching Could Identify Overstated Business Deductions. GAO/GGD-93-133. Washington, D.C.: August 13, 1993. Information Reporting. GAO/GGD-93-55R. Washington, D.C.: July 22, 1993. Tax Administration: Information Returns Can Improve Reporting of Forgiven Debts. GAO/GGD-93-42. Washington, D.C.: February 17, 1993. Tax Administration: Overstated Real Estate Tax Deductions Need to Be Reduced. GAO/GGD-93-43. Washington, D.C.: January 19, 1993. Tax Administration: Federal Agencies Should Report Service Payments Made to Corporations. GAO/GGD-92-130. Washington, D.C.: September 22, 1992. Tax Administration: Approaches for Improving Independent Contractor Compliance. GAO/GGD-92-108. Washington, D.C.: July 23, 1992. Tax Administration: Benefits of a Corporate Document Matching Program Exceed the Costs. GAO/GGD-91-118. Washington, D.C.: September 27, 1991. IRS Needs to Implement a Corporate Document Matching Program. GAO/T-GGD-91-40. Washington, D.C.: June 10, 1991. Tax Administration IRS Can Improve Its Program to Find Taxpayers Who Underreport Their Income. GAO/GGD-91-49. Washington, D.C.: March 13, 1991. Tax Administration: Expanded Reporting on Seller-financed Mortgages Can Spur Tax Compliance. GAO/GGD-91-38. Washington, D.C.: March 29, 1991. IRS’ Compliance Programs to Reduce the Tax Gap. GAO/T-GGD-91-11. Washington, D.C.: March 13, 1991. IRS Can Use Tax Gap Data to Improve Its Programs for Reducing Noncompliance. GAO/T-GGD-90-32. Washington, D.C.: April 19, 1990. Tax Administration: Information Returns Can Be Used to Identify Employers Who Misclassify Workers. GAO/GGD-89-107. Washington, D.C.: September 25, 1989. Tax Administration: Missing Independent Contractors’ Information Returns Not Always Detected. GAO/GGD-89-110. Washington, D.C.: September 8, 1989. Tax Administration: IRS’ Efforts to Establish a Business Information Returns Program. GAO/GGD-88-102. Washington, D.C.: July 22, 1988. The Merits of Establishing a Business Information Returns Program. GAO/T-GGD-87-4. Washington, D.C.: March 17, 1987. | For tax year 2001, the Internal Revenue Service (IRS) estimated a tax gap of at least $11 billion from individual taxpayers misreporting income from capital assets (generally those owned for investment or personal purposes). IRS did not estimate the portion of this gap from securities (e.g., stocks, bonds, and mutual fund capital gains distributions). GAO was asked for information on (1) the extent and types of noncompliance for individual taxpayers that misreport securities capital gains, (2) actions IRS takes to reduce the securities tax gap, and (3) options with the potential to improve taxpayer voluntary compliance and IRS's ability to address noncompliant taxpayers. For estimates of noncompliance, GAO analyzed a probability sample of examination cases for tax year 2001 from the most recent IRS study of individual tax compliance. GAO estimates that 38 percent of individual taxpayers with securities transactions misreported their capital gains or losses in tax year 2001. A greater estimated percentage of taxpayers misreported gains or losses from securities sales (36 percent) than capital gain distributions from mutual funds (13 percent). This may be because taxpayers must determine the taxable portion of securities sales' income whereas they need only add up their capital gain distributions. Among individual taxpayers who misreported securities sales, roughly two-thirds underreported and roughly one-third overreported. Furthermore, about half of these taxpayers who misreported failed to accurately report the securities' cost, or basis, sometimes because they did not know the basis or failed to adjust the basis appropriately. IRS attempts to reduce the securities' tax gap through enforcement and taxpayer service programs, but challenges limit their impact. Through enforcement programs, IRS contacts taxpayers who may have misreported capital gains or losses and seeks to secure the correct tax amount. IRS also offers services to help taxpayers comply with capital gains tax obligations, such as guidance on how to determine securities' gains and losses. Challenges that limit these programs' impact include the lack of information on basis, which IRS needs to verify most gains and losses, and uncertainty as to whether taxpayers use or understand the guidance. Expanding the information brokers report on securities sales to include adjusted cost basis has the potential to improve taxpayers' compliance and help IRS find noncompliant taxpayers. IRS research shows that taxpayers report their income much more accurately when it is reported to them and IRS. Basis reporting also would reduce taxpayers' burden. For IRS, basis reporting would provide information to verify securities gains or losses and to better target enforcement resources on noncompliant taxpayers. However, basis reporting would raise challenges that would need to be addressed. For instance, brokers would incur costs and burdens--even as taxpayers' costs and burdens decrease somewhat--and many issues would arise about how to calculate adjusted basis, which securities would be covered, and how information would be transferred among brokers. However, industry representatives said that many brokers already provide some basis information to many of their clients and some use an existing system to track and transfer basis and other information about securities. Many of the challenges to implementing basis reporting also could be mitigated. For example, many of the challenges could be addressed by only requiring adjusted basis reporting for future purchases, and by developing consistent rules to be used by all brokers. To the extent that actions to mitigate the challenges to basis reporting delay its implementation or limit coverage to only certain types of securities, the resulting improvements to taxpayers' voluntary reporting compliance would be somewhat constrained. |
The results of research on the prevention and treatment of AIDS—a disease first identified in the United States in 1981—have only recently begun to accrue. Over the past 11 years, a number of therapies have been developed to fight both HIV and its associated infections and cancers. The Food and Drug Administration (FDA) has approved several dozen drugs for treating HIV infection or AIDS-related conditions, many of which have only been made available during the last 2 to 3 years. In December 1995, FDA approved the first protease inhibitor, saquinavir (Invirase). Following this, the agency approved three other protease inhibitors: ritonavir (Norvir), indinavir (Crixivan), and nelfinavir (Viracept). In November 1997, FDA approved a new formulation of saquinavir, Fortovase. Most recently, in September 1998, FDA approved efavirenz (Sustiva), a drug that requires less frequent dosing and has milder side effects than other drugs. Because HIV can develop a resistance to these and other AIDS treatment drugs, several drugs are often combined. Combination therapy is likely to include three to five drugs, including reverse transcriptase inhibitors combined with protease inhibitors. For many patients, combining protease inhibitors with other drugs greatly reduces the amount of HIV. Before it was possible to readily measure the amount of virus in patients, most drug therapies were targeted to patients whose infection had progressed, as evidenced by a decline in their immune system function or by the onset of clinical signs and symptoms of HIV. Of the 650,000 to 900,000 people with HIV infection in the United States, the CDC estimates that about 500,000 of those people know their HIV status; and for almost 240,000 of these individuals, HIV has progressed to AIDS. In June 1997, the National Institutes of Health (NIH) released standards of clinical care for HIV and AIDS combination drug therapy. The standards recommend that therapy be initiated as early as possible and that HIV and AIDS drugs be used in combination rather than individually. Under the treatment guidelines, all patients with HIV infection are considered to be candidates for the combination drug therapy, greatly expanding the group requiring treatment. New combination therapy standards also call for continuity of therapy and optimum dosages to suppress HIV replication. According to NIH, underdosing and lapses in a patient’s therapy regimen greatly increases the risk of the patient’s developing drug-resistant HIV variants. Optimum regimens and dosing are under study and continually changing. Combination therapies of as many as five drugs currently are prescribed. Aggressive regimens such as these must be coupled with, and are driven by, results of frequent blood testing to monitor immune system status and levels of HIV. This focus on early and aggressive treatment, coupled with NIH’s call for frequent monitoring of HIV-positive individuals, is expected to result in greater numbers of people seeking combination drug therapy and possibly more complex and costly drug treatment regimens, and more treatment-associated costs such as laboratory testing. The cost of combination therapy—taking into account all federal drug discount pricing—is estimated to be about $10,000 per patient annually. While some people with HIV or AIDS are covered by private medical insurance, many others are either uninsured or have limited prescription drug coverage and must rely on one or a combination of federal and state programs and assistance programs offered by manufacturers of HIV and AIDS treatment drugs. The majority of federal assistance for AIDS patients is provided through Medicaid and programs funded under the CARE Act, which was enacted in 1990 to help alleviate the burdens placed on a public health system generally unprepared for the AIDS epidemic. In 1998, Medicaid is estimated to cover 55 percent of adult AIDS patients and about 90 percent of pediatric AIDS cases. Applying those percentages to the current number of AIDS cases, we estimate that at least 108,000 individuals with AIDS are covered by Medicaid in 1998. The CARE Act provides funding for states’ ADAPs, which rely on federal, state, and local partnerships to provide drug therapy on an outpatient basis. ADAPs are designed to provide assistance to those HIV-positive individuals who have no, or limited, private third-party prescription drug coverage; cannot afford to pay for drugs themselves; and are ineligible for Medicaid or have limits on the prescription drug benefit offered by Medicaid. In calendar year 1996, ADAPs served a total of about 80,000 clients nationwide. Funding for HIV and AIDS drug therapy as well as other treatments is also provided by other federal sources, including the Departments of Defense (DOD) and Veterans Affairs (VA). DOD programs currently treat about 5,000 active duty service personnel with HIV or AIDS. In 1996, VA treated more than 12,000 eligible veterans. While the total number of individuals served in these programs is much smaller than the number served through Medicaid and programs funded under the CARE Act, VA is the nation’s largest provider of direct care for people with HIV and AIDS. In addition, VA clients could be eligible for care from more than one program. The remainder (less than half) of the individuals with AIDS rely on sources other than ADAPs, VA, DOD, or Medicaid to finance their drug therapy. Some have private health insurance and others are uninsured and rely on personal resources and charitable organizations. Uninsured and underinsured individuals with AIDS tend to rely on a combination of public and private funding sources. For example, pharmaceutical companies that manufacture HIV and AIDS drugs have programs to provide limited temporary assistance to individuals who are financially disadvantaged and ineligible or waiting for other sources of prescription coverage. Medicaid enrollees have access to the new drug therapies if prescription drugs are offered by their state Medicaid program and these drugs are deemed the appropriate therapy. Medicaid provides health coverage for certain low-income families, the elderly, and disabled persons. States vary in their Medicaid eligibility requirements (see app. I). States have discretion regarding the quantities and duration of use for prescription drugs, although all FDA-approved drugs must be offered. Historically, program eligibility has been linked to receipt of cash assistance under a welfare program, such as Aid to Families With Dependent Children (AFDC) or the Supplemental Security Income (SSI) program. In recent years, the program has been expanded to provide health coverage for low-income children and pregnant women with no ties to welfare. An individual with AIDS or HIV infection could qualify for Medicaid on the basis of eligibility for a cash assistance program or alternative eligibility criteria. Most adults with AIDS or HIV infection become eligible for Medicaid by meeting the disability criteria of the federal SSI program, usually not until they have developed AIDS and have become too disabled by their disease to work. Patients who do not qualify for Medicaid may seek assistance from ADAPs, which are primarily designed to fill gaps in prescription drug coverage. To qualify for ADAP benefits, they must have a medical need and an income below a certain amount, which is generally higher than that permitted for Medicaid. Unlike Medicaid, ADAPs do not require disability as a criterion for eligibility of HIV-positive adults and thus can cover those who have not developed AIDS. (For more detail on each state’s financial criteria for Medicaid and ADAP eligibility, see app. I.) The care of HIV and AIDS patients for all types of treatment, including drugs, involves a variety of programs funded by the federal government, states, and private payers, but the largest share of federal funding is through the Medicaid program. Within these programs, expenditures for drugs have increased rapidly in recent years and account for most of the growth in the CARE Act programs. The federal government, states, and private payers all help to finance the care of HIV and AIDS patients for all types of treatment, including drugs. The federal portion of Medicaid is the largest share of federal funding; however, most states match federal Medicaid funds on nearly a one-to-one ratio. Other programs also provide supportive services for low-income individuals with HIV or AIDS. For example, in fiscal year 1997, about $133 million was allocated by formula to 53 metropolitan areas and to 27 states for areas outside qualifying cities under the Department of Housing and Urban Development’s (HUD) Housing Opportunities for People With AIDS program. In fiscal year 1997, total federal spending on medical care, including inpatient and outpatient services and prescription drugs, for individuals with AIDS or HIV was estimated at $4.8 billion. This amount includes federal matching payments that HCFA estimates at $1.8 billion for fiscal year 1997. Total federal spending for HIV and AIDS medical care in fiscal year 1998 is estimated by HHS at $5 billion; the precise amount of Medicaid spending for HIV- and AIDS-related treatment is not yet known. We estimate that a substantial proportion of federal spending for AIDS or HIV medical care—at least one-sixth—is for prescription drugs, primarily through Medicaid and the ADAPs. Between 1995 and 1997, the combined expenditures in the Medicaid and ADAP programs for HIV- and AIDS-related drugs more than doubled, rising from $606 million to $1.3 billion. Spending on drug therapies represented about one-fourth of federal and state Medicaid spending on HIV- and AIDS-related drugs and exceeded $950 million in calendar year 1997, up $449 million (or 90 percent) since 1995. Similarly, spending through ADAPs is estimated at $359 million for fiscal year 1997, up $254 million (or 242 percent) since 1995. (See table 1.) Much of this increase can be attributed to an increase in the percentage of people with HIV and AIDS seeking combination drug therapy and the increased expense of combining drugs as opposed to a single medication. Over the past several years, overall federal funding for the CARE Act has increased more than 50 percent, from about $760 million in 1996 to about $1.2 billion in 1998. However, in this 3-year period, increases in funding for CARE Act services other than ADAPs have been minimal, while ADAP funding has more than quintupled. (See table 2.) States also provide considerable resources to fund ADAPs through the CARE Act. The fiscal year 1997 state contributions of $98 million represented almost a doubling of state dollars from fiscal year 1996. However, between fiscal years 1995 and 1997, the portion of ADAP funding from state dollars dropped from 31 percent to 25 percent because federal funding grew even more quickly than state funding. (See app. II for state contributions.) Certain metropolitan areas that are disproportionately affected by the AIDS epidemic are eligible to receive funding under title I of the CARE Act for the delivery of comprehensive HIV and AIDS medical care and support services. Some of these title I programs make eligible metropolitan area (EMA) contributions to the state ADAP programs. Between 1995 and 1997, when direct federal funding for ADAPs under title II increased dramatically, title I contributions to ADAPs remained flat. EMA contributions totaled $20.8 million in fiscal year 1995, $25.9 million in fiscal year 1996, and $24.2 million in fiscal year 1997. There is no requirement that contributions be made from title I programs to ADAP. (See app. III for a list of title I EMA contributions to ADAPs, by state.) In addition, title I pays for HIV/AIDS drugs exclusive of the ADAPs. In general, EMAs report that these expenditures have risen during this time frame. In several cases, the expenditures rose significantly after 1996, which could reflect the introduction of the protease inhibitors and other new therapies. However, detailed information on these expenditures is not available. At least half the people infected with HIV were estimated to have been on combination therapy in 1997, increasing to over 60 percent of patients in 1998. Developing such estimates by insurance coverage or payer source is difficult. It is possible to estimate the number of Medicaid beneficiaries with AIDS who are likely receiving combination therapy. However, given the lack of data on the number of Medicaid beneficiaries with HIV that has not yet progressed to AIDS, it is not possible to develop estimates of the number of these individuals who will seek combination therapies. It likewise is difficult to estimate the number of individuals who will ultimately seek ADAP coverage for combination drug therapy because of the lack of good data on the characteristics of those served. However, recent experiences show a steadily increasing demand for ADAP services. ADAPs have taken a number of steps to stretch their limited resources, including cross-checking program enrollment with Medicaid and obtaining discounts for drug purchases. Although there are a number of FDA-approved drugs for the treatment of HIV, at least half of the people with AIDS in the United States are estimated to be receiving therapies that combine a protease inhibitor with other drugs. These drugs are also available for individuals who are HIV positive but do not have AIDS, but data on this population are of insufficient quality to pinpoint the number of HIV cases receiving combination drug therapy. Only 30 of the states report HIV status, and the comprehensiveness of the reporting varies by state. Some of the states without HIV reporting have a large number of AIDS cases, such as New York and California, suggesting that many HIV cases are not reported. On the basis of their clinical experience and research, two AIDS researchers developed formulas to determine the number of people who might seek combination drug therapy in 1997 and 1998. They estimated that of the total number of people in the United States with AIDS or who are HIV positive, 50 percent would be on combination therapy in 1997 and 60 to 65 percent in 1998. They assumed that about 20 percent of people who try combination therapy will not be able to tolerate the side effects and will therefore discontinue it. They also assumed that some patients will choose not to (or cannot because of their lifestyle) take the medication and that some HIV-positive individuals will be unaware of the infection and thus will not seek treatment. We developed estimates of the number of Medicaid beneficiaries with AIDS who will likely seek combination drug therapy in 1997 and 1998. In 1998, Medicaid covered an estimated 55 percent of all adult AIDS cases and 90 percent of all pediatric AIDS cases, while in 1997 these percentages were estimated to be 54 percent for adult cases and 90 percent for pediatric cases. Medicaid currently covers at least 108,000 AIDS patients and covered at least 104,000 AIDS patients in 1997. Therefore, using the AIDS researchers’ formulas, we estimate that for the Medicaid beneficiaries with AIDS, at least 52,000 (50 percent of 104,000) would have been on combination therapy in 1997 and at least 67,500 (62.5 percent of 108,000) are on therapy in 1998. Given the lack of data on the number of Medicaid beneficiaries with HIV that has not yet progressed to AIDS, it is not possible to develop estimates of the number of these individuals who will seek combination therapies. However, the gender and age distribution of HIV-positive individuals who do not have AIDS will likely differ from the gender and age distribution of beneficiaries with AIDS who have qualified for Medicaid on the basis of disability. This HIV-positive group includes pregnant women, women and their dependent children, and children in low-income families who qualified for Medicaid because they met federal and state income and categorical eligibility requirements. Although they may be asymptomatic, they could qualify for Medicaid—and thus for coverage of their HIV-related care—for an extended period of time, depending on their income and other qualifying characteristics. HCFA has estimated that there may be as many as 50,000 such HIV-infected individuals covered by Medicaid. It is difficult to estimate the number of individuals who will ultimately seek ADAP coverage for combination drug therapy. However, recent experiences show a steadily increasing demand for ADAP services. Unlike estimates of the number of people seeking coverage through Medicaid, estimates of the number of individuals who qualify for combination therapy under the ADAPs cannot be made. This is because, in addition to AIDS patients, ADAPs’ clients include people who are HIV positive but do not yet have AIDS. It is this latter group for whom limitations on data make it impossible to estimate the total candidate population for the therapy. In addition, states have varying financial and medical standards individuals must meet to qualify for ADAP services, so this subset of candidate patients cannot be computed. Furthermore, because these individuals finance their care through multiple funding sources, some individuals only qualify for ADAP benefits for part of the year. The only information that is available for predicting the likely future demand for ADAP coverage is the recent experience of the ADAP programs. Since 1992, the number of people seeking funding for AIDS therapies through ADAPs has increased rapidly. In calendar year 1996, ADAPs served a total of about 80,000 clients nationwide, compared with about 50,000 in 1994. Comparing states’ ADAP caseloads for July 1996 and July 1997—the most recent data available—shows that per-month client use of ADAPs increased 39 percent overall, from about 31,000 to more than 43,000. A survey by the National Alliance of State and Territorial AIDS Directors shows the number of patients served by ADAPs increasing at a rate of 1,000 per month. Per-month expenditures increased 78 percent overall, from nearly $15 million to more than $27 million. (For a state-by-state profile of ADAPs, see app. IV.) HHS has reported that as early as mid-1996 some ADAPs had 80 percent or more of their clients receiving combination drug therapy. The ADAP Working Group has made projections for expected ADAP enrollment and drug utilization through the year 2000. It projects that the rate of ADAP clients receiving combination drug therapy over the next 2 years will be 90 percent. The higher proportion of ADAP clients receiving combination therapy, compared with expected rates for Medicaid patients, likely reflects the somewhat different patient population who may seek coverage by the ADAP precisely because they have been prescribed high-cost drug treatment. ADAPs have implemented a number of measures in an effort to stretch their limited resources. These measures include cross-checking program enrollment with Medicaid, discount drug pricing, and emergency measures such as establishing waiting lists. Yet even with these cost containment efforts, the National Alliance of State and Territorial AIDS Directors found that more than one-fifth of the programs expect budget shortfalls for 1998. To ensure that program dollars are spent wisely, a number of ADAPs have taken steps to help identify the most appropriate source of assistance for clients and individuals seeking prescription drug benefits. Many individuals seeking ADAP coverage may not be aware that they are eligible for assistance through other sources, such as Medicaid. Additionally, some may be eligible for prescription drug benefits under more than one program. In our contacts with officials from the 10 largest ADAPs—which collectively account for about 70 percent of total federal ADAP funding—we found that most cross-check Medicaid eligibility and verification files at initial enrollment and on an ongoing basis, although the frequency with which they updated Medicaid eligibility status varied significantly. For example, New York updates the information weekly, while others do so monthly or less often. Most of these ADAPs are linked to the Medicaid files via computer for both initial screening and cross-checks. States also use other means to verify eligibility. For example, Virginia requires all ADAP clients to apply to Medicaid within 90 days of enrollment. In Puerto Rico, in lieu of computer linkages to Medicaid, case managers work with clients to check for Medicaid or ADAP coverage. (See table 3.) A recent study of all ADAPs similarly found that 39 states require their ADAPs to cross-check client eligibility for Medicaid, mostly through direct access to Medicaid data or through screening by case managers. The study points out that 19 of the 23 states with limited Medicaid coverage have restricted ADAP access. This suggests that the expansiveness of a state’s Medicaid program may directly affect the demand for ADAP services. For example, the Medicaid programs in Mississippi, Oklahoma, and Texas are among 11 state programs that have placed limits on the number of prescriptions available each month; at the same time, the ADAPs in these states have not been able to meet the demand and have had to develop waiting lists. Figure 1 shows the restrictiveness of the Medicaid and ADAP programs in the various states. Most ADAPs have reduced their expenditures on HIV and AIDS drugs through several discount pricing methods. For example, under the Veterans’ Health Care Act of 1992 (which enacted section 340B of the Public Health Service Act), ADAPs—as well as state Medicaid programs—can obtain drugs at a minimum 15.1-percent discount below the average manufacturer price. ADAPs that cannot obtain up-front drug discounts may negotiate voluntary manufacturer rebates of certain drugs. Some ADAPs seek discounts from retail pharmacies, receive third-party partial insurance reimbursements (when available), collect copayments for drugs from clients, or obtain reimbursement coverage from Medicaid if a client becomes eligible for that program. However, not all ADAPs have obtained the lowest prices available in purchasing drugs. According to a recent HHS Inspector General’s report, only 19 of the 53 ADAPs participated in the 340B drug pricing program in fiscal year 1996. Many of the nonparticipating programs cited the list of administrative burdens as a disincentive. However, a recent HHS policy change will allow ADAPs to participate more readily in this program by the use of a rebate mechanism. For the sample of nonparticipating ADAPs that it examined, the Inspector General estimated that they could have purchased an additional 8 percent of drug therapies if they had participated in the 340B program. Regardless of these efforts, with the increase in the number of people seeking assistance, many states have found it difficult to adequately fund their ADAPs. Some states have cut costs by restricting patient access to ADAPs and implementing other emergency measures. According to a study published by the National Alliance of State and Territorial AIDS Directors, in fiscal year 1997, 22 states implemented emergency measures to contain costs. These problems have occurred most frequently near the end of the time period for which the title II funding grant is provided. Twelve states moved funds from other CARE Act budget categories, such as home health care, and other sources; 10 states capped program enrollment; and 9 states restricted access to protease inhibitors. Thirteen states noted that they would likely exhaust their funds before more funding would be made available. Nine states reported that they maintained waiting lists for ADAP enrollment, while seven states maintained waiting lists for current clients to obtain protease inhibitors. As of July 1998, 19 ADAPs had some type of restrictions on their services. As shown in table 4, these limitations included capping enrollment and expenditures and maintaining waiting lists. As discussed, it is not possible to accurately project the number of patients who will be on combination drug therapy in the future. It is therefore difficult to assess the likely impact of the new therapies on public programs. Many factors—such as the long-term effectiveness of current therapies, evolving standards of care, and new research developments—influence future demand and cost. Regardless of the overall effect of the new therapies on public programs, the impacts are likely to be different for the Medicaid program and for health care funded through the CARE Act. Rapid advances in HIV and AIDS treatment have occurred in the last 2 years. Researchers are identifying optimal standards of care, which are now a part of federal treatment guidelines. Such information—as well as ongoing research and discoveries—will likely influence the demand for these new drugs and therapies and their effect on public programs. The long-term effectiveness of protease inhibitors and combination drug therapies is largely unknown. Patient outcomes will likely influence the number of individuals who seek combination therapy in the future. For example, patients responding well to drug therapy may be removed from the therapy after a few years to determine whether the virus has been eliminated. Patients whose conditions cannot be stabilized may also be removed from the therapy or they may continue to receive therapy because they still benefit from the drugs. Other patients may over time develop a resistance to drugs that initially succeeded in stabilizing or reducing their viral load. Some patients may not be able to tolerate the drugs because of side effects and would thus be removed from the therapy after a brief period. Standards of care will also likely influence the demand for combination drug therapy treatment and the associated costs. Just as the recently released NIH standards of clinical care for HIV and AIDS have greatly expanded the candidate population who qualify for treatment, changes in these standards could alter the number of individuals seeking the therapy. Other new drugs and therapies would also likely have an effect on demand and cost. The National Institute of Allergy and Infectious Diseases is currently supporting research on the development of HIV vaccines, and a number of new drugs for HIV infection and AIDS-associated opportunistic infections are either being developed or tested. At the same time, investigations into exactly how HIV damages the immune system is suggesting new and more effective methods of treatment. Researchers do not yet know how many years people with HIV or AIDS might maintain a combination therapy regimen or how long their lives might be extended. If the new drugs and therapies slow or halt HIV’s progression to AIDS, other costs associated with the care of people with AIDS—such as hospitalizations, support services, and long-term care—may be effectively delayed. Some evidence already suggests that the new combination therapies have noticeably lowered the current utilization of inpatient hospital services. For example, at the 4th Conference on Retroviruses and Opportunistic Infections held in January 1997, state and hospital officials demonstrated reduced hospitalization rates, suggesting new HIV and AIDS drugs as a possible cause. A recent study by VA attributes a 37-percent decrease in the number of hospitalizations and a 41-percent decrease in the number of hospital days at 173 VA medical centers to the combination therapies. This study cites an $18 million net cost savings in 1997 in contrast with 1996.Public health officials in New York City also announced a 50-percent drop in AIDS deaths from the last quarter of 1995 to the same quarter in 1996, citing as a partial reason the new HIV and AIDS drugs. Researchers at Johns Hopkins University pointed out that if a person with AIDS avoided a single hospitalization—which averages $7,000 per stay—in 1 year, the costs associated with combination drug therapy for the same individual could be completely offset. However, if the drugs extended the life of a person with HIV or AIDS, it is possible that at some point the cost of the drugs would exceed the amount that would have been spent on hospitalizations and other treatments. Finally, hospitalization costs might simply be delayed. Another analysis by the Johns Hopkins University AIDS researchers sought to examine the cost-effectiveness of combination therapy. The model used in this study projected an incremental cost-effectiveness for triple therapy of $10,000 to $18,000 per life-year gained. They compared the cost per life-year saved of triple-drug therapy with the cost per life-year saved for accepted treatments for other medical conditions and found that it is within the range of other treatments for other diseases and conditions. (See table 5.) Although drug treatment costs per person would essentially be the same for individuals receiving assistance from Medicaid and from ADAPs, the effect on these two programs would likely be different. For Medicaid, reductions in hospitalizations could, in the short-term, offset the costs associated with HIV and AIDS combination drug therapy. However, in the longer term, program costs may not be offset if hospitalizations are merely delayed. For ADAPs, increases in the number of people who seek assistance for combination drug therapies would not be offset by fewer hospitalizations, because ADAPs only cover the cost of prescription drugs, not hospitalizations. However, delaying the onset of AIDS, its symptoms, and associated diseases and conditions could, in the short term, reduce the need for other services funded under the CARE Act. For example, under title I, the CARE Act provides 49 metropolitan areas disproportionately affected by the AIDS epidemic with funding for mental health treatment, case management, support services, and substance abuse programs for HIV and AIDS patients. Arguably, if the new HIV and AIDS drugs successfully delayed the onset of AIDS, the demand for a number of these services might be postponed, at least for the period of time the drugs are effective. On the other hand, the success of drug therapies might increase the amount of time that clients are enrolled and the use of related support and diagnostic services. Moreover, it is not clear that clients served under other titles of the CARE Act are the same as those served under ADAP. In light of NIH’s recently published standards of care, people with HIV who are asymptomatic may seek combination therapies in greater numbers. The development of new drugs and therapies, such as quadruple therapy, would likely add to the prescription drug demand. Although insurance coverage for the estimated 410,000 to 660,000 individuals who are HIV positive but have not developed AIDS is unknown, ADAPs are the most likely to see increases in the number of individuals who are uninsured or underinsured and seeking funding for combination drug therapy in 1998. HHS officials anticipate that welfare reform efforts will likely cause ADAP enrollment to increase. As individuals transition from Medicaid and obtain employment, they will more likely become qualified for ADAP benefits. And if treatment fails, individuals will still need care provided through other services funded through CARE Act programs. We obtained comments on a draft of this report from HHS and from two expert reviewers. HHS and the expert reviewers made technical comments, which we incorporated where appropriate. In particular, HHS was concerned that we had not accounted for the different characteristics and service needs of clients served by the ADAPs and other programs funded by the CARE Act. We added information to the report to take these complexities into account. In addition, HHS provided projections of the number of people with AIDS covered by Medicaid in 1998 that HCFA actuaries believed were more precise than those in our draft. We modified our report to reflect the HCFA estimate. We will make copies of this report available to interested parties upon request. Please call me at (202) 512-7119 or Marcia Crosse, Assistant Director, at (202) 512-3407 if you have any questions about this report. Other contributors to this report include Lawrence S. Solomon, Project Manager; Nila Garces-Osorio, Social Science Analyst; and Karen Sloan, Communications Analyst. Within broad federal guidelines, states have flexibility in developing their Medicaid programs, including requirements for eligibility and prescription drug benefits. Medicaid covers all prescribed HIV and AIDS drugs approved by the Food and Drug Administration (FDA) consistent with the requirements of 1927(d) of the Social Security Act. The Health Care Financing Administration (HCFA) surveyed state Medicaid programs and found that all states were covering protease inhibitors, as required. Because of prescription limits, however, combination therapy, with its dependence on multiple drugs, can rapidly exceed these limits (for example, 11 states limit the number of allowable drugs to as few as three per month). Thirty-one programs require nominal copayments for the drugs. Generally, state AIDS Drug Assistance Programs (ADAP) cover many FDA-approved HIV and AIDS drugs, but not all drugs are covered by each program. To assess financial eligibility for ADAP enrollment, most states use federal poverty guidelines; income limits are often expressed as a percentage of the federal poverty level (FPL). The financial requirements range from 100 percent of FPL in one state to 558 percent of FPL in another state. Some states list the requirement in terms of absolute income levels: for example, as long as liquid assets total less than $25,000, New York requires a household of one to earn no more than $44,000; a household of two, less than $59,200; and three or more, less than $74,400. Other states also use specific income levels unrelated to the federal poverty guidelines. Some programs consider out-of-pocket medical expenses when determining income. Ten of the programs restrict financial assets. (See table I.1.) States have both financial and medical requirements for ADAP enrollment. For example, a person must have an income or assets below a certain dollar amount or demonstrate financial hardship. At a minimum, a person must be diagnosed as having HIV infection. Almost half of the states have only these basic requirements. Other states also require that a client have CD4 counts less than a certain level (CD4 is a measure of the immune system level). For example, six states require a CD4 level of less than 500. Twelve states require a doctor’s prescription for the HIV and AIDS drugs. Some states also test the HIV viral load in order to determine medical eligibility. Income at or below 300% of FPL; will assist with spend-down (continued) Income at or below 300% of FPL (income limit may be adjusted on basis of medical expenses incurred) Income at or below 281% of FPL, currently less than $1,410 per month after taxes (additional allowance for dependents) Income at or below 150% of FPL (out-of-pocket drug costs can spend-down) (continued) Income at or below 200% of FPL (residents of northern Virginia may have incomes up to $17,428) Income at or below 300% of FPL (Table notes on next page) In fiscal year 1997, a total of 34 states (plus the District of Columbia and Puerto Rico) provided funds to their ADAPs in addition to the funds provided by the federal government. The state contributions have increased from a total of $28.7 million in 1995 to $98.1 million in 1997 (see table II.1). State % of total funding (–100) (–100) (–4) (–59) (–67) (–79) (–61) (–10) (–52) (–78) (–9) (–15) (continued) State % of total funding (–100) (–100) (–62) (–80) (–43) (–44) (–35) (–80) (–72) (–13) (–80) (–5) (–73) $28,720,457 $50,378,650 $98,108,000 (–19) Not available. Percentage change cannot be calculated. State had no ADAP that year. Currently, 49 communities in 21 states, the District of Columbia, and Puerto Rico have been designated under title I of the CARE Act as EMAs disproportionately affected by the AIDS epidemic. In 1997, these EMAs contributed some $24 million to the ADAP programs. The level of these contributions has been generally flat over the past few years, increasing from 1995 to 1996, and then declining slightly in 1997 (see table III.1). Table III.1: Title I EMA Contributions to ADAPs and Percentage Change, Fiscal Years 1995, 1996, and 1997 (–36,675) (–100) (–1,547,339) (–9%) (–1,013,827) (–100) Percentage change cannot be calculated. From January 1997 to July 1997, 39 states’ ADAPs experienced growth in the number of clients served; 42 experienced increases in monthly expenditures for the same period. Six states experienced a 50-percent or greater increase in clients served. For example, clients served through Delaware’s ADAP increased 327 percent—the greatest increase experienced by a state; conversely, Mississippi saw a 56-percent decrease in clients served. Only five states experienced minimal change (a less than 5-percent increase or decrease). (See table IV.1.) Percentage change, July 96- July 97 (–3%) (–15) (–32) (–43) (–1) (–20) (–1) (–38) (continued) Percentage change, July 96- July 97 (–22) (–21) (–20) (–41) (–32) (–4) Not available. Percentage change cannot be calculated. 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. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO provided information on the potential implications for federal and state budgets from the increased use of combination drug therapies for patients with human immunodeficiency virus (HIV) and acquired immunedeficiency syndrome (AIDS), focusing on: (1) federal and state spending on HIV and AIDS drug treatment, by major programs, over the last several years; (2) the estimated number of people with AIDS and HIV on combination drug therapy who are covered by Medicaid or other publicly funded programs, and measures that have been taken to stretch the resources in the Ryan White Comprehensive AIDS Resources Emergency (CARE) Act; and (3) the potential impacts of new drug therapies on federal and state government outlays. GAO noted that: (1) while state governments and private payers share in the financing of medical care for people with HIV and AIDS, the federal government currently funds more than half the cost of such care; (2) for fiscal year (FY) 1998, estimated federal spending on treatment for individuals with AIDS or HIV is expected to total over $5 billion, an increase of about 5 percent over FY 1997; (3) GAO estimates that a substantial portion of federal spending for AIDS or HIV medical care--at least one-sixth--is for prescription drugs, primarily through Medicaid and funding under title II of the CARE Act for states' AIDS Drug Assistance Programs (ADAP); (4) with recent research developments in HIV and AIDS treatment, the demand for federal and state funding for HIV and AIDS treatment is expected to increase; (5) more than half of the 240,000 people with AIDS in the United States are estimated to be receiving combination drug therapies that include a protease inhibitor and other drugs; (6) of the AIDS patients on Medicaid, GAO estimates that at least 67,500 are receiving combination drug therapy in 1998; (7) data on the number of individuals who are HIV positive but do not have AIDS are insufficient, so it is difficult to develop reliable estimates of the total number of Medicaid- and ADAP-eligible individuals who would likely qualify for and seek combination drug therapy; (8) however, some ADAPs report that a great majority of their clients will receive combination therapy in 1998; (9) ADAPs have taken several steps to stretch available funds and thereby maximize the number of clients they are able to serve; (10) other factors--such as evolving standards of care, the long-term effectiveness of current therapies, and new research developments--also influence projections of the impact of new drug therapies on federal and state government programs; (11) although the effect of the demand for the new combination therapies is difficult to estimate, ADAPs will likely experience greater financial pressure than Medicaid in caring for individuals with AIDS or HIV who seek assistance; (12) this is in part because Medicaid primarily provides coverage for those individuals whose HIV infection has progressed to AIDS, and there are some indications that Medicaid costs for drug therapy might be offset by reductions in hospitalizations; (13) in contrast, ADAPs cover drug costs for both AIDS and others who are HIV positive, and who have fixed incomes; and (14) since ADAPs only cover drugs, cost offsets are not as likely to occur. |
From the end of the seventeenth century to the middle of the nineteenth century, Spain and México issued grants of land to individuals, groups, towns, pueblos, and other settlements in order to populate present-day New Mexico. Academic treatises and popular literature typically divide these grants into two types: “individual grants” and “community land grants.” Grants awarded to towns and other settlements were modeled on similar communities created in Spain, where the king granted lands adjacent to small towns for common use by all town residents. Under Spanish and Mexican law in the territory of New Mexico, officials made grants to towns and other communities. These grants usually contained sufficient land and water resources to facilitate settlement and the establishment of communities. Both land and water were essential ingredients for sustaining agricultural communities in New Mexico. Such grants were in keeping with Spanish laws, including the 1680 Recopilación de las Leyes de los Reynos de las Indias, which was a compendium of laws governing settlements in the New World. However, local laws, practices, and customs often dictated how grants were made and confirmed. After achieving independence from Spain in 1821, México continued to adhere to Spanish law by extending additional land grants to individuals to encourage settlements in unoccupied areas and to stave off U.S. encroachment on Mexican territory. The Mexican-American War began in 1846 and formally ended with the signing of the Treaty of Guadalupe Hidalgo in 1848. Under the treaty, México ceded most of what is presently the American Southwest, including the present day states of New Mexico and California, to the United States for $15 million. Figure. 1 shows the territory ceded by México under the treaty. While the treaty generally provided protection for property in the ceded area, Article X expressly addressed land grant protection. However, U.S. President James Polk objected to the provision, fearing that a revival of land grant claims had the potential to jeopardize the grants already settled in Texas. The Senate Resolution of advice and consent to ratification contained several amendments to the treaty, including one that struck out Article X. Subsequently, in 1848, the United States and México signed the Protocol of Querétaro, which explained certain aspects of the treaty. In Article 2 of the Protocol, the United States indicated in its interpretation that the exclusion of Article X in no way meant that it planned to annul the land grants. The Protocol specified the United States’ position that land grant titles would be protected under the treaty and that grantees could have their ownership of land acknowledged before American tribunals. In the 1853 Gadsden Purchase, the United States purchased additional land from México for $15 million, including the southwest corner of the present State of New Mexico. The Gadsden Purchase incorporated by reference the property protection provisions of the Treaty of Guadalupe Hidalgo. To implement the treaties, the Congress enacted legislation in 1854 to establish the Office of Surveyor General of New Mexico. The Surveyor General was charged with examining documents and verifying the ownership of land grants. The U.S. government required individuals or towns and other communities to prove ownership or property interests in grant lands. After reviewing the land grant documentation, the Surveyor General was to recommend to the Secretary of the Interior whether a grant should be rejected or confirmed. If the Secretary of the Interior agreed with a recommendation to confirm, he, in turn, would recommend that Congress approve the grant. Upon congressional approval of the grant, the U.S. government usually issued a patent, which conveyed the property’s title to the owner. The Congress reviewed and confirmed 64 of the surveyor generals’ recommendations, but in the late 1870s, the congressional review of recommendations ceased. In 1891, the Congress established the Court of Private Land Claims to adjudicate the outstanding claims that the surveyors general had reviewed but the Congress had not yet approved , and other claims presented to the court. In United States v. Sandoval et al., 167 U.S. 278 (1897), a case on appeal from the Court of Private Land Claims, the Supreme Court held that México, not the local community, held title to all common lands in community land grants issued before 1848. Consequently, under the Treaty of Guadalupe Hidalgo, México had transferred ownership of these communal lands to the United States. Although the Sandoval decision did not overturn previous court confirmations of land grants, it did affect all subsequent claims adjudicated by the Court of Private Land Claims. In 1904, the court finished its work, approving claims and land surveys that represented approximately 6 percent of the acreage claimed. The Congress and the Court of Private Land Claims confirmed 155 grants of the total of 295 grants we identified, and patents were issued for 142 of these grants.Appendix I lists all the land grants that we identified, the years of grant confirmation and patent issuance, and the acreage patented. The completion of the Court of Private Land Claims’ work did not quell the controversy surrounding the loss of the common lands. Many persons, including grantee heirs, scholars, and legal experts, still claim that the United States failed to uphold the provisions of the Treaty of Guadalupe Hidalgo to protect the property of Mexican-Americans and their descendants. They remain critical of the federal courts’ treatment of the common lands and the failure to approve more of the acreage claimed. They also assert that common lands were lost by other means, and that this loss deprived many small Mexican-American farmers of their livelihoods. Land grant documents contain no direct reference to “community land grants” nor do Spanish and Mexican laws define or use this term. Scholars, land grant literature, and popular terminology use the phrase “community land grants” to denote land grants that set aside common lands for the use of the entire community. We adopted this broad definition for the purposes of this report. To determine the meaning of the term “community land grants,” we first reviewed land grant documents, and found that grant documents do not describe grants as community land grants. We also did not find applicable Spanish and Mexican laws that defined or used the term. However, as a result of our review of land grant literature, court decisions, and interviews with scholars, legal experts, and grantee heirs, we found that the term is frequently used to refer to grants that set aside some land for general communal use (ejidos) or for specific purposes, including hunting (caza), pasture (pastos), wood gathering (leña), or watering (abrevederos). Our definition coincides with the way in which scholars, the land grant literature, and grant heirs use the term. Under Spanish and Mexican law, common lands set aside as part of an original grant could not be sold. Typically, in addition to use of common lands, settlers on a community land grant would receive individual parcels of land designated for dwelling (solar de casa) and growing food (suerte). Unlike the common lands, these individual parcels could be sold or otherwise disposed of by a settler who fulfilled the requirements of the grant, such as occupying the individual parcel for a continuous period. For example, the documentation for the Antón Chico grant, issued by México in 1822, contains evidence that common lands were part of the original grant. The granting document provided for individual private allotments and common lands. Congress confirmed the Antón Chico grant in 1860 and the grant was patented in 1883. Using our definition, we identified three types of community land grants, totaling 154 grants, or approximately 52 percent of the 295 land grants in New Mexico. In 78 of the community land grants, the common lands formed part of the grant according to the grant documentation. Scholars, grant heirs, and others have found an additional 53 grants that they believe contain communal lands; and we located 23 grants of communal lands to the indigenous pueblo cultures in New Mexico. The first type of community land grant we identified is a grant in which common lands formed part of the original grant. From our review of grant documents, Spanish and Mexican law, New Mexican law, and grant literature, as well as interviews with grant heirs, scholars, legal experts, and others, common lands were part of the original grant in the following three instances: The grant document itself declares that part of the land be made available for communal use, using such terms as “common lands” or “pasturage and water in common.” We identified 29 grants that contain this or similar language. For example, the 1815 Spanish Los Trigos grant, which was issued to three individuals, made pasture available to the settlers of the grant. Also, an 1846 Mexican land grant provided land to John Scolly and several associates to set aside wood and common pasture for the use of all the settlers. Current New Mexico law treats grants that make specific reference to common lands as community land grants. The grant was made for the purpose of establishing a town or other new settlement. Spanish laws and customs concerning territories in the New World provided that new settlements, cities, and towns would include common lands. Although México obtained its independence in 1821, Mexican land grants continued to follow Spanish laws and customs. We identified 13 grants as Spanish and Mexican grants to towns. For example, in 1768, Spain issued the Ojo de San José grant to six individuals for the purpose of establishing a town. Similarly, México issued the Doña Ana Bend Colony grant in 1840 to 116 petitioners to establish a town, which would then set aside an area for the town commons. New Mexico law currently considers grants to towns, communities, colonies, pueblos, or individuals for the purpose of establishing a town to be community land grants. The grant was issued to 10 or more settlers. Spanish law governing settlement in the New World stated that 10 or more married persons could obtain a land grant, if they agreed to form a settlement indicating that a grant would contain common lands. For example, the 1807 Spanish Juan Bautista Valdez grant was made to 10 settlers and the 1842 Mexican Angostura del Pecos grant to 54 settlers. We identified 36 grants of this type. Table 1 lists 78 grants in which common lands were part of the original grant. The second type of community land grant we identified is a grant that a person or persons stated included common lands. Our review of the papers filed with each grant claim to the surveyors general and the Court of Private Land Claims, and those of a legal scholar, disclosed that, in some instances, the only mention of common lands was found in a claimant’s petition or other documents. In these cases, the files did not contain any grant documents showing that the common lands were part of the original grant. We also identified grants in this category as community land grants after interviewing grantee heirs, scholars, and others knowledgeable about a grant’s history, and reviewing other information provided to us. Again, no existing grant document supported the claim, although some claimants stated that such documentation had been lost or destroyed. Furthermore, some scholars raised the issue that, in some individual grants, common lands had been set aside by the grantees, their heirs, or other grant settlers to encourage additional settlement after the original grant was made. In these instances, there would not be any supporting official documentation because the grant predated the setting aside of common lands. For example, one scholar believed that the Sangre de Cristo grant, which México originally issued as an individual grant in 1843, later evolved into a community land grant when an heir of the original grantee provided land to new settlers and set aside additional land for communal use. Table 2 lists 53 grants identified by grantee heirs, scholars, or others as having common lands but lacking grant documentation. The third type of community land grants we identified encompasses grants extended by Spain to the indigenous pueblo cultures in New Mexico to protect communal lands that they had used and held for centuries before the Spanish settlers arrived. For the most part, the pueblo settlements these colonists encountered in the sixteenth century were permanent, communally owned villages, where inhabitants engaged in agricultural pursuits. Spain declared itself guardian of these communities, respected their rights to land adjacent to the pueblos, and protected pueblo lands from encroachment by Spanish colonists. Spain made grants to these communities in recognition of their communal ownership of village lands. México continued to recognize pueblo ownership of land and considered pueblo residents to be Mexican citizens. With the establishment of the Office of Surveyor General in 1854, the Congress required the Surveyor General to investigate and report on pueblo claims. The Congress subsequently confirmed 22 Spanish grants to pueblos on the recommendation of the Surveyor General. The Court of Private Land Claims confirmed one pueblo grant. Table 3 lists the pueblo grants. We issued an Exposure Draft in January 2001 to seek public comments on our definition and identification of community land grants and to gather information about community land grants not readily available to us in public documents. In New Mexico, we distributed the English and Spanish versions of the Exposure Draft widely to community groups, scholars, land grant heirs, and Indian pueblos and made copies available through local governmental offices and libraries in 18 counties, as well as U.S. Forest Service ranger stations located throughout the state. We sent announcements to English and Spanish newspapers and radio and television stations in the state. Copies of the Exposure Draft were also available through the offices of the Senators Bingaman and Domenici and Congressman Udall of New Mexico. In addition, the public could access and comment on the report on the GAO web page. We also received comments and documentation by fax, regular mail and e-mail. In March 2001, we held open forums at five New Mexico locations, including Santa Fé and Albuquerque, to gather comments. We received over 200 oral and written comments to the Exposure Draft during the comment period, some of which included information not readily available from the research sources we used. The comment period, which was originally scheduled to end on April 2, was extended until May 2. Most of the comments did not address our definition of community land grants and the three types of community land grants that we identified. A significant number of the comments concerned the history of particular community land grants. This information will be reviewed in preparation of our next report. Most of the comments concerning our definition and lists of community land grants were in agreement with our analysis. A few commentators disagreed with the classification of particular land grants. Based on information received, the Elena Gallegos grant, which was identified as a community land grant in table 1, was redesignated as an individual grant under the name Diego Montoya. During our New Mexico visit in March, heirs identified two other grants, the Francisco Montes Vigil and the Cristóbal de la Serna grants, as being community land grants. We added these two grants to table 2, which contains a list of grants that heirs and others have identified as containing common lands. We also added the Cañada de Santa Clara to the list of Indian Pueblo grants in table 3, based upon documentation provided during the comment period. See Appendix IV for a more extensive discussion on the comments received. We placed maps after each table that graphically depict the number of grants principally in each county and added the classification as to type of grant to Appendix I to help identify grants. Some grants have more than one name. To facilitate the identification of grants with multiple identifiers, we added Appendix II, which alphabetizes these alternative identifiers and links each to the appropriate grant in Appendix I. As agreed with your offices, this report will be issued in English and Spanish versions. We plan to send copies to the New Mexico congressional delegation. We will distribute copies in both languages in New Mexico and provide copies upon request. GAO contacts and key contributors to this report are listed in Appendix VI. If you have any questions about this report, please contact me at (202) 512- 7648. Key contributors to this report are listed in Appendix VI. Date confirmed or other actionRejected The Court of Private Land Claims recognized the grant as valid and ordered it surveyed and partitioned. However, problems arose when attempts were made to identify the common boundary with the Santo Tomás Yturbide Grant. A patent was not issued because claimants argued the Confirmation Act of 1860 conveyed the title; a final survey yielded 14,808.075 acres. The grant was located within the confirmed Domingo Fernández grant, so no action was taken on the claim. Although a petition was filed in 1872, no further action was taken by the claimants to pursue recognition of the claim. Therefore, there is no formal decision on the matter. Based on a U.S. Supreme Court decision that found, among other things, that the grant had not been given in accordance with Mexican law. The grant apparently lies within the Pueblo of Nambé grant and has not been patented. No actual claim was presented to the Court, and therefore no actual confirmation was made by either the Congress or the Court. When the La Majada grant was confirmed, this was apparently sufficient for the Town of Peña Blanca residents. In 1931, the New Mexico Federal District Court confirmed acreage not previously part of the Pueblo of Cochití lands. The Town of Las Vegas grant was apparently in conflict with the Baca grant. The Congress recognized the conflict and allowed the Baca heirs to obtain equivalent acreage elsewhere in the Territory. Of five tracts selected two were in New Mexico, known as Float # 1 (Sandoval County) and Float # 2 (San Miguel County), each containing 99,289.39 acres. The claimants probably obtained title through the Act of March 3, 1891. This act allowed each of those settlers, who had lived on the land for more than 20 years before an official survey of a township was conducted, to a patent of up to 160 acres of land. There was no documentation of the grant, and no claim was submitted to the Court of Private Land Claims. No specific information available. The purported grant document was filed with the Office of the Surveyor General, but was later proven to be fraudulent. As the result of the establishment of a reservation in 1877, as revised in 1883, 1885 and 1917, the pueblo’s claim was not presented to the Court of Private Land Claims. The only grant actually given to Santa Fé residents was in 1715 for some common pastureland and water. The Congress ultimately granted to the City of Santa Fé all lands not already used by the United States or confirmed private land grants. The confirmed amount is based on the Surveyor General’s preliminary survey of 4 square leagues. The U.S. Supreme Court found the Court of Private Land Claims to be in error and directed a reversal. The grant was rejected in 1900. Grant Alexander Valle Juan Bautista Valdez Juan G. Pinard Piedra Lumbre Piedra Lumbre Sevilleta Cañón de Chama Francisco de Anaya Almazán Francisco de Anaya Almazán Sitio de Juana López Albuquerque (Town of) Socorro (Town of) Juan José Lovato San Antoñito San Cristóbal Cubero (Town of ) Pueblo of Santo Domingo & San Felipe Estancia Lo De Padilla Diego de Belasco Ojo De Borrego Diego Montoya Badito Bracito Rancho de Coyote Diego Montoya Ranchito Rancho El Rito Rancho El Rito Lo De Padilla Ortiz Mine Embudo Juan Bautista Valdez Santiago Bone Domingo Fernández San Cristóbal Francisco de Anaya Almazán Caja del Río Bernalillo (Town of) Bernalillo (Town of) Arroyo Hondo Don Fernando De Taos Galisteo (Town of) Grant Bartolomé Trujillo Baltazar Baca Ojo de San Jose San Marcos Pueblo Cañón De Carnue San Miguel del Vado San Joaquín del Nacimiento Juan José Sánchez Francisco X. Romero Santa Cruz Santa Rita del Cobre Joaquín (de) Mestas Juan Manuel Córdova San Mateo Spring(s) Bosque Grande Maragua Las Trampas (Town of) Concerned about whether the United States fulfilled its obligations under the Treaty of Guadalupe Hidalgo with regard to community land grants made by Spain and México in what is now the State of New Mexico, Senators Jeff Bingaman and Pete Domenici asked us to study numerous issues regarding the treaty and its implementation. Subsequently, New Mexico Congressman Tom Udall joined in the request. We plan to answer their questions in two reports. This first report defines the concept of community land grants, identifies three types of grants that meet this definition, and lists the grants that we identified in each category. The second report will review the United States legal obligations under the Treaty of Guadalupe Hidalgo to protect community land grants and the procedures established to implement these obligations. In accordance with the request, we limited our review to community land grants made by Spain or México between the end of the 17th century and 1846 that were wholly or partially situated within the present State of New Mexico and subject to the Treaty of Guadalupe Hidalgo. We also included grants in what is now New Mexico that were made until the 1853 Gadsden Purchase, since they too were made subject to the treaty. We analyzed land grants in New Mexico for which we could find evidence to identify community land grants. To respond to this request, we collected and reviewed documents from the U.S. National Archives and Records Administration in Washington, D.C.; the National Archives and Records Administration in Denver; the New Mexico State Records Center and Archives; archives at the U.S. Bureau of Land Management and the U.S. Forest Service; various libraries, including the Center for Southwest Research at the University of New Mexico Zimmerman Library and the Special Collections at the University of New Mexico Law School Library; the U.S. National Park Service’s Spanish Colonial Research Center at the University of New Mexico; scholars, land grant heirs, lawyers representing land grant interests; and other individuals or entities associated with land grants in New Mexico. We researched, collected, and reviewed published and unpublished material on land grants, including books, articles, monographs, and unpublished theses. Our search for relevant materials included a search for articles published in México that address the issues in this report. A list of materials that we consulted can be found in Appendix V. During the course of our review, we interviewed dozens of land grant heirs in New Mexico and contacted the Governors of Indian pueblos; historians, researchers, and other academicians studying land grant issues, including scholars in México; lawyers representing the interests of land grant heirs and an Indian pueblo; officials at the U.S. Bureau of Land Management (BLM) and the U.S. Forest Service; local government officials with the State of New Mexico, including the Office of the Attorney General, and with several counties in which land grants exist; and various representatives of other entities or interests associated with land grant issues in New Mexico to gain a better understanding of community land grant issues. To determine how community land grants are defined, we reviewed numerous documents that addressed land grants in New Mexico, including English translations of original grant documents; English translations of Spanish and Mexican laws; federal, state, and territorial court decisions on land grants; scholarly articles describing customs associated with land grants; and various academic materials analyzing land grants. In interviews with academicians and other experts on land grants, lawyers dealing with land grant issues or cases, land grant heirs, and other observers of land grants (e.g., federal employees, librarians, graduate students at the University of New Mexico Law School Library and University of New Mexico Library), we asked for their views on defining community land grants. We also asked several experts to comment on our preliminary definition of community land grants. We received over 200 oral and written comments and documentary evidence related to Spanish and Mexican land grants during the comment period from January 24 to May 2, 2001. The scope and nature of these comments and our responses can be found in Appendix IV, “Public Comments.” To identify the universe of Spanish and Mexican land grants in New Mexico, we used a variety of historical data. We started with an unpublished Master of Laws (LLM.) thesis by J. J. Bowden at Southern Methodist University Law School, entitled Private Land Claims in the Southwest, to develop our initial list of Spanish and Mexican grants. This six-volume thesis describes 280 grants, made in what is today the State of New Mexico, in great detail and includes English translations of parts of the granting documents. The work also identifies many of the different names for the grants. We next examined documents on file at various archives from the Office of the Surveyor General and Court of Private Land Claims -the two entities responsible for carrying out the legal processes set in place in the nineteenth century to implement the treaty. Where possible, we reviewed English translations of the original granting documents. We also used other sources of information, including those provided by land grant heirs. If discrepancies were found among various documents, we deferred to the archived files of the Office of the Surveyor General or Court of Private Land Claims. Our research identified 295 Spanish and Mexican land grants made by Spain and Mexico in the area, which now comprises the State of New Mexico. To distill community land grants from this universe of land grants, we applied our definition, searching for clues in the granting documents and other sources. For example, some grants contained the following language and would be considered community land grants: “pasturage and watering places shall be in common” (Caja del Río), the “pastures and woodlands in common” (Barranca), “the public square is also common among all” (Cañón de Carnue), and “set aside for the commons of the town” (Doña Ana Bend Colony). Criteria for inclusion as a community land grant included not just language denoting common lands but language indicating that a grant had been made to a town or settlement, since under Spanish and Mexican law and custom, grants to towns included common lands. We also included grants made to 10 or more people, since Spanish law states in the Recopilación de las Leyes de los Reynos de las Indias that a grant could be made to 10 or more married persons to form a settlement, indicating that the grant was a community grant. Historical treatises and interviews with scholars and grant heirs alerted us to the possibility of additional community grants. Although grants may have originally been issued to individuals, sometimes land was subsequently set aside for common use and thus these grants should be considered community land grants. Such evolutions are not captured in grant documents. Other grant heirs and advocates assert that certain grants are community land grants, but we do not know the basis for the assertion. We included grants identified by heirs and others as being community land grants in a second list. We make no judgment as to the efficacy of these assertions but list them for the Congress’ consideration. We also found that Spain issued land grants to indigenous pueblo cultures already resident in the colonial territories. According to scholars, these cultures held the lands communally and did not have a concept of private ownership of real property. We list these grants separately because the lands in common existed before Spanish settlement and because of the unique relationship between Native Americans and the Spanish, Mexican and United States governments. We used surveyor general documents and public laws to ascertain the number of grants made to Native Americans. To list each land grant by county, we compared county data in several federal, state and independent databases listing New Mexican land grants to determine the level of reliability of the databases. We also recognized that the county boundaries have changed markedly since 1850. We found significant discrepancies among the various databases because of, in part, conflicting interpretations of which county contained the largest area when a grant straddled county lines. This is particularly problematic in unsurveyed grants. In an effort to maintain consistency in listing counties and to minimize errors, we used official federal, state and county government maps and J. J. Bowden’s thesis. The maps relied on actual survey data of certain land grants. We visually reviewed the maps to determine the primary county for each of the land grants illustrated. However, we recognized that the maps contained limited information. We therefore used Bowden’s thesis—one of the more thorough reports on land grants in New Mexico—to complete the county listings. We did not verify the accuracy of either the official maps or of Bowden’s thesis. In creating the map to represent the location of each land grant, we learned that no map illustrating all grants existed. Officials from federal and state agencies, as well as independent researchers, told us that current maps only listed certain land grants, such as those grants that had been confirmed and surveyed. It should be noted that we relied on published and unpublished documents and archives, primarily in New Mexico, Colorado and Washington, D.C. The quantity, quality, availability and reliability of the evidence for the many grants varied considerably. For example, the Doña Ana Bend Colony files contain extensive documents pertaining to the establishment of the colony and the location of tracts, while the Hacienda del Álamo file contains only the claimant’s petition with no original grant documents to verify the claim. We relied on official translations of the original granting documents wherever possible. Documents from the Office of the Surveyor General included the name of the individual who was responsible for translating the submitted documents. However, we did not independently assess any translation. We also note that the names of some grants in Bowden’s thesis, the documents of the Office of Surveyor General, and the Court of Private Land Claims’ files are not always consistent. We have identified the other names of grants in Appendix II. We conducted our review from April 2000 through August 2001, in accordance with generally accepted government auditing standards. We received over 200 oral and written comments concerning the Exposure Draft during the comment period. The period was originally scheduled to end on April 2, but was extended until May 2. This allowed more time for presenting information and documentation. We received comments electronically via the GAO Web page, e-mail, fax, regular mail, and meetings in New Mexico held from March 23 through March 28, 2001. Some of the comments received asked for information about our study and particular land grants and how to find out whether the persons commenting were heirs to particular grants. We received documentation submitted in support of suggested changes to the Exposure Draft by fax and regular mail and in our meetings. Most of the comments did not address the definition and list of community land grants. We obtained information about many grants, including the detailed histories of some, which will be reviewed in our future work. The comments on the definition and lists generally agreed with both. We made some changes in the background and categorization of four land grants in response to specific comments, and the changes are discussed below. Many suggested changes did not include supporting documentation. Generally, we made only those changes for which there was documentary support. Our analysis of the public comments to a large extent follows the order of the report: 1. Background. We received comments concerning the legal background for community land grants. Some individuals stated that the report did not contain enough detail about Spanish and Mexican laws applicable to community settlements. One letter cited the influence of Roman law on the development of Spanish towns and settlements both in Spain and New Mexico. It also discussed the different kind of lands that belonged to a community that the author of the letter believed the Supreme Court did not recognize in United States v. Sandoval, 167 U.S. 278 (1897). The Sandoval case concluded that the common lands of community land grants belonged to the sovereign and in this case to the American government as the successor sovereign to Mexico under the Treaty of Guadalupe Hidalgo. Because this initial report deals with the definition of community land grant and the kinds of community land grants, we decided not to include a detailed description of Spanish and Mexican law affecting community land grants and the types of lands that were part of a community settlement in this report. We defer consideration of this information in connection with our next report. We made several technical changes at the suggestion of the Department of State. 2. Concept of Community Land Grants Defines Community Land Grants. Some commentators said that it was important that we include additional terminology to help define community land grants . They also emphasized the importance of water as a community resource and the importance of custom and tradition in community grants. Our definition of “community land grant” is very broad and identifies all grants that have land for communal use. The Exposure Draft already makes reference to the significant role of local laws, custom, and practices in the making and confirmation of grants. We have added a statement on the important linkage between land and water in communities. 3. Common Lands Formed Part of the Original Grant According to Grant Documentation (Table 1). We made one change to Table 1, which is a list of community land grants identified through original grant documentation. As a result of a review of documentation obtained subsequent to the January 24 issuance of the Exposure Draft, it appears that the Elena Gallegos grant does not fit any of the three criteria that we developed to identify the first category of community land grants. The three criteria are: (1) the original grant document declares part of the lands be made available for communal use; (2) the grant was made for the purpose of establishing a new town or settlement; and (3) the grant was made to 10 or more settlers. Consequently, we removed the Elena Gallegos grant from the community grants listed in Table I and identified it as an individual grant in Appendix I under the name “Diego Montoya.” The Court of Private Land Claims decision confirming the petition of several hundred individuals to parts of the Elena Gallegos grant set out the history of the grant. The grant had been originally made in the latter part of the 17th century and then reissued in 1716 to Diego Montoya as a private grant. Subsequently, the grant was conveyed to Elena Gallegos. Later, a large number of individuals settled on the grant and small communities (ranchos) developed. Because the grant was originally made to Diego Montoya, an alternate identifier for this grant in the Exposure Draft, “Diego Montoya,” will now become the name of the grant in Appendix I and “Elena Gallegos” will become an alternate identifier in Appendix II. We also received a comment that the Tierra Amarilla grant did not belong in Table 1 as a community land grant since it is a private grant. The commentator cited several federal and New Mexico cases that have held that the Congress confirmed the Tierra Amarilla grant as a private grant rather than as a community one. We recognize that Congress confirmed the Tierra Amarilla grant in 1860 by statute as a private grant and that its determination is legally conclusive of this question under present American law. However, the purpose of our report is to define the types of “community land grants” associated with both Spain and Mexico and also to identify the grants that are included in each type. This identification is not a legal determination as to whether a particular land grant is a private or community one. Rather, it provides a framework for our ongoing work. We are presently examining the United States implementation of its obligations under the Treaty of Guadalupe Hidalgo concerning community land grants. We have identified grants in which common lands formed part of the original grant. Such grants must meet one of three criteria to be so included. One of these criteria is that the original grant document “declares part of the land be made available for communal use.” The document creating the Tierra Amarilla grant contains such language. The grant document provided that “pastures, watering places and roads remain free according to the customs generally prevailing in all settlements.”4. Grants Identified by Grant Heirs and Others (Table 2). This category includes grants that heirs, scholars, and other persons knowledgeable about a grant’s history have stated contained common lands. Also, it includes some individual grants where, according to such persons, grantees, their heirs, or other grant settlers, certain lands were set aside for common use as an inducement to attract new settlers to the grant. In other cases, we were told that settlements arose on individual land grants that contained some of the features of community land grants, e.g., a common area for grazing livestock. These grants are also reflected in Table 2. We received a comment that we remove both Pedro Armendaris grants, Numbers 33 and 34, from table 2 because they were private land grants. We received materials supporting this request, which included copies of Surveyor General documents and two United States patents for private grants issued by President Rutherford B. Hayes in 1878. These materials recite the history of the grants as presented to the Surveyor General and that formed the basis of congressional confirmation of these grants as private grants in 1860. These documents establish that the Spanish officials made grants to Pedro Armendaris in 1819 (No. 33) and 1820 (No.34). However, our purpose in this report is to be as comprehensive as possible in identifying the universe of community land grants. We wanted to identify grants that fit certain evidentiary criteria, as well as grants that heirs and others identified as containing common lands. This self- identification is important because adequate grant documentation is often lacking. In the case of these two grants, the documentary evidence shows that the grants were made to Pedro Armendaris. However, some persons have identified the grants as having common lands set aside for the use of settlers. This characterization does not affect their legal status as individual grants. As stated above, this report makes no legal determinations. The grants are included in Table 2 because someone has identified the grants as containing common lands. We make no determination of whether the assertion is true. We also added two grants to Table 2: Francisco Montes Vigil and Cristóbal de la Serna. During our March interviews in New Mexico, heirs to these grants stated that they were community land grants, but provided no evidence that common lands formed part of the original grant. However, since identification by grant heirs was sufficient for a grant to be included in the second category of community land grants, these grants are listed in Table 2. We are aware that in several instances courts in the New Mexico Eighth Judicial District have concluded that the Cristóbal de la Serna grant was an individual land grant, based on a detailed examination of its history. As stated previously, our inclusion of this grant in Table 2 does not affect this conclusion. We received two different comments that the Tecolote land grant did not belong in Table 2. One comment would place the grant in Table 1 as a community land grant for which allegedly there is documentary support. The other comment suggested that the grant be listed in Appendix I as an individual grant. Originally, we had included it in Table 2 because an individual had identified it as a community land grant. These different views reflect the positions taken in current litigation in New Mexico State court. The issue in the litigation is whether the heirs of the original grantee have a superior right to part of the grant than the Town of Tecolote. According to the parties to the litigation, a Mexican court in 1838 divided the grant between the heirs of the original grantee, Salvador Montoya, and the settlement of Tecolote. The Town of Tecolote received a patent (title) from the United States in 1902 covering the acreage of the original grant. The patent provides that it should only be construed as the relinquishment by the United States of any claim to the land in question. The patent further provides that it does not adversely affect the rights of any other person to the land. In the litigation, heirs of the original grantee are claiming that they have a superior right than the Town of Tecolote to about one-half of the grant. To be included in the first category of community land grants, original grant documentation is necessary and in this instance none was provided to us. However, to be included in the second category, someone only has to identify a grant as having common lands. We take no position on the litigation. We also received comments that the Alameda, Embudo, La Majada, San Marcos Pueblo, Sebastían Martín, and Gijosa grants did not belong in Table 2. However, we had previously received information that others had identified these as community land grants. This information was sufficient to include these grants in Table 2. 5. Common Lands of Indigenous Pueblo Cultures (Table 3). An official from the Santa Clara Pueblo wrote that we had omitted from Table 3 the Cañada de Santa Clara grant, which is contained only in Appendix I. He provided an English translation and a copy of the original 1763 Spanish grant. The grant provides that the whole of the Valley of Santa Clara “shall be for cultivable and common lands of the said Pueblo for their flocks and horses with all its pastures and waters.” We have added this grant to table 3 because of this documentary evidence. Table 3 consists of grants made directly to the Indian pueblos. It does not include the subsequent purchase or acquisition by an Indian pueblo of a grant from the grantee or any other person who has the right to dispose of it. We also received a request from representatives of the Ysleta del Sur Pueblo, which is located in Texas, to be included in our review of community land grants. According to the request, following the Pueblo Revolt in 1680, the Spaniards moved the ancestors of the present tribe from Isleta Pueblo, near modern day Albuquerque, to the El Paso, Texas area, where they remain today. The Ysleta del Sur Pueblo received a grant from the Spanish Governor of New Mexico in 1751. At the time of the signing of the Treaty of Guadalupe Hidalgo in 1848, the area the Pueblo occupied was located in New Mexico. However, it became part of Texas two years later, as a part of the Compromise of 1850. Neither the Surveyor General of New Mexico nor the Court of Private Land Claims approved the Spanish grant because the Pueblo was located in Texas. The Pueblo believes it should be included in the GAO study because it has a common basis for complaint with the individuals and tribes that comprise it. Our requestors have asked that we examine the United States obligations under the Treaty of Guadalupe Hidalgo and its implementation with reference to community land grants in New Mexico. In the Exposure Draft, which defines “community land grant” and identifies such grants in New Mexico, we included the Indian Pueblos that fit our definition and criteria for community land grants. Because the Ysleta del Sur Pueblo is located in Texas, however, it does not fall within the ambit of our study. We received a letter from Taos Pueblo expressing concern about the lack of attention given to Pueblo grants in our study. The letter noted that dozens of land grant heirs and governmental officials were interviewed, but only a few individuals involved with the problems of one Pueblo were interviewed. We provided copies of the Exposure Draft to the Governors of each of the New Mexico Pueblos and held open forums in 5 locations in the state. The Taos Pueblo also stated that without a comprehensive study concerning Indian Pueblo lands, the Pueblo would be unable to accept the findings of the GAO study. We are aware that problems over land ownership have frequently arisen between settlers and the Pueblos. As Taos Pueblo recognizes, our congressional requestors specifically asked GAO to assess the United States legal obligations under the Treaty of Guadalupe Hidalgo and their implementation with respect to community land grants. In the event that we identify potential options for resolving any U.S. failure, the congressional requestors want GAO to discuss the potential effects of these options on tribal land claims. The treatment of the pueblo grants in the second report will depend on the factors mentioned in the response to comment (b) in Table 4 below. The Taos Pueblo letter did not contain any comments about Table 3 of the Exposure Draft, which lists all the Pueblo grants and the dates they were made. The Exposure Draft showed that the Taos Pueblo had received its grant in 1815, which was much later than the dates for the other Pueblos. We reviewed our work papers and concluded that the date was not accurate. We spoke with an employee of Taos Pueblo familiar with its history. The employee indicated that little information could be found that established a date certain for the original Spanish grant. Accordingly, we have left the space for the grant’s date blank and added a footnote indicating that the date of the grant is uncertain. 6. Detailed Data on the 295 Spanish and Mexican Land Grants (Appendix I). On the basis of comments received, we realized that some grants listed in Appendix I overlap or are included in other grants. For example, we received information that the Juan Montes Vigil grant listed in Appendix I was part of the La Majada grant. Neither Congress nor the Court of Private Land Claims confirmed the Vigil grant, although it was presented to the Surveyor General for his approval. However, the Court of Private Land Claims confirmed the La Majada grant in 1894 with a patent issued in 1908. Also, we received information that the José Domínguez grant and the Sebastían Martín grant covered the same area. In fact, Sebastían Martín purchased the grant from José Domínguez’s daughter and son-in-law. Congress confirmed the Sebastían Martín grant in 1860 and a patent issued in 1893. The Surveyor General rejected the Domínguez grant. We also made changes to Appendix I to make it easier to use. First, it proved difficult to identify grants that had other names, which we had included as alternate identifiers in Appendix I. We removed the column in Appendix I designated as “Alternative grant identifiers” and replaced it with a new Appendix II that alphabetizes all the alternate identifiers and links each identifier to a particular grant in Appendix I. Second, we added a column to Appendix I, which identifies what kind of a grant it is for the purposes of this report: (1) “C” for community grants with original documentation listed in Table 1; (2) “OI” for community land grants identified by grant heirs and others listed in Table 2; (3) “P” for Indian Pueblo grants listed in Table 3; and (4) “I” for “individual grants.” Third, instead of one New Mexico map showing the grants identified in Tables 1 through 3 by county, we created three separate New Mexico county maps in the report showing the location of grants in each table. Lastly, in Table 1, as well as in Table 2 and Appendixes I and II we have removed the words “Town of” from the name of certain grants and placed these words in parentheses after the name of the grant. We then realphabetized each list. We made these changes to make it easier to locate the name usually associated with these grants. 7. New Mexico Attorney General’s Task Force. We received oral and written comments from New Mexico Attorney General’s Task Force set up to assist GAO in its study of community land grants. Table 4 summarizes their major comments, some of which we have grouped together, and our responses. 8. Taos County Community Centers. We received several comments and materials from Taos County Community Centers Association, Inc. One of these comments claimed that the 295 grants listed in Appendix I of the Exposure Draft covered only one third of the grants made in New Mexico and that there were 719 grants that had not been accounted for. The comment was based on a statement in a book by a New Mexico historian that the Surveyor General in his 1856 report to Congress indicated that he had received “a collection of 1,014 grants and documents relating to land titles of which (197) were private grants” (emphasis added). The Association sponsored a New Mexico House Joint Memorial, stating that there were 719 grants unaccounted for in the GAO Exposure Draft. The 1856 Surveyor General’s report showed, as the quoted passage from the history book stated, that indeed there were 1,014 grants and documents given to the Surveyor General. This number refers to other documents too, not just grants, including conveyances and wills. The 1856 Surveyor General’s report lists fewer grants than the 295 that we found. 9. Identification of Source Materials. We were asked why the Exposure Draft does not, as scholarly articles do, cite the specific support or source for statements or information in the report. GAO reports are not scholarly studies, but are prepared for the use of the Congress and they should be written in a clear and concise manner. Consequently, it is not our usual practice to footnote each statement in our reports. Both Appendixes III and V list the materials used in the preparation of this report. These Appendixes contain more detailed information that we usually provide in reports so that scholars and others could see what information we used to develop the definition and lists of community land grants. To assure report accuracy, GAO staff, which have not been involved in a study, independently review the sources for each statement and the information in the report. Our process of quality control requires that each statement be supported by appropriate and valid documentation and that the person performing the quality control checks must independently assess the adequacy of the support. When a study is completed, the documentary sources for the report, as well as any data bases developed, will usually be available to the public upon request. 10. Spanish Version of Exposure Draft.- A few commentators noted that the translation of the English version of the Exposure Draft into Spanish did not reflect the Spanish used in New Mexico. Specifically, it used technical terms that are not familiar to New Mexican Spanish speakers. For example, the Exposure Draft uses the word “concesión” for a “grant” made by Spain and Mexico while the word for a Spanish grant in New Mexico is “merced.” We added a footnote regarding “merced.” “Algunos Documentos Sobre el Tratado de Guadalupe y la Situación de México Durante la Invasión Americana.” Archivo Historico Diplomatico Méxicano No. 31 (1930). Arellano, Anselmo F. “The Never Ending Land Grant Struggle.” (Austin, Texas, University of Texas, undated) www.dla.utexas.edu/depts/ anthro/activist/ Essay8.htm (downloaded Apr. 6, 2000). _____. Through Thick and Thin: Evolutionary Transitions of Las Vegas Grandes and Its Pobladores (1990) (unpublished Ph.D. dissertation, University of New Mexico). Beck, Warren A. New Mexico: A History of Four Centuries. Norman, OK: University of Oklahoma Press. Blackmar, Frank W. Spanish Institutions of the Southwest. Glorieta, NM: The Rio Grande Press, 1976. Bloom, John Porter, ed. The Treaty of Guadalupe Hidalgo, 1848: Papers of the Sesquicentennial Symposium. Las Cruces, NM: Doña Ana County Historical Society and Yucca Tree Press, 1999. Bowden, J.J. Private Land Claims in the Southwest (1969) (unpublished LL.M. thesis , Southern Methodist University). _____. Spanish and Mexican Land Grants in the Chihuahuan Acquisition. El Paso, TX: University of Texas at El Paso, 1971. _____. “Spanish and Mexican Land Grants in the Southwest.” Land and Water Law Review, Vol. 8, No. 2 (1973), pp. 467-512. Bradfute, Richard Wells. The Court of Private Land Claims: The Adjudication of Spanish and Mexican Land Grant Titles, 1841-1904. Albuquerque, NM: The University of New Mexico Press, 1975. Brayer, Herbert O. Pueblo Indian Land Grants of the “Rio Abajo”. Albuquerque, NM: The University of New Mexico Press, 1939. Briggs, Charles L. and John R. Van Ness, eds. Land, Water, and Culture: New Perspectives on Hispanic Land Grants. Albuquerque, NM: The University of New Mexico Press, 1987. Calendar to the Microfilm Edition of the Land Records of New Mexico: Spanish Archives of New Mexico, Series I, Surveyor General Records, and the Records of the Court of Private Land Claims. Santa Fé, NM: National Historical Publications and Records Commission and the New Mexico State Records Center and Archives, 1987 (a microfilm project). Cameron, Christopher D.R. “Symposium: Understanding the Treaty of Guadalupe Hidalgo on Its 150th Anniversary: ‘Friends’ or ‘Enemies?’ The Status of Mexicans and Mexican-Americans in the United States on the Sesquicentennial of the Treaty of Guadalupe Hidalgo.” Southwestern Journal of Law and Trade in the Americas, Vol. 5 (1998), pp. 5 et seq. Carlson, Alvar W. The Spanish-American Homeland. Baltimore, MD: The John Hopkins University Press, 1990. Cheever, Federico M. “Comment: A New Approach to Spanish and Mexican Land Grants and the Public Trust Doctrine: Defining The Property Interest Protected by the Treaty of Guadalupe-Hidalgo.” UCLA Law Review, Vol. 33 (1986), pp. 1364-1409. Codgell, Thomas. “A Brief Historical Survey of the Treaty of Guadalupe Hidalgo.” (Austin, Texas, undated) www.jump.net/-treaty/survey (downloaded Aug. 10, 2000). DeBuys, William. “Fractions of Justice: A Legal and Social History of the Las Trampas Land Grant, New Mexico.” New Mexico Historical Review, Vol. 56, No. 1 (1981), pp. 71 et seq.. Ebright, Malcolm. Land Grant Community Associations in New Mexico (1994) (research paper, Center for Land Grant Studies, University of New Mexico). _____. Land Grants and Law Suits in Northern New Mexico. Albuquerque, NM: The University of New Mexico Press, 1994. _____. ed. Spanish and Mexican Land Grants and the Law. Manhattan, KS: Sunflower University Press, 1991. The microfilm archives were accessed at the New Mexico State Records Center and Archives in Santa Fé, New Mexico; at the National Archives and Records Administration in Denver, Colorado; and at the National Archives and Records Administration in Washington, D.C. _____. “The San Joaquin Grant: Who Owned the Common Lands? A Historical-Legal Puzzle.” New Mexico Historical Review, Vol. 57, No. 1 (1982), pp. 5-26. _____. The Tierra Amarilla Grant: A History of Chicanery. Santa Fé, NM: The Center for Land Grant Studies Press, 1993. Espinosa, Gilberto. “New Mexico Land Grants.” The State Bar of New Mexico 1962 Journal, Vol. 1, No. 2 (1962), pp. 3-13. Forrest, Suzanne Sims. “A Trail of Tangled Titles: Mining, Land Speculation, and the Dismemberment of the San Antonio de las Huertas Grant.” New Mexico Historical Review, Vol. 71 (Oct. 1996), pp. 361-393. Gates, Paul W. and Robert W. Swenson. History of Public Land Law Development. Washington, DC: U.S. Government Printing Office, 1968. Gomez, Placido. “The History and Adjudication of the Common Lands of Spanish and Mexican Land Grants.” Natural Resources Journal, Vol. 25, No.1 (1985), pp. 1039-80. Griswold del Castillo, Richard. The Treaty of Guadalupe Hidalgo: A Legacy of Conflict. Norman, OK: University of Oklahoma Press, 1990. Guadalupe Hidalgo Treaty of Peace 1848 and The Gadsden Treaty with Mexico 1853. Seattle, WA: Tate Gallery Publisher, 1963. Hall, G. Emlen. Four Leagues of Pecos: A Legal History of the Pecos Grant, 1800-1933. Albuquerque, NM: The University of New Mexico Press, 1984. . “ San Miguel del Bado and the Loss of the Common Lands of New Mexico Community Land Grants.” New Mexico Historical Review, Vol. 66 (Oct. 1991), pp. 413-432. _____. “Tularosa and the Dismantling of New Mexico Community Ditches.” New Mexico Historical Review, Vol. 75, No. 1 (2000), pp. 77-106. Index to Special District Governments in New Mexico. Santa Fé, NM: New Mexico Legislative Council Service, 1983. Jenkins, Myra Ellen. “The Baltasar Baca ‘Grant’: History of an Encroachment.” El Palacio (Spring 1961), pp. 47-105. Knowlton, Clark S. Land-Grant Problems Among the State’s Spanish Americans (undated) (unpublished paper, University of Texas). _____. The Las Vegas Community Land Grant: Its Decline and Fall. Salt Lake City, UT: Center for Land Grant Studies, University of Utah, 1980. _____. “The Mora Land Grant: A New Mexican Tragedy.” Journal of the West, Vol. 27, No. 3 (undated), pp. 189-218. _____. “The Study of Land Grants as an Academic Discipline.” The Social Science Journal, Vol. 13, No. 3 (1976), pp. 3-7. Kutsche, Paul and John R. Van Ness. Canones: Values, Crisis, and Survival in a Northern New Mexico Village. Salem, WI: Sheffield Publishing Co., 1981. Lamar, Howard R. The Far Southwest 1846-1912. A Territorial History. New Haven, CT: Yale University Press, 1966. Land Title Study Prospectus: Prospectus No.2. Santa Fé, NM: State Planning Office, 1969. Leonard, Olen E. The Role of the Land Grant in the Social Organization and Social Processes of a Spanish-American Village in New Mexico. Albuquerque, NM: Calvin Horn Publisher, Inc., 1970. Luna, Guadalupe T. “Symposium: En El Nombre de Dios Todo-Poderoso: The Treaty of Guadalupe Hidalgo and Narrativos Legales.” Southwestern Journal of Law and Trade in the Americas, Vol. 5 (1998) pp. 45 et seq. Luna, Hilario. San Joaquin del Nacimiento. No city, state or publisher indicated, 1975. Lutz, Robert E. “Symposium: The Mexican War and the Treaty of Guadalupe Hidalgo: What’s Best and Worst About Us.” Southwestern Journal of Law and Trade in the America, Vol. 5 (1998) pp. 27-29. Matthews-Lamb, Sandra K. The “Nineteenth” Century Cruzate Grants: Pueblos, Peddlers, and the Great Confidence Scam? (1998) (unpublished Ph.D. dissertation, University of New Mexico). Meyer, Michael C. The Contemporary Significance of the Treaty of Guadalupe Hidalgo to Land Use Issues in Northern New Mexico. Tucson, AZ: Northern New Mexico Stockman’s Association and the Institute of Hispanic American Culture, 1998. _____. Water in the Hispanic Southwest: A Social and Legal History 1550-1850. Tucson, AZ: The University of Arizona Press, 1984. Meyer, Michael C. and Michael M. Brescia. “The Treaty of Guadalupe Hidalgo as a Living Document: Water and Land Use Issues in Northern New Mexico.” New Mexico Historical Review, Vol. 73 (Oct. 1998), pp. 321- 345. Morrow, William W. Spanish and Mexican Private Land Grants. San Francisco and Los Angeles, CA: Bancroft-Whitney Company, 1923. Nabokov, Peter. Tijerina and the Courthouse Raid. Albuquerque, NM: The University of New Mexico Press, 1970. “New Mexico Land Grant Claims.” AMIGOS—Quien junto al agua tiene su tierra, primero riega, Vol. 7, Nivel 2, No. 6 (undated). Poldervaart, Arie W. Black-Robed Justice. Santa Fé, NM: Historical Society of New Mexico, 1948. Remote Claims Impact Study: Lot II-A, Study of the Problems that Result from Spanish and Mexican Land Grant Claims. Albuquerque, NM. Submitted to the Farmers Home Administration in Washington, D.C. by the Natural Resources Center, University of New Mexico School of Law, 1980. Reynolds, Matthew G. Spanish and Mexican Land Laws. St. Louis, MO: Buxton & Skinner Stationery Co., 1895. Rivera, Jose A. Acequia Culture: Water, Land, & Community in the Southwest. Albuquerque, NM: The University of New Mexico Press, 1998. Rock, Michael J. “The Change in Tenure New Mexico Supreme Court Decisions Have Effected Upon the Common Lands of Community Land Grants in New Mexico. “The Social Science Journal, Vol. 13, No. 3 (1976), pp. 53-63. Rowley, Ralph A. Precedents and Influences Affecting the Treaty of Guadalupe Hidalgo (1970) (unpublished M.A. thesis, University of New Mexico). Sanchez, George I. Forgotten People: A Study of New Mexicans. Albuquerque, NM: Calvin Horn, Publisher, 1967. Sanchez, Jane C. “Law of the Land Grant: The Land Laws of Spain.” (Albuquerque, NM: Los Sanchez, Jan. 2000) http://home.sprintmail.com/~sanchezj/1-title.htm (downloaded Aug. 23, 2000). Sando, Joe S. Pueblo Nations: Eight Centuries of Pueblo Indian History. Santa Fé, NM: Clear Light Publishers, 1992. Simmons, Marc. Spanish Government in New Mexico. Albuquerque, NM: The University of New Mexico Press, 1968. Smith, Andrew T. “The Founding of the San Antonio de las Huertas Grant.” The Social Science Journal, Vol. 13, No. 3 (1976), pp. 35-43. Status Database of New Mexico Land Grants. Santa Fé, NM: Bureau of Land Management, 2000. The Lands of New Mexico Supplement. No city indicated, NM: Museum of New Mexico, date unreadable. The New Mexico Legal Rights Demonstration Land Grant Project-An Analysis of the Land Title Problems in the Santo Domingo De Cundiyo Land Grant. Albuquerque, NM: New Mexico Legal Rights Demonstration Land Grant Project, Legal Aid Society of Albuquerque, Inc., 1976. Torrez, Robert J. “‘El Bornes’: La Tierra Amarilla and T.D. Burns.” New Mexico Historical Review, Vol. 56, No. 2 (1981), pp. 161-75. . “From Empire to Statehood: A History of New Mexico’s Spanish and Mexican Archives.” Colonial Latin American Historical Review (Spring 1996), pp. 333-53. _____. “New Mexico’s Spanish and Mexican Land Grants.” New Mexico Genealogist (Dec. 1997), pp. 143 et seq. _____. “Sale Burro y Entre Burro.” A Historical Perspective on the Tierra Amarilla Grant (1989) (unpublished paper). . The Enduring Legacy of Spanish Land and Water Policy in New Mexico (undated) (unpublished paper, New Mexico State Records Center and Archives). . “The San Juan Gold Rush of 1860 and Its Effect on the Development of Northern New Mexico.” New Mexico Historical Review, Vol. 63 (July 1988), pp. 257-72. . “The Tierra Amarilla Land Grant.” Southwest Heritage, Vol. 13, Nos. 3 and 4 (Fall 1983 and Winter 1984), pp. 2-4, 16. Van Ness, John R. “Spanish American vs. Anglo American Land Tenure and the Study of Economic Change in New Mexico.” The Social Science Journal, Vol. 13, No. 3 (1976), pp. 45-52. _____. and Christine M. Van Ness, eds. Spanish & Mexican Land Grants in New Mexico and Colorado. Santa Fe, NM: The Center for Land Grant Studies, 1980. Westphall, Victor. “Fraud and Implications of Fraud in the Land Grants of New Mexico." New Mexico Historical Review, Vol. 49, No. 3 (1974), pp. 189-218. _____. Mercedes Reales: Hispanic Land Grants of the Upper Rio Grande Region. Albuquerque, NM: The University of New Mexico Press, 1983. _____. The Public Domain in New Mexico 1854-1891. Albuquerque, NM: The University of New Mexico Press, 1965. _____. Thomas Benton Catron and His Era. Tucson, AZ: The University of Arizona Press, 1973. White, Koch, Kelley and McCarthy, Attorneys at Law and The New Mexico State Planning Office. Land Title Study. Santa Fé, NM: State Planing Office, 1971 (reprinted 1981). In addition to those named above, Robert C. Arsenoff, John C. Furutani, Robert E. Sánchez, José Alfredo Gómez, Barry T. Hill, Jeffrey D. Malcolm, David A. Rogers, James R. Yeager, Jonathan S. McMurray, Carol Herrnstadt Shulman, Alice A. Feldesman, William D. Updegraff, Stephen F. Palincsar, Etana Finkler, Veronica C. Sandidge, Randy Byle, Heather Taylor, Bridget Beverly, Tonya Ford, Wanda Okoro, Susan Conlon, Oliver H. Easterwood, Robert G. Crystal, Margie Armen, James M. Rebbe, Jessica A. Botsford, Amy Webbink, Moza Al-Suylaiti, and Heather Tierney made key contributions to this report. We also wish to acknowledge the following staff of the GAO Library, whose research assistance and help in locating materials and court cases greatly facilitated our work on this report: librarians, Rennese D. Bumbray, Maureen K. Cummings, Eunhwa Kim, Bonita L. Mueller, Audrey L. Ruge, Kimberly R. Walton; and technicians, Patricia A. Givens, William R. Haynos, Geraldine B. Howard, Edna Legrant, Alice E. Paris, and Ester L. Saunders. | Until the mid-nineteenth century, Spain made land grants to towns and individuals to promote development in the frontier lands that now constitute the American Southwest. Under the Treaty of Guadalupe Hidalgo, which ended the Mexican-American War, the United States agreed to recognize ownership of property of every kind in the ceded areas. Many people, including grantee heirs, scholars, and legal experts, still claim that the United States did not protect the property of Mexican-Americans and their descendants, particularly the common lands of community grants. Land grant documents contain no direct reference to "community land grants," nor do Spanish and Mexican laws define or use this term. GAO did find, however, that some grants refer to lands set aside for general communal use or for specific purposes, including hunting, pasture, wood gathering, or watering. Scholars, the land grant literature, and popular terminology commonly use the phrase "community land grants" to denote land grants that set aside common lands for the use of the entire community. GAO adopted this broad definition in determining which Spanish and Mexican land grants can be identified as community land grants. GAO identified 154 community land grants out of the total of 295 land grants in New Mexico. Seventy-eight were grants in which the shared lands formed part of the grant according to the original grant documentation; 53 were grants that scholars, grantee heirs, or others believed to contain common lands; and 23 were grants extended to the indigenous Pueblo cultures in New Mexico. |
The U.S. insular areas of American Samoa, CNMI, and Guam are located in the Pacific Ocean, between 4,100 and 6,000 miles from the U.S. mainland. USVI is located about 1,000 miles southeast of Miami in the Caribbean Sea, as shown in figure 1. According to U.S. Census Bureau data for 2000, the population of the U.S. insular areas ranges from about 57,000 in American Samoa, to about 155,000 in Guam. Residents born in CNMI, Guam, and USVI are citizens of the United States. Residents born in American Samoa are nationals of the United States, but may become naturalized U.S. citizens. The population of both American Samoa and CNMI, which control their own immigration, included significant percentages of people who were foreign nationals. According to U.S. Census Bureau data for 2000, median household incomes in the four insular areas ranged from less than half of the U.S. median household income of almost $41,000 for American Samoa to nearly equal for Guam, as shown in table 1. The percentage of individuals in poverty ranged from a low in Guam of 23 to a high in American Samoa of 61. Guam’s 23 percent is nearly twice the rate of the continental U.S. rate of 12 percent. While the United States exercises sovereignty over the insular areas, each administers its local government functions through popularly elected governors. As shown in table 2, American Samoa and CNMI are self- governed under locally adopted constitutions. Guam and USVI have not adopted local constitutions and remain under organic acts approved by Congress. Because each of the insular areas is an unincorporated territory, its residents—although they have many of the rights of citizens of the 50 states—cannot vote in national elections and do not have voting representation in the final approval of legislation by the full Congress. The insular areas receive substantial amounts in federal grants from a variety of federal agencies, as shown in table 3. Recipients that expend $500,000 or more a year in federal awards under more than one federal program are required by the Single Audit Act to undergo a single audit. Single audits are audits of the recipient organization—the government in the case of the insular areas—that focus on the recipient’s internal controls and its compliance with laws and regulations governing federal awards. As nonfederal entities expending more than $500,000 a year in federal awards, the insular areas are required to submit single audit reports each year to comply with the Single Audit Act. One of the objectives of the act is to promote sound financial management, including effective internal controls, with respect to federal awards administered by nonfederal entities. Single audits also provide key information about the federal grantee’s financial management and reporting. Recipient organizations are required by the act to submit their single audits reports to the Federal Audit Clearinghouse (FAC). The single audit reporting package sent to the FAC includes (1) the auditor’s reports; (2) the entity’s audited financial statements and related notes; (3) the schedule of expenditures of federal awards, related notes, and the auditor’s report on the schedule; (4) a schedule of findings and questioned costs; (5) reports on internal controls over financial reporting, and compliance with laws and regulations; and (6) a summary schedule of prior audit findings. The reporting package also includes corrective actions for findings identified for the current year as well as unresolved findings from prior fiscal years. Table 3 below shows the total amount of federal funds provided to each insular area and the largest five federal grant agencies for each insular area. The Secretary of the Interior has administrative responsibility over the insular areas for all matters that do not fall within the program responsibility of another federal department or agency. DOI’s OIA and IG carry out the Secretary’s responsibilities. OIA was established to foster the efficiency and effectiveness of the insular area governments and to provide technical and financial assistance. In this role, OIA coordinates activities with other federal agencies in the development and implementation of programs and policies pertaining to the insular areas. DOI’s IG has the authority to audit all insular area accounts pertaining to revenue and receipts and all expenditures; may report all findings of government failures to collect amounts owed; and may report improper and illegal expenses to the Secretary. DOI’s IG has issued many audit reports covering issues on individual insular areas. See appendix III for a list of reports on the insular areas issued by the DOI IG between calendar years 2000 and 2005. To identify the economic challenges the insular areas face, we reviewed relevant literature dealing with economic conditions in the insular areas, including the potential impact of recent changes in tax and trade laws. We also interviewed officials at OIA and specialists at the U.S. Census Bureau and analyzed various documents and studies from these agencies, including estimates of gross domestic product (GDP). We reviewed analyses prepared by the U.S. Department of Labor (DOL) of the tuna industry in American Samoa and gathered military personnel data from DOD. In addition, we obtained economic data from insular area officials, such as CNMI plant closings, employment statistics, and tourism indicators. We studied the fiscal condition of each of the insular area governments by identifying and analyzing the revenues, expenditures, government fund balances, and net assets data, as reported in their single audit reports issued for fiscal years 2001 through 2004. We used benchmark estimates of 2002 GDP, prepared by the U.S. Census Bureau for each of the insular areas, to calculate revenues and expenditures as a percentage of GDP. After our work was completed, American Samoa, CNMI, and Guam issued their single audit reports for fiscal year 2005. We did not update our information on the insular areas’ fiscal conditions because the USVI single audit report for fiscal year 2005 had not been issued. We reviewed the financial accountability of the insular area governments by (1) determining the timeliness of submission of the single audit reports, (2) analyzing the contents of the single audit reports issued for fiscal years 2001-2004, (3) identifying those insular area governments designated as high-risk grantees through U.S. federal agency contacts, (4) obtaining information about OIA’s efforts to help the insular areas improve financial management, and (5) identifying the relevant auditing organizations at the federal and local levels. We determined the timeliness of submission of the single audit reports using the FAC’s “Form Date,” which is the most recent date that a required SF-SAC data collection form or a revised form was received by the FAC. We did note that the “Form Date” is updated if revised SF-FACs for that same fiscal year are subsequently filed. Our review of the contents of the single audit reports identified the auditors’ opinions on the financial statements, matters cited by the auditors in their qualified opinions, the numbers and nature of material weaknesses and reportable conditions reported by the auditors, and the status of corrective actions. We interviewed OIA officials to identify their role in assisting the insular area governments in efforts to improve financial accountability, including training and technical assistance funded by OIA and provided by the USDA’s Graduate School. To identify the federal and local auditing authorities with oversight over the four insular area governments, we reviewed the information on the authorities’ Web sites and reports that had been recently issued. Because high-risk designations are made at the individual agency or program level, and this information is not consolidated at the federal government level, we contacted officials at the largest five federal grant agencies for each insular area to determine whether they had designated any of these four insular area governments or agencies of these governments as high-risk grantees, and whether special conditions had been placed on them. We used the schedules of expenditures of federal awards included in the fiscal year 2004 single audit reports to identify the largest five federal grant agencies for each insular area. We conducted our work from September 2005 through August 2006 in accordance with U.S. generally accepted government auditing standards. Several factors common to all four U.S. insular areas constrain their economic potential. These factors include lack of diversification, scarce natural resources, small domestic markets, limited infrastructure, and shortages of skilled labor. The labor markets of all four insular areas face competition with U.S. mainland wage levels because natives from the insular areas are free to migrate to the United States. Therefore, the insular areas’ private and public sectors face chronic difficulties retaining well-trained and highly educated workers. Two of the insular areas, American Samoa and CNMI, control their own immigration and have developed industries that depend on foreign labor paid a minimum wage below that of the United States. Although geographic isolation is frequently mentioned as a factor restraining economic progress in the insular areas, it does not appear to apply to CNMI, Guam, or USVI. CNMI and Guam are well positioned to integrate with the regional economies of East Asia; and USVI is surrounded by the Caribbean Basin countries and the United States. On the other hand, American Samoa is more geographically isolated, with Australia, more than 2,000 miles away, and New Zealand, 1,600 miles away, as the closest large economies. Although the type of industries and extent of dependence varies, the local economies of the insular areas rely on one or two primary industries. The result of this dependence is economies that are vulnerable to changes in international trade agreements, tax laws, and other external events. For example, American Samoa’s private sector is largely based on two tuna canneries. Although these tuna canneries have been an integral part of American Samoa’s private sector for decades, they are likely to face increased foreign competition from existing and pending trade agreements established to advance free trade, which could have a serious negative effect on them. Similarly, CNMI’s economy is highly dependent on the garment manufacturing industry, which is facing the challenge of remaining internationally competitive against low-wage nations given recent changes in trade agreements. Guam’s economy depends on two main sectors—tourism and the provision of services to the U.S. military. Guam’s tourism sector is currently stable, but has been affected by several external events, such as the terrorist attacks on the United States on September 11, 2001, and the Severe Acute Respiratory Syndrome (SARS) epidemic. The stability of the sector that provides services to the U.S. military is tied to Guam’s status as a strategic U.S. military base. USVI has a more diverse economy than American Samoa, CNMI, or Guam, with several sources of revenue—primarily tourism, petroleum refining, and international business and financial services. However, USVI’s tourist sector, like that of CNMI and Guam, has experienced volatility due to the terrorist attacks on the United States on September 11, 2001, and the impact of hurricanes. USVI is also facing challenges resulting from recent tax law changes that could cause a reduction in U.S. businesses operating in the insular area. American Samoa’s economy depends primarily on the tuna canning industry. The industry is the insular area’s largest source of income and, with the government sector, one of its two largest sources of employment. According to DOL, the two tuna canneries in the insular area employ about one-third of the workforce, with another one-third employed by other businesses, many of which support the tuna industry. The government sector in American Samoa accounts for about 20 percent of the insular area’s GDP and employs around one-third of its labor force. Noncitizens make up a large portion of the canneries’ employees, about 80 percent in 2000. Several changes in federal trade and tax law may adversely affect the American Samoa tuna industry, in turn affecting the insular area’s economy and government. Since the 1950s, tuna canned in American Samoa has been permitted to enter the United States duty free. However, changes scheduled to take effect in existing free trade agreements, as well as several pending agreements, are likely to increase competition for the tuna canneries in American Samoa. For example, according to a DOL study, the elimination of tuna tariffs in 2008 for Mexico under the North American Free Trade Agreement (NAFTA) could, in concert with other factors, result in Mexico’s becoming a major exporter of canned tuna to the United States. Likewise, the Andean Trade Preference Act (ATPA), as amended in 2002, allows the U.S. President to exempt Bolivia, Colombia, Ecuador, and Peru from paying U.S. tariffs on shipments of pouched tuna, which is expected to gain market share in the United States. According to DOL, Congress may choose to gradually eliminate tariffs on canned tuna for these countries in the future. In that case, Ecuador—ATPA’s major tuna exporter—could become, like Mexico, a significant supplier of canned tuna to the United States. In addition, the U.S.-Thailand Free Trade Agreement now being negotiated could further challenge the American Samoa tuna industry if it grants Thailand—the biggest exporter of tuna to the United States—the right to ship canned tuna to the United States duty free. The canneries in American Samoa have benefited from possession tax credits under section 936 of the Internal Revenue Code, which is designed to encourage U.S. corporations to invest in the U.S. insular areas and create jobs by reducing the federal taxes on income earned by qualifying U.S. corporations. However, the credit expired for taxable years beginning after December 31, 2005. Although the House passed legislation to extend the credit for American Samoa for 1 year, the provision was removed in conference and was not included in the final version of the bill, which was signed by the President on May 17, 2006. According to the DOL study, the loss of the federal income tax credit will reduce the canneries’ after-tax profitability and could prompt them to move to countries with a lower minimum wage. The economic and social impact associated with a significant downturn in its major industry may be severe in American Samoa because the large foreign workforce has relatively strong roots in the insular area and, as a result, may remain in the insular area even if unemployed. The CNMI economy depends on two industries, garment manufacturing and tourism, for its employment, production, and exports. These two industries rely heavily on a noncitizen workforce that represents more than three quarters of the labor pool. The garment industry, for example, uses textiles and labor imported mostly from China. Garment manufacturing and tourism account for about 85 percent of CNMI’s total economic activity and 96 percent of its exports. Recent estimates of CNMI’s GDP suggest that, in 2002, the garment industry contributed to roughly 40 percent of CNMI’s GDP and 47 percent of payroll. The rapid growth of tourism between 1988 and 1996, with visitor arrivals rising from over 245,000 to over 735,000, an average annual increase of 14.7 percent, fueled economic expansion. However, recent alterations in trade law have increased foreign competition for CNMI’s garment industry and caused its exports to fall, while other external events have negatively impacted its tourism sector. Several recent developments in international trade law have affected CNMI’s garment industry. Historically, while other garment exports faced quotas and duties in shipping to the U.S. market, CNMI’s garment industry benefited from quota-free and duty-free access to U.S. markets for shipments of goods in which 50 percent of the value was added in CNMI. Recently, however, U.S. agreements with other textile-producing countries have liberalized the textile and apparel trade. For example, in January 2005, in accordance with one of the 1994 World Trade Organization (WTO) Uruguay Round agreements, the United States eliminated quotas on textile and apparel imports from other textile-producing countries, leaving CNMI’s apparel industry to operate under stiffer competition, especially from low-wage countries such as China. With its trade advantage lessened, CNMI’s garment industry has shrunk. According to a DOI official, more than 3,800 garment jobs were lost between April 2004 and the end of July 2006, with 10 out of 27 garment factories closing. U.S. Department of Commerce data show that the value of CNMI shipments of garments to the United States dropped by more than 16 percent between 2004 and 2005, from about $807 million to $677 million, and down from a peak of $1 billion in 1999-2000. In the first 7 months of 2006, garment exports to the United States dropped by more than 27 percent compared to the same period in 2005, with sales declining from $419 million to $305 million. Given that the taxes and fees from the garment industry account for about 35 to 40 percent of the insular area’s revenues, these developments will likely have significant financial and economic impacts, according to OIA officials. Various external events have affected CNMI’s tourism industry in recent years. Due to CNMI’s proximity to Asia, Asian economic trends have a direct impact on CNMI’s economy. For example, tourism in CNMI experienced a sharp decline in the late 1990s with the Asian financial crisis. According to the Marianas Visitors Authority, total visitor arrivals dropped from a peak of 736,117 in 1996 to 501,788 in 1999. After a modest recovery in 2000, tourism faltered again with the September 11, 2001, terrorist attacks on the United States, bringing the number of visitors to 444,284 in 2001. In 2003, according to CNMI officials, tourism slowed— with a double-digit decline in arrivals for several months—in reaction to the SARS epidemic, which originated in Asia, and the war in Iraq. At the same time, CNMI has experienced an influx of Chinese tourists in recent years, with the potential to reenergize the industry. The Chinese share of visitors increased significantly from 0.4 percent in 1997 to 6.5 percent in 2005. CNMI officials are optimistic that the trend will continue in the future, especially on the island of Tinian, which already has gambling and hotel facilities owned and operated by Chinese interests from Hong Kong. Tourism in CNMI is also subject to changes in airline practices. For example, Japan Airlines (JAL) withdrew its direct flights between Tokyo and Saipan in October 2005, raising concerns because roughly 30 percent of all tourists and 40 percent of Japanese tourists arrive in CNMI on JAL flights, according to CNMI and DOI officials. The Marianas Visitors Authority’s June 2006 data show that the downward trend in Japanese arrivals is not being offset by the growth in other tourism markets such as China and South Korea, with the total number of foreign visitors dropping from 43,115 in June 2005 to 38,510 a year later. A mitigating factor is Northwest Airlines’ new daily nonstop flights between Osaka and Saipan, which are expected to replace about 40 percent of the seats lost from JAL’s action. Guam’s economy is dominated by two sectors—tourism and government. Tourism provided about 65 percent of business activity in 2004, according to the Guam Economic Development and Commerce Authority Administrator. A 2002 U.S. Census Bureau study indicates that the government sector of Guam represented more than 36 percent of the island’s GDP. The U.S. military accounted for more than 40 percent of total government expenditures and about 90 percent of U.S. federal expenditures in Guam. Although Guam’s tourism sector is currently stable, it has been affected by several external events since the late 1990s. The government sector, which is projected to grow in the near future, has historically been sensitive to significant changes in the U.S. military presence. Guam’s tourism sector is vulnerable to external events. In 1997-1998, the Asian financial crisis and a severe typhoon slowed tourist arrivals. According to the Guam Visitors Bureau data, tourist arrivals dropped by almost 18 percent from 1.38 million in 1997 to 1.14 million the following year. After a modest recovery in 1999-2000, the terrorist attacks on the United States in September 2001, two more typhoons in 2002, and the SARS epidemic in 2003 caused further setbacks in the tourism sector. However, in 2004, with the economic recovery in Japan and a resulting increase in Japanese tourists—which make up the bulk of foreign visitors—tourism on the island increased to about 100,000 arrivals per month, according to Guam’s Visitors Bureau. Although the number of active-duty military personnel in Guam is currently increasing, the island’s economy is vulnerable to policy changes regarding the U.S. military presence. Even though military personnel in Guam remained relatively stable from 1978 to 1992, averaging around 8,400, it declined by about 60 percent between 1992 and 2002, according to DOD. A 2003 economic report states that this decline in the numbers of military personnel may have contributed to Guam’s GDP shrinking by as much as 25 to 35 percent over the same period. Military spending, aimed primarily at repairing aging facilities and those damaged by typhoons, rose in 2004. In addition, DOD, in October 2005, announced its plans to transfer 7,000 Marines from Okinawa, Japan, to Guam over the next 6 years, a move that would more than triple the number of military personnel and raise the amount of DOD’s spending in the insular area. With several sources of revenue, primarily tourism, petroleum refining, and international business and financial services, USVI has a more diversified economy than American Samoa, CNMI, or Guam. Tourism accounts for more than one half of USVI’s income and, according to 2002 data from the USVI Bureau of Economic Research, over 20 percent of USVI employment. Exports of refined petroleum, reaching $4.8 billion in 2003, made up almost 90 percent of USVI’s total exports. Companies selling international services benefit from a special tax incentive program established by the USVI government in 2001. They accounted for about 29 percent of all USVI corporate and individual income receipts in 2003, but less than 2 percent of USVI employment. While it is diversified, USVI’s economy faces several challenges. First, recent U.S. tax law changes may negatively affect businesses operating in the insular area. Second, the tourism sector, which experienced several setbacks in 2001 through 2004, may be experiencing increased volatility as a result of local tourism trends and other factors. As a result of tax changes that ensued from the American Jobs Creation Act of 2004 (AJCA), a growing number of U.S. businesses are projected to suspend operations in USVI, thus reducing local government revenues and jobs. U.S. businesses operating in USVI calculate their income under a coordinated U.S. and USVI income tax policy, but pay their taxes exclusively to the USVI government, if certain requirements are met. These coordinated rules allow the USVI government to reduce the amount of taxes payable to the USVI government provided the businesses are bona fide USVI residents whose income is derived from sources within USVI or is effectively connected with the conduct of a trade or business in USVI. For example, qualifying businesses receive a 90 percent exemption from USVI income taxes and a 100 percent exemption from property and gross receipts taxes under this program operated by USVI’s Economic Development Commission (EDC). Such provisions are designed to encourage economic development in the insular area. Effective January 2005, however, AJCA imposed stricter requirements on U.S. businesses for establishing residency and limited the types of income eligible for the program’s tax exemptions, which will likely reduce the tax incentives for U.S. businesses operating in USVI. Security concerns and natural disasters have affected USVI’s tourism industry in the past 5 years. The total number of visitors to USVI declined after the terrorist attacks of September 11, 2001, on the United States, although in 2004 a record number of tourists—2.6 million—visited the islands, according to the USVI Bureau of Economic Research. Three- quarters of these visitors in 2004 were cruise passengers and one-quarter were overnight visitors. According to an OIA official, cruise ship visitors are increasingly affected by problems associated with crime, especially in St. Croix. Finally, the danger of hurricanes threatens USVI’s tourist industry each year, imposing significant costs. In the last few years, DOI has organized a number of initiatives, such as conferences in the United States and business opportunity missions to the four insular areas, to attract American businesses to these insular areas. The main goal of these efforts is to facilitate interaction and the exchange of information between U.S. firms and top government and business officials from the insular areas, and to spur new investment in a variety of industries. OIA recognizes that the natural economic partners of the Pacific insular areas are neighboring Asian and Pacific countries. However, OIA does not have a foreign affairs component that could actively promote economic relations between the insular areas and foreign countries in the region. Further, OIA believes it needs to promote partnership with U.S.-based firms before foreign ones. In 2003, a 1-day Secretary’s Investment Development Conference in Washington, D.C. attracted approximately 500 participants, while the second 2-day Secretary’s Conference on Business Opportunities in the Islands in 2004 drew over 1,200 participants to Los Angeles. The 2004 conference had 248 attendees from the four insular areas. About half of the participants from USVI, Guam, and American Samoa came from government. More than 80 percent of CNMI’s participants were from government. The largest number of participants from the U.S. mainland came from California and Hawaii with a large majority from the private sector, but 26 other states and the District of Columbia were also represented. Individuals from the People’s Republic of China, the Philippines, and Australia took part as well. In addition to the conferences, OIA organized three trade missions in the past year. Between 11 and 14 U.S. companies, both small and large, participated in each of these missions. OIA notes that many mission participants from the mainland did return to the insular areas for follow-up visits. According to OIA, several projects and business deals resulted from contacts made at conferences and missions. For example, OIA indicates that a California-based company is developing a nurse-training facility in CNMI and an entrepreneur from southern California started a software company in American Samoa. Innovative projects such as setting up a production/mass mailing facility in CNMI aimed at the Japanese market are reported to be underway. Although the list does not include new large business enterprises with significant employment impact, it appears that OIA’s initiatives have brought new firms and jobs to the insular areas, albeit on a modest scale. While some of these business activities may have taken place anyway, the OIA conferences and missions seem to have helped create linkages and joint projects between the business communities in the mainland and in the insular areas. Some of the new firms may just be displacing local ones or are interested in selling products and services rather than investing; however, others are likely to benefit the insular areas’ economies by building local capacity and increasing competition and productivity if investments are realized. Many business deals are apparently still in the planning stages, with companies expressing interest, holding talks, and doing preliminary work. Whether and to what extent OIA’s conferences and missions have contributed to stronger economies in the insular areas is difficult to discern because OIA does not carry out formal impact evaluations of its conferences and missions. It does obtain some feedback through informal surveys conducted with participants. But OIA would benefit from an in- depth analysis of how effective its initiatives are in attracting investment to the islands. Further, OIA could, by learning the extent to which U.S. firms are partnering with foreign investors already operating in the insular areas, discover further opportunities for partnership. For example, many Asian-owned businesses are currently contributing entrepreneurial skills and capital: many garment factories in CNMI and one of the two canneries in American Samoa are Asian-owned. Much of the insular areas’ economic development may be dependent on relationships with Asian companies, yet OIA does not actively seek to reach firms outside of the U.S. mainland. With the exception of American Samoa, the fiscal condition of the insular area governments steadily weakened from fiscal year 2001 through fiscal year 2004, the most recent year for which audited financial statements were available for all four insular areas. In CNMI and Guam, the fund balance of total governmental funds declined as government spending rose faster than revenues. CNMI’s net assets at fiscal year-end declined for fiscal years 2001-2004. The USVI government maintained positive balances of total government funds and reduced its negative balance of net assets by increased borrowing during the period. American Samoa showed an increase in government funds until fiscal year 2004, due to 2 years of strong surpluses of revenues over expenditures, stemming from an insurance settlement of claims from Hurricane Val, which hit the insular area in 1991. In fiscal year 2004, the increases in government funds reversed, although it is not yet known if this is a new trend. American Samoa’s net assets increased during the entire 4 fiscal years. For fiscal years 2001 through 2003, American Samoa’s fund balance of total governmental funds increased steadily from a deficit of $23.1 million at the beginning of fiscal year 2001 to a positive $43.2 million at the end of fiscal year 2003 before dropping to $37.8 million in fiscal year 2004. From 2001 to 2003, total annual revenues rose by over $15 million, while annual spending fell by almost $12 million, contributing to significant surpluses for fiscal years 2002 and 2003. However, included in the revenues for 2002 and 2003 were proceeds attributable to an insurance settlement of claims from Hurricane Val. Without the receipt of these insurance proceeds, American Samoa’s spending would have exceeded its revenues for those years. In fiscal year 2004, the increases in government funds apparently reversed, although it is not yet known if this is a new trend. For fiscal year 2004, revenue fell $9 million while spending increased $22 million. As shown in table 4, net assets almost tripled to $211 million during fiscal years 2001 through 2004. In fiscal year 2002, American Samoa’s government revenues, including the U.S. federal government’s contributions, were higher as a share of GDP, 38 percent, than the revenues of any of the other three insular areas. The U.S. federal government also contributed a higher proportion of these revenues— 60 percent in fiscal year 2004. The financial data in table 4 were extracted from American Samoa’s audited financial statements, which received qualified opinions from the outside auditors. Therefore, these figures are subject to the limitations cited by the auditors in their opinions and to the material internal control weaknesses identified. These limitations and other accountability issues are discussed in a separate section of this report. Also, restatements of the financial statements may occur, so the numbers shown in table 4 may be different in subsequently issued single audit reports. CNMI’s total government funds balance declined from a positive $3.5 million at the beginning of 2001 to a deficit of $49.2 million by the end of 2004 as total government spending rose more rapidly than revenues, which, as shown in table 5, caused a decline in the government’s total net assets over the period. CNMI is distinct among the four insular areas in that it has been stable in terms of revenue per capita, although spending per capita has fluctuated. Like USVI, it receives a significantly lower proportion of its revenues from the federal government than do American Samoa or Guam. The financial data in table 5 were taken from the audited financial statements, which received qualified opinions from the outside auditors. Therefore, these figures are subject to the limitations cited by the auditors in their opinions and to the material internal control weaknesses identified. These limitations and other accountability issues are discussed in a separate section of this report. Also, restatements of the financial statements may occur, so the numbers shown in table 5 may be different in subsequently issued single audit reports. Guam’s total government funds balance declined from a positive of $74.4 million at the beginning of 2001 to a deficit of $198.7 million by the end of 2004 as total government spending rose more rapidly than revenues. Guam’s reported net assets at fiscal year-end also fell from the amount shown in fiscal year 2001, as shown in table 6. (The substantial drop in net assets for fiscal year 2002 reflected a correction of previously misstated amounts.) During fiscal year 2004, net assets increased, after decreases in fiscal years 2002 and 2003. The federal government has contributed a smaller proportion of Guam’s total revenues than it has for American Samoa, but larger proportions than for CNMI and USVI. The financial data in table 6 were taken from the audited financial statements, which received qualified opinions from the outside auditors. Therefore, these figures are subject to the limitations cited by the auditors in their opinions and to the material internal control weaknesses identified. These limitations and other accountability issues are discussed in a separate section of this report. Also, restatements of the financial statements may occur, so the numbers shown in table 6 may be different in subsequently issued single audit reports. For example, the figures shown for net assets as of the end of fiscal year 2004 and the change in net assets were restated in comparative information provided for fiscal year 2004 in Guam’s fiscal year 2005 single audit report. USVI’s balance of total government funds remained positive throughout the period and grew from $215.5 million at the beginning of 2001 to $463.7 million at the end of 2004. However, this growth was made possible only through increased government borrowing. Spending grew more rapidly than revenues during this period and exceeded revenues by $99.1 million in 2004. Although USVI’s negative net assets figures appear to have improved over the period, the trend is due to the recording of assets not previously recorded. At the end of fiscal year 2004, USVI still had a significant negative value for net government assets, as shown in table 7. The financial data in table 7 were taken from the audited financial statements, which received qualified opinions from the outside auditors. Therefore, these figures are subject to the limitations cited by the auditors in their opinions and to the material internal control weaknesses identified. These limitations and other accountability issues are discussed in a separate section of this report. Also, restatements of the financial statements may occur, so the numbers shown in table 7 may be different in subsequently issued single audit reports. The governments of the four U.S. insular areas have had long-standing financial accountability problems, including the late issuance of the reports required by the Single Audit Act, inability to achieve unqualified (“clean”) audit opinions on their financial statements, and numerous material weaknesses in internal controls over financial operations and compliance with laws and regulations governing federal grant awards. The findings in the single audit reports clearly point out that the insular area governments have lacked effective internal controls to provide reasonable assurance that transactions are properly recorded; assets are safeguarded from fraud, waste, abuse, and mismanagement; and federal funds are being expended in accordance with grant requirements. As a result, there has been limited accountability over the use of federal funds. Multiple agencies oversee the insular areas’ efforts to improve their financial accountability and several federal agencies have designated the insular areas as high-risk under the Grants Management Common Rule. Under the rule, federal grant awarding agencies may designate a grantee as high- risk if the grantee has a history of unsatisfactory performance, is not financially stable, has an inadequate management system, has not conformed to the terms and conditions of previous awards, or is otherwise not properly managing federal funds. OIA and DOI’s IG, other federal inspectors general, and local auditing authorities provide oversight and assistance to the insular area governments. For fiscal years 1997 through 2004, the insular areas did not submit their single audit reports to the FAC by the due date, which is generally no later than 9 months after the fiscal year end. As shown in table 8, American Samoa and Guam have improved on the timeliness of their audit reports since 1997. Although they were still unable to submit their single audit reports on time for fiscal year 2004, the last year of the review period for all four areas, American Samoa and Guam both submitted their fiscal year 2005 single audit reports to the FAC by the June 30, 2006, due date. The timeliness of CNMI and USVI governments’ single audit submissions did not improve for fiscal years 1997 through 2004. However, CNMI submitted its fiscal year 2005 single audit report to the FAC less than 1 month late. As of September 27, 2006, the USVI government had not submitted its fiscal year 2005 single audit report to the FAC. Single audits are a key control for the oversight and monitoring of the insular area governments’ use of federal awards. The late submission of single audit reports means that federal government agencies have information on the insular area governments’ accountability over federal funds that is not up to date and whose usefulness is therefore limited. Auditors are required by OMB Circular No. A-133 to provide opinions (or disclaimers of opinion, as appropriate) as to whether the (1) financial statements are presented fairly in all material respects in conformity with generally accepted accounting principles (GAAP) and (2) auditee complied with laws, regulations, and the provisions of contracts or grant agreements which could have a direct and material effect on each major federal program. When reporting on the fairness of the presentation of financial statements, auditors can issue an unqualified opinion, a qualified opinion, an adverse opinion, or a disclaimer of opinion. Auditors express an unqualified (“clean”) opinion on financial statements when they have determined, based on sufficient review work, that the financial statements are presented fairly in all material respects, in accordance with GAAP. Auditors render a qualified opinion when they identify one or more specific matters that impact the fair presentation of the financial statements. The effect of a specific matter on the auditors’ qualified opinion can be significant enough to reduce the usefulness of the financial statements. Adverse opinions are expressed on financial statements when the auditors have sufficiently definitive data to conclude that the financial statements are not fairly presented in conformity with GAAP. A disclaimer of opinion states that the auditor does not express an opinion on the financial statements. Auditors may decline to express an opinion due to scope or data limitations when they are unable to conclude about the fairness of the financial statements in conformity with GAAP. In accordance with OMB Circular No. A-133, auditors are required to determine and express an opinion as to whether the auditee has complied with laws, regulations, and the provisions of contracts or grant agreements that may have a direct and material effect on each of its major federal programs. Auditors are to identify the applicable compliance requirements to be tested and reported on in a single audit. OMB’s Compliance Supplement lists and describes the 14 types of compliance requirements and related audit objectives and suggested audit procedures that auditors should consider in single audits conducted in accordance with OMB Circular No. A-133. The four insular area governments have been unable to achieve unqualified (“clean”) audit opinions on their financial statements, receiving either disclaimers or qualified opinions on the financial statements issued for fiscal years 1997 through 2004 as shown in table 9. American Samoa has made progress in reducing the number of matters that caused the auditors to render qualified opinions on the financial statements, but, for fiscal year 2004, the auditors could not obtain sufficient information about the following items in the American Samoan primary government: (1) the amount of funds owed to or from the other funds—pooled cash; (2) the physical inventory records; and (3) the accuracy of the beginning fund balances. The auditors also could not obtain the information needed to attest to the fairness of the information presented for the discretely presented component units. Specifically, the auditors could not obtain the information needed concerning (1) the cost of property, plant, and equipment in accordance with U.S. generally accepted accounting principles and the operating revenues of the American Samoa Telecommunication Authority and (2) the financial position and activity of the American Samoa Medical Center Authority – Lyndon B. Johnson Tropical Medical Center. CNMI has also made progress in addressing the matters that resulted in the qualified opinions on its financial statements for fiscal years 2001 through 2003. However, the auditors identified the following issues in fiscal year 2004 as matters leading to the qualified audit opinion: (1) inadequacies in the accounting records regarding taxes receivable and receivables from agencies, advances, accounts payable, tax rebates payable, other liabilities and accruals, amounts owed to component units, and the reserve for continuing appropriations and (2) inadequacies in accounting records and internal controls regarding the capital assets of the Northern Marianas College, and in accounting records and internal controls in inventory, federal agencies receivables, utility plant, accounts payable, and obligations under capital lease of the Commonwealth Utilities Corporation. Guam has made progress in reducing the number of matters associated with the auditors’ qualified opinions rendered on the government’s financial statements for fiscal years 2001 through 2004. The auditors cited the following matters associated with its qualified opinion for fiscal year 2004: (1) inability to access tax-related balances, (2) lack of audited financial statements for Guam Memorial Hospital Authority, and (3) lack of audited financial statements for the Guam Visitors Bureau. Although USVI has made progress in addressing some of the matters that were previously cited as leading to the auditors’ qualified opinions, the auditors have identified new matters for fiscal year 2004. The auditor’s qualified opinion on the general fund, governmental activities, and discretely presented component units was due to the following: (1) lack of accounting records for corporate income tax receivables for tax year 2002 in the general fund and governmental activities, (2) failure to record a provision for landfill closure and postclosure costs in governmental activities, and (3) inability to determine whether capital assets and land held for sale by the Virgin Islands Housing Authority (VIHA) and the Virgin Islands Housing Finance Authority (VIHFA) were fairly stated. The auditors issued a disclaimer on the USVI government’s business-type activities because (1) the financial statements as of September 30, 2003, did not include a receivable for unemployment insurance contributions due to inadequate records; and (2) liability for Workers’ Compensation claims was not included. Auditors for the four insular areas rendered qualified opinions, disclaimers, or adverse opinions on the insular area governments’ compliance with the requirements for each major federal award program. When auditors identify instances of noncompliance, they are required to report whether the noncompliance could have a direct and material effect on a major federal program. The audit opinions rendered on the insular area governments’ compliance with the requirements for major federal programs for the fiscal years under review are shown in table 10. The large number and the significance of reported internal control weaknesses raise serious questions about the integrity and reliability of the insular area governments’ financial statements and their compliance with requirements of major federal programs. The auditors, in their reports on internal control over financial reporting and on compliance with federal requirements for major federal programs, disclosed many internal control weaknesses. The insular area governments’ 29 reported internal control material weaknesses and reportable conditions for fiscal year 2004 indicate a lack of sound internal control over financial reporting needed to provide adequate assurance that transactions are properly recorded, assets are properly safeguarded, and controls are adequate to prevent or detect fraud, waste, abuse, and mismanagement. Reportable conditions over financial reporting are matters that come to an auditors’ attention related to significant deficiencies in the design or operation of internal controls that could adversely affect the entity’s ability to produce financial statements that fairly represent the entity’s financial condition. Material weaknesses in financial reporting are reportable conditions in which the design or operation of internal controls does not reduce to a relatively low level the risk that misstatements caused by error or fraud—material in relation to the financial statements being audited—may occur and not be detected in a timely period by employees in the normal course of performing their duties. Table 11 shows the number of material weaknesses and reportable conditions for each of the four insular areas, for fiscal year 2004. The reported internal control weaknesses revealed serious deficiencies in internal controls over financial reporting. For example, auditors for the American Samoa government reported for fiscal years 2001 through 2004 that accountants and clerks doing the general accounting were not adequately trained and supervised. The auditors also reported that account reconciliations, journal entries, and other basic transactions were not adequately performed and summarized, a material weakness that casts doubt on the integrity and reliability of the financial information presented in the single audit report. Another internal control weakness reported by the auditors was that the government records had not been maintained in an organized manner due to a lack of formal procedures for the maintenance and storage of records. Due to this material internal control weakness, documentation may be misplaced, lost, or destroyed without being detected. One of the internal control weaknesses that the auditors reported for CNMI’s government for fiscal year 2004 involved liabilities recorded in the General Fund. Due to the lack of detailed subsidiary ledgers, the auditors could not determine the propriety of these account balances, and whether the negative balances in the accounts, as in prior years, also included prepaid items. The recording of prepaid items as expenditures will cause expenditures to be overstated and the related liabilities to be understated. One of the control activities mentioned in GAO’s Standards for Internal Control in the Federal Government is accurate and timely recording of transactions and events. This control activity is applicable to the entire process or life cycle of a transaction or event from the initiation and authorization of a transaction through its final classification in summary records. CNMI’s auditors also reported as an internal control weakness, in at least two of its single audit reports, a Commonwealth Health Center (CHC) receivable balance that represented accounts outstanding in excess of 120 days due to inadequate billing and collection procedures. According to the auditors, the effect of this weakness was a possible misstatement of CHC’s receivable balances, partially mitigated by a corresponding uncollectible account balance of the same amount. The auditors recommended that the uncollectible accounts be written off, and that the CHC implement procedures for processing all billings on a timely basis and for following up on aged accounts. In Guam, the lack of required physical inventories of government equipment and the lack of uniform maintenance procedures to keep equipment in good condition were cited as material weaknesses by auditors for fiscal years 2003 and 2004. The auditors also stated that the government of Guam did not perform a comprehensive inventory of its capital assets, including infrastructure. According to Guam’s single audit report for fiscal year 2004, the government was working to tag all of its equipment with bar code property identification labels so that it would be able to conduct a physical inventory. Another internal control weakness was reported in the accounts payable-trade account: accounts payable that had aged 2 or more years remained in the accounts payable listing while more current balances were liquidated. Moreover, the auditors reported that all nine of the general ledger liability accounts tested included invalid accruals. The auditors attributed these problems—which could result in a potential misstatement of accounts payable—to poor internal control over the filing of supporting documentation of recorded transactions. Unreconciled differences in the combined cash balances for some governmental funds for fiscal year 2004 were reported by the auditors. The auditors attributed these differences to the lack of timeliness of the performance of bank reconciliations, which does not appear to have been monitored—the effect being a misstatement of cash balances. GAO’s Standards for Internal Control in the Federal Government highlights reconciliation as a key control activity. Auditors for USVI reported that the reconciliations of all USVI government bank accounts as of September 30, 2003 (fiscal 2003 year-end) were not completed until June 2004. The auditors stated that performing timely and accurate reconciliation of bank accounts is a key control over cash receipts and disbursements, and that the lack of timely reconciliation of all bank accounts may result in errors or irregularities in cash transactions to not be promptly detected. USVI’s auditors attributed the failure to prepare timely bank reconciliations to a lack of established procedures. Auditors also reported this material weakness in the single audit report for fiscal year 2004 for USVI and stated that the reconciliations of all USVI government bank accounts as of September 30, 2004, were not completed until July and August of 2005. Auditors also found weaknesses in the government’s ability to quantify and record certain key financial activity, such as a workers’ compensation claims liability, due to the lack of complete and accurate financial data. During 2004, as in previous years, the government experienced delays in its year-end closing process and in the preparation of complete and accurate financial statements in accordance with GAAP. In numerous year-end closing entries that, in some instances, represented corrections to routine transactions that occurred throughout the year, auditors found their nature, timing, and extent indicative of weaknesses in controls over financial reporting. Auditors reported material weaknesses and reportable conditions in the insular area governments’ compliance with requirements for major federal programs and the internal controls intended to ensure compliance with these requirements. In the context of compliance, reportable conditions are matters that come to an auditor’s attention related to significant deficiencies in the design or operation of internal controls over compliance that could adversely affect the entity’s ability to operate a major federal program within the applicable requirements of laws, regulations, contracts, and grants. Material weaknesses in this context are reportable conditions in which internal controls do not reduce to a relatively low level the risk of noncompliance with applicable requirements of laws, regulations, contracts, and grants that would be material to the major federal program being audited and undetected in a timely way by employees in the normal course of performing their duties. As shown in table 12, auditors reported nine material weaknesses in compliance with requirements for major federal programs for the American Samoa government for fiscal year 2004. One of these weaknesses involved a receiving report that showed that an item purchased with 2004 grant funds was not received until August 31, 2005, the end of the 2005 grant year. The effect of this delay was that the government received and expended from the 2004 grant, but did not complete the transaction and receive the goods from the vendor until 1 year later. The auditors attributed this weakness to the vendor’s requirement of advance payment for this purchase and lack of follow up to determine whether the goods that had been paid for had been delivered. For fiscal year 2004, another reported internal control weakness in compliance with requirements for major federal programs involved delays in the completion of the single audit, which did not occur within 9 months of the fiscal year end, as required by the Single Audit Act. The auditors stated that the cause of the missed single audit due date was (1) a failure of the accounting system and (2) the lack of trained, qualified, and competent personnel. These two factors resulted in a delay in closing the accounting records. One of the two internal control weaknesses affecting compliance with major federal programs reported for CNMI’s government for fiscal year 2004 was the failure to record expenditures for the Medical Assistance Program when they were incurred. In one instance, the auditor identified expenditures for billings from service providers for services rendered in previous years. The auditors attributed this weakness to the lack of policies and procedures regarding the timely recognition of expenditures at the time services are rendered. The effect of this weakness is that expenditures reported to the grantor agency, the U.S. Department of Health and Human Services (HHS), are based on the paid date and not, as required, the service date. In addition, actual expenditures incurred during the year are not properly accrued and therefore, current year expenditures and unrecorded liabilities are understated. The other internal control weakness related to the lack of adherence to established policies and procedures regarding physical inventory counts of property and equipment and the lack of reconciliation between the Division of Procurement and Supply’s (P&S) master listing and the listings of several CNMI divisions and offices. For example, CNMI’s Emergency Management Office (EMO) provided a list of equipment acquired with Office of Domestic Preparedness grants, but the listing did not include the serial number or other identification of the equipment or its condition. Moreover, a physical inventory was not conducted in the past 2 years by either the EMO or P&S. As a result, CNMI’s government was not in compliance with federal property standards and its own property management policies and procedures. In prior-year single audits and the fiscal year 2004 report, Guam’s auditors stated that the government was in noncompliance with applicable procurement requirements. The auditor noted, in the fiscal year 2004 report, that there was insufficient documentation on file supporting the procurement for four of seven transactions tested related to a DOL grant. For two additional transactions, Guam’s Chief Procurement Officer determined that the lease of space from a vendor was an unauthorized procurement because the lease agreement had expired. The method of procurement, selection of contract type, contractor selection or rejection, and the basis for the contract price are to be included in the procurement records, according to applicable procurement requirements. The auditor attributed this weakness to a lack of internal control over compliance with applicable procurement requirements. Noncompliance with applicable procurement requirements was also noted for transactions related to U.S. Environmental Protection Agency and HHS grants. The auditors also reported that the government of Guam may have been noncompliant with earmarking requirements associated with an HHS block grant for maternal and child health services. According to federal law, 30 percent of the total grant payments must be used for preventive and primary care services for children, 30 percent must be used for services for children with special health care needs, and not more than 10 percent of the allotted funds can be used by a grantee for administrative expenses. The government of Guam did not provide the auditors with documents that demonstrated compliance with these requirements for its 2004 Maternal and Child Health Services Block Grant. The auditors reported that they could not determine whether the government of Guam was in compliance with these earmarking requirements due to weak internal control over recordkeeping. Auditors reported that for fiscal years 2003 and 2004, the USVI government failed to provide accurate, current, and complete disclosure of financially assisted activities as required by U.S. Department of Agriculture (USDA) grants. In one instance, auditors found that financial reports prepared by the USVI Department of Health for the Women, Infants, and Children (WIC) Program did not reconcile with the USVI government’s financial management system (FMS). The auditors identified the cause of this weakness to be due to current procedures, which do not require a reconciliation of WIC Program records with the FMS. This lack of reconciliation could result in incorrectly posted transactions going undetected and uncorrected and therefore also incorrect financial information being reported to USDA. The lack of reconciliation between the government’s records and its FMS was also noted as a weakness related to a DOL grant for unemployment insurance. In its fiscal year 2004 single audit report, the auditors noted that the USVI Department of Education did not fully comply with 12 of the 18 requirements for the second year of the compliance agreement with the U.S. Department of Education. For example, the auditors reported that the inventory management system, which was to be fully implemented by December 31, 2004, was not implemented by that date. According to the auditors, failure to fully comply with the compliance agreement by the specified deadlines was due to a lack of the necessary resources. The late submission of single audit reports combined with ongoing, significant audit findings, have been key reasons for the designation of the insular area governments as high-risk grantees by several federal agencies. Under the Grants Management Common Rule, federal awarding agencies may designate a grantee as high-risk if the grantee has a history of unsatisfactory performance, is not financially stable, has an inadequate management system, has not conformed to the terms and conditions of previous awards, or is otherwise not properly managing federal funds. Federal agencies that designate a grantee as high-risk may impose special conditions including (1) issuing funds on a reimbursement basis; (2) withholding authority to proceed to the next phase until receipt of evidence of acceptable performance within a given funding period; (3) requiring additional, more detailed financial reports; (4) requiring the grantee to obtain technical or management assistance; or (5) establishing additional prior approvals for expenditures of federal funds. Agencies, in carrying out their regulations associated with the Grants Management Common Rule, can place special conditions either at the agencywide level or at the individual program level. OIA designated the government of American Samoa as a high-risk grantee in June 2005, as GAO had recommended in its report on American Samoa’s accountability for key federal grants. In making this designation, OIA recognized that the government of American Samoa had made significant progress in improving its financial accountability, and stated that the high- risk designation was to encourage other federal agencies to support American Samoa’s fiscal reform process. OIA placed several special conditions on the American Samoan government, including the completion of single audits by the statutory deadline and having balanced budgets for 2 consecutive years—without considering nonrecurring windfalls such as insurance settlements. The American Samoa government or its agencies have also been designated as high-risk by the departments or components of USDA, Education, HHS, and the U.S. Department of Transportation (DOT). USDA’s Food and Nutrition Service (FNS) has also designated American Samoa as a high-risk grantee. According to a USDA official, GAO’s prior recommendation that DOI designate American Samoa as a high-risk grantee influenced the FNS decision in February 2006 to designate American Samoa as a high-risk grantee for three of its programs. Some of the reasons cited by FNS officials for the high-risk designation include delinquent audits, noncompliance with laws and regulations, failure to resolve audit findings or to follow up on review findings, incurring unallowable or questionable costs, and weak systems for monitoring the programs and managing program data. In a letter to the Governor of American Samoa, FNS officials also stated that they were concerned that other serious problems might exist but had not been identified due to weaknesses and inadequate controls described in the letter. FNS officials further stated that the additional requirements associated with a high-risk designation would help to determine whether other serious but unidentified problems exist. While the U.S. Department of Education initially designated American Samoa as a high-risk grantee in 2003 due to the lack of timely and complete single audits, American Samoa has now submitted its single audits through fiscal year 2005. The American Samoan government remains a high-risk grantee for the U.S. Department of Education due to continuing concerns about weaknesses and internal control issues identified in the single audits. One of HHS’s operating divisions, the Substance Abuse and Mental Health Services Administration (SAMHSA), designated American Samoa as a high-risk grantee due to the government’s delinquent single audits. The insular area remains a high-risk grantee of SAMHSA, due to several older audits that were late and audit issues identified in submitted single audit reports. SAMHSA also designated American Samoa’s Department of Human and Social Services as a high- risk grantee due to the lack of compliance of its financial management system with federal regulations. DOT’s Federal Motor Carrier Safety Administration (FMCSA) has considered American Samoa to be a high-risk grantee for its Motor Carrier Safety Assistance Program (MCSAP) due to past performance problems, although no formal designation was made in writing and no special conditions were imposed. DOT officials provided an example of a past performance problem for American Samoa: the insular area justified purchase of a vehicle for MCSAP purposes, but the vehicle was provided to the Governor’s office. Instead of a formal high-risk designation, FMCSA provided additional oversight and required American Samoa to submit additional supporting documentation for all progress and final vouchers. American Samoa cooperated voluntarily by submitting the documentation and accepting the disallowed costs. The U.S. Department of Education designated CNMI as a high-risk grantee in 2003 because CNMI’s Department of Education was unable to provide timely and complete single audits for 4 consecutive years. In September 2004, the U.S. Department of Education removed the high-risk designation based on site visits and the completion of the fiscal year 2003 single audit for CNMI with few audit findings. Guam was designated as a high-risk grantee by the U.S. Department of Education in 2003 because Guam’s Public School System was unable to provide timely and complete single audits for 5 consecutive years. As of October 27, 2006, Guam remained as a high-risk grantee for the U.S. Department of Education. Additional special conditions have been placed by U.S. Department of Education officials on its grants to Guam requiring them to demonstrate improved management stability and effective fiscal controls. DOT’s FMCSA has considered Guam to be a high-risk grantee for its MCSAP due to past performance problems, although no formal designation was made in writing and no special conditions were imposed. DOT officials provided an example of a past performance problem for Guam—two vehicle inspectors paid by MSCAP funds were accepting payments for themselves in exchange for inspection decals. Instead of a formal high-risk designation, FMCSA provided additional oversight and required Guam to submit an action plan detailing corrective actions. The government of Guam cooperated voluntarily by submitting the action plan and proof that the inspectors’ employment had been terminated. The U.S. Department of Housing and Urban Development (HUD) has designated the Guam Housing and Urban Renewal Authority (GHURA) as a high risk agency because of its poor performance under both the Public Housing Assessment System (PHAS) and Section Eight Management Assessment Program (SEMAP). HUD’s Real Estate Assessment Center sent staff to Guam in 2006 to perform a quality assurance review of the auditor and a report of its review is expected soon. A memorandum of agreement is being developed to set targets and strategies for improving GHUR’s performance. The U.S. Department of Education, HHS, and HUD have designated the USVI government (or its components) as a high-risk grantee. The USVI government was designated as a high-risk grantee by the U.S. Department of Education in 1999. Although USVI was already designated as a high-risk grantee, the U.S. Department of Education entered into a comprehensive 3-year compliance agreement with USVI on September 23, 2002, due to serious and recurring deficiencies in USVI’s administration of the U.S. Department of Education programs. In fiscal year 2005, U.S. Department of Education officials determined that the USVI government would be unable to meet all of the terms of the compliance agreement by its expiration on September 23, 2005. In a letter dated June 17, 2005, U.S. Department of Education notified the USVI government that, in accordance with the terms of the compliance agreement, it would apply special conditions to its grant awards, requiring the USVI government to procure the services of a third-party fiduciary to perform the financial management duties for all U.S. Department of Education grant awards made to USVI. As of August 25, 2006, all contract terms between the USVI government and the recommended third party fiduciary had been settled, the contract had been signed, and the fiduciary has begun work. The Centers for Disease Control and Prevention (CDC), a component of HHS, designated USVI’s Department of Health as a high-risk grantee in January 2006 due to the lack of compliance with financial management standards. According to the letter to USVI’s Department of Health, one of the criteria for removing the high-risk designation is the establishment of appropriate internal controls to safeguard federal funds. The Administration of Children and Families (ACF), another component of HHS, placed USVI’s Department of Human Services as a high-risk grantee in April 1997 for delinquent single audits. According to an April 9, 1997, letter, the USVI government had not submitted single audits, other than one received for the 2-year period beginning October 1, 1988, and ending September 30, 1990. Subsequent updates to the high-risk listing have referred to the USVI government’s chronically late single audits. In August 2003, HUD designated the Virgin Islands Housing Authority (VIHA) as a high-risk grantee, and shortly thereafter placed VIHA into receivership. VIHA had been under examination for several years due to its failure to submit balanced budgets, a violation of HUD financial reporting requirements, and the general deterioration of management operations. VIHA’s Board of Directors was unable to provide adequate oversight of housing authority programs, including the Section 8 program. VIHA also had failed to submit timely audited financial statements for fiscal years 2001 and 2002. VIHA’s failure to submit timely verifiable financial information had adversely affected HUD’s ability to verify that federal funds were being used properly and in accordance with program requirements and regulations. A preliminary review done by HUD indicated that VIHA was operating under a budget deficit of approximately $3.5 million. Moreover, HUD officials discovered that VIHA was improperly funding a Virgin Islands government nursing home for elderly residents in one of its public housing developments. VIHA was also cited for providing rent rebates of $3 million annually to public housing residents in violation of HUD regulations. In its audits of VIHA’s fiscal year 2001 and 2002 single audits, the independent public auditor found that VIHA had serious deficiencies in financial reporting, financial analysis, and financial management systems. For example, the auditor noted that VIHA maintained incompatible accounting systems that precluded effective recording and reporting processes. Therefore, VIHA’s accounting records did not reflect an accurate or complete accounting of the financial position and, in addition, VIHA was unable to track and identify expenditures of federal funds. According to HUD officials, serious fiscal irregularities and ineffective VIHA Board leadership, factors such as VIHA staff with insufficient skills, VIHA’s inability to adequately manage programs, and its failure to improve and correct other operational problems, all pointed to a breakdown in the management of VIHA. On August 1, 2003, HUD notified VIHA that it was in substantial default of Section 15 under the Annual Contributions Contract (ACC) for failure to produce reliable financial statements. Violations of Section 15 (A) of the ACC were based on the numerous deficiencies noted in the authority’s books and records identified by VIHA’s independent auditors and late submission of financial reports. All of these actions identified VIHA as a high-risk agency. On August 20, 2003, HUD imposed an administrative receivership, assuming VIHA’s decision-making authority and management by sending in a recovery team to stabilize the authority’s operations. As of August 15, 2006, VIHA was still in receivership. While HUD officials told us that no special conditions have been placed on VIHA, HUD will look for the following actions to be completed before ending the receivership: improvement in Public Housing Assessment System (PHAS) scores for a sustained period in the areas in which the authority was failing; evidence that VIHA has put in place an advisory board to begin taking management control of the authority; evidence that key personnel have been hired, such as an executive director, chief financial officer, and managers in areas such as procurement, maintenance, construction/development, information technology, occupancy, and resident services; evidence that the VIHA has established policies and procedures that conform to HUD requirements, staff has been trained in these policies and procedures, and these policies and procedures are being followed; timely and accurate submission of required HUD reports; and unqualified audit opinion on both the financial statements and compliance with OMB Circular No. A-133 for major programs. HUD is currently evaluating the conditions at VIHA and expects new PHAS scores in early 2007. All recent required HUD reports have been submitted by VIHA in a timely and accurate manner. In 2006, VIHA revised its procurement policy and, according to HUD officials, implemented the new policy successfully. VIHA has also instituted new financial internal controls and procedures to correct the financial oversight deficiencies that have been noted in the past. VIHA received an unqualified financial audit for fiscal year ending December 31, 2005. In November 2006, VIHA hired a new Chief Financial Officer with a background in housing authority finance. HUD and VIHA are considering hiring additional experienced permanent staff for the housing authority in 2007. Also, HUD and VIHA are currently evaluating additional changes to various policies and procedures in order to improve oversight and efficiency throughout the housing authority. DOI’s OIA and IG, other federal inspectors general, and local auditing authorities assist or oversee the insular areas’ efforts to improve their financial accountability. OIA monitors the progress of completion and issuance of the single audit reports as well as providing general technical assistance funds to provide training for insular area employees and funds to enhance financial management systems and processes. DOI’s IG has audit oversight responsibilities for federal funds in the insular areas. In addition, the IG evaluates the effectiveness of OIA programs. Each insular area’s cognizant agency for the single audit monitors the submissions of the insular area government’s single audit report for the insular area and considers extensions requested for submitting the report. The insular areas’ cognizant agencies for fiscal years 2001-2005 were DOI for American Samoa and CNMI, HHS for Guam, and USDA for USVI. According to an OMB official, DOI will be the cognizant agency for all four insular areas for the fiscal year 2006-2010 single audits. When the single audit report is completed, the Office of Inspector General of the cognizant agency reviews the report to determine whether it meets applicable reporting standards and the requirements of OMB Circular No. A-133 for implementing the Single Audit Act. The inspectors general of other federal grant-making agencies perform audits of the insular area governments’ implementation of federal programs to assess whether federal funds are used for intended purposes and effectively and efficiently. Local auditing authorities audit, assess, and analyze the insular area governments’ activities for improving accountability, effectiveness, and efficiency of government operations. Interagency groups, such as IGIA, and other less formal groups also have worked to improve the financial accountability of the insular areas. A key part of OIA’s mission is to promote sound financial management processes in the insular area governments. To accomplish this mission, OIA has increased its focus on bringing the insular area governments into compliance with the Single Audit Act. For example, OIA created an incentive for the insular areas to comply with the act by stating that an insular area cannot receive capital funding unless its government is in compliance with the act or has presented a plan, approved by OIA that is designed to bring the government into compliance by a certain date. In addition, OIA provides general technical assistance funds for training and other direct assistance, such as grants, to help the insular area governments comply with the act and to improve their financial management systems and environments. The Graduate School of the USDA has been working with OIA for over a decade through its Pacific Islands and Virgin Islands Training Initiatives (PITI and VITI) to provide training and technical assistance. In fiscal year 2004, OIA began a joint program with the Graduate School to address the long-standing problem of audit findings and resolutions that had not been addressed by the insular area governments. The USDA Graduate School also works with the Island Government Finance Officers Association (IGFOA) to promote improved financial management in the insular areas. Table 13 shows OIA funding of USDA Graduate School activities. In addition to funding the training and other services provided by the USDA Graduate School, OIA makes direct grants using its general technical assistance funds. Some of these grants are targeted at the resolution of specific financial management and reporting problems. OIA has staff members in headquarters and field representatives in American Samoa and CNMI who make site visits to the insular areas. According to an OIA official, the office does not use a standard framework to write up the results of these site visits, although staff members do make notes while they are visiting the insular area. Establishing a routine procedure of writing up the results of site visits in a standard framework would help ensure that (1) all staff members making site visits are consistent in their focus on overall accountability objectives and (2) OIA staff has a mechanism for recording and following up on the unique situations facing each of the insular area governments. DOI’s IG performs the functions and duties that were once the responsibility of government comptrollers for the four insular areas. In this role, the IG has audit oversight responsibilities for the insular areas. It is also responsible for reviewing and following up on single audits for American Samoa and CNMI due to its role as the cognizant agency for the two insular areas for the single audits for fiscal years 2001-2005. For fiscal years 2006-2010, DOI’s IG will be responsible for reviewing and following up on the single audits for all four insular areas because DOI will be the cognizant agency for all four. The IG also evaluates the effectiveness of OIA’s programs and has issued three reports in 2002 and 2003 that addressed the use of federal funds in the four insular areas. One of the reports, dated March 1, 2002, identified what the IG believed to be the top management challenges for the U.S. insular areas and compact states. The report included assessments for each of the insular areas regarding the following four challenges: (1) overall financial management, (2) internal audit capabilities, (3) audit resolution issues, and (4) areas for improvement. In its evaluation report of oversight and follow up on audit findings and recommendations related to the insular area governments’ use of federal funds provided by DOI, the IG stated that the single audit report findings were not sufficiently addressed, due to a lack of federal control over the funds and DOI’s lack of adequate audit follow-up procedures. Noting OIA’s lack of enforcement authority over subsidies and entitlement-type funding, the IG stated that OIA should increase its oversight of these findings by encouraging the insular areas to address them and to monitor the implementation of corrective actions. In September 2003, the IG issued a report about grants OIA administers for the insular areas. The IG reported that OIA had properly processed awards and distributed grant funds, but needed to improve the control process used to monitor grants. In accordance with the Reports Consolidation Act of 2000, DOI’s IG also submits annual summaries of issues that it has determined to be the most significant management and performance challenges facing the department. One of the challenges the IG listed, in DOI’s fiscal year 2005 performance and accountability report, related to the insular areas. The IG noted in describing this challenge that these governments have long- standing financial and program management deficiencies. The IG has also issued many audit reports covering issues on individual insular areas. Since January 2000, it has issued 2 audit reports on American Samoa, 1 on CNMI, 8 on Guam, and 29 relating to the government of USVI. The citations for these reports are in appendix III. Inspectors general of other federal agencies that provide grants also conduct audits and evaluations on issues related to the insular areas’ use of awarded funds. The U.S. Department of Education’s IG has recently issued several reports—including reports on the USVI government’s administration of funds under Title IV of the Higher Education Act and grant funds for the Infants and Toddlers program—as well as the previously mentioned report on the USVI government’s lack of progress in meeting the terms of the compliance agreement. In addition to U.S. federal government audit organizations, each of the four insular areas has its own local auditing authorities. The USVI has its Office of Inspector General; Guam and CNMI, the Offices of the Public Auditor; and American Samoa, the Territorial Audit Office. All four of these audit authorities have the authority to review their governments’ use of federal grant funds. These audit authorities also determine whether government operations are efficient and effective and government assets are properly safeguarded and protected from fraud, waste, abuse, and mismanagement. All of these local audit authorities are members of the Association of Pacific Islands Public Auditors (APIPA), formed in January 1988 through a memorandum of understanding (MOU) executed by the heads of the audit organizations of five Pacific island nations. APIPA was formed to achieve several objectives, including (1) the establishment of an organized body to promote efficiency and accountability in the use of public resources of emerging nations of the Pacific and (2) sponsorship of auditing and accounting training workshops. APIPA has an annual conference to provide continuing education for its members. While multiple entities oversee the insular areas’ efforts to improve their financial accountability, in 1999 and 2003 the White House recognized the need to improve coordination of federal programs as they relate to insular areas and established the Interagency Group on Insular Areas (IGIA) consisting of representatives from several federal agencies. This group is responsible for identifying issues that affect the insular areas and for making recommendations to the President and other appropriate officials regarding these issues. Executive agencies were to coordinate significant decisions or activities relating to the insular areas with the IGIA. The most recent meeting of the IGIA was in February 2006 to discuss ongoing issues, such as fiscal management, and work done during 2005 in the areas of economic and tax policy, infrastructure financing, and healthcare. We were unable to obtain information concerning the outcome of IGIA efforts. Furthermore, there appears to be limited joint monitoring or coordination of financial assistance programs and grants management across the many federal grant-making agencies as evident from discussions held with agency officials we contacted. With increased coordination, the federal agencies could collectively share key information, such as high-risk designations, and work with the insular area governments to substantially improve their financial accountability. Under the Single Audit Act and OMB Circular No. A-133, auditees, when the audit is completed, are to prepare corrective action plans to address each audit finding in the current year’s single audit report. Corrective actions are defined in OMB Circular No. A-133 as action taken by the auditee that (1) corrects identified deficiencies, (2) produces recommended improvements, or (3) demonstrates that audit findings are invalid or do not warrant action by the auditee. The corrective action plan should provide the names of the contact persons responsible for corrective actions, the corrective actions planned, and the anticipated completion date. In its corrective action plan for fiscal year 2004, American Samoa government managers acknowledged the auditor’s finding that there were significant failures in the operation of the internal control structure related to general accounting and grants administration. Management commented in its corrective action plan that 7 years had passed since the implementation of the new computer system and the hiring of new staff. According to the corrective action plan, new internal control policies and procedures have been implemented. In this same corrective action plan, American Samoa government managers stated that they disagree with the finding that government records have not been maintained in an organized manner due to the lack of formal procedures regarding the maintenance and storage of records. According to the plan, the American Samoan government has made progress in the Grants Division by assigning grants analysts to specific departments to work with the grants program administrator to ensure that expenditures are allowable under the program. In its corrective action plan for fiscal year 2004, CNMI officials responded to the auditor’s finding that due to the lack of detailed subsidiary ledgers, the auditors could not determine the propriety of two liability account balances and whether the negative balances in the accounts, as in prior years, also included prepaid items. CNMI government officials stated that the negative balances may not have been properly closed for prepaid items. According to the corrective action plan, balances are being reviewed and adjusted as needed and new procedures for receiving procurements were implemented, and reconciliation procedures will be developed. In its corrective action plan for the Commonwealth Health Center’s (CHC) receivable balance with accounts outstanding in excess of 120 days, management stated that they agreed with the findings, but management also asserted that it had made major progress in correcting the problems. According to management, the cause of the problem is a combination of the inefficiency of the present computer billing system, an inadequate number of staff in the Billing and Collection Office, nonpayment of bills by the Government Health Insurance program, and the inclusion of Medicaid expenditures beyond the annual cap as receivables. In its corrective action plan for fiscal year 2004, government of Guam officials responded to the auditor’s finding of the lack of the required physical inventories of equipment by reporting that GASB No. 34, Basic Financial Statements and Management’s Discussion and Analysis for State and Local Governments, was being adopted using a two-stage approach. The first stage is to record all capital assets such as buildings and infrastructure. The second stage is to compile all fixed asset records. For the findings related to noncompliance with procurement requirements, the government of Guam stated that GSA will continue to improve the processes and to uphold the integrity of the procurement activities of the government. In response to the auditors’ repeated findings about single audit compliance, the USVI government stated that it is committed to completing and submitting its single audit reports within 9 months after the end of the fiscal year in accordance with federal laws and regulations. However, the government plans to request and obtain a written extension from its cognizant agency if the audit cannot be completed within the 9-month deadline. For fiscal years 2003 and 2004, the auditor recommended that the USVI Department of Finance develop procedures to accelerate the bank reconciliation process and establish procedures that include the review and approval of the reconciliations by a member of management. The government responded that it will hire employees to assist with the reconciliation process, and it will change its policies and procedures for recording and handling deposits. At the 2006 IGFOA Conference held in May 2006, USVI government officials reported that with the implementation of a new Enterprise Resource Planning System, they expect timely reporting, reconciliations, information to decision makers, and completion of single audits, as well as a reduction or elimination of audit findings. American Samoa, CNMI, Guam, and USVI face daunting economic, fiscal, and financial accountability challenges. The viability of their economies depends on a few key industries. While Guam will benefit from DOD’s decision to reassign troops from Japan to Guam, changes in treaties, tax laws, and other external events have or will likely negatively affect the other insular areas’ key industries. OIA has a number of initiatives underway to promote economic development in the insular areas. OIA’s efforts in helping create linkages between the business communities in the U.S. states and the insular areas are key to helping meet some of these challenges. Nevertheless, the islands would benefit from formal periodic OIA evaluation of its conferences and business-opportunity missions, including assessments of the cost and benefit of its activities and the extent to which these efforts are creating partnerships with the economies of other nations. A healthy private sector can improve the insular areas’ fiscal condition by increasing local tax revenues. The fiscal condition of three of the four insular areas generally worsened during fiscal years 2001 to 2004, with the fourth—American Samoa—showing a more stable trend than the other insular areas. Efforts to meet formidable fiscal challenges and build strong economies in the insular areas are hindered by delayed and incomplete financial reporting that does not provide officials with the timely and complete information they need for effective decision making. Questions about the reliability and completeness of the reporting have prevented auditors from issuing unqualified, or “clean,” opinions on the island governments’ financial statements. Auditors also identified many weaknesses likely to have a material, detrimental effect on the insular area governments’ accountability over federal funds in their reviews of internal controls over financial reporting and compliance with major federal grant requirements. OIA officials monitor the insular area governments’ progress in submitting single audit reports, and OIA provides funding to improve financial management. Other agencies that provide funding for the insular areas provide their own oversight, such as their monitoring of entities with high- risk designations. Yet, progress has been slow and inconsistent, leaving the insular areas in current economic, fiscal, and financial difficulty. The benefit to the insular areas of past and current assistance is unclear, as is the way toward prosperity and fiscal stability. Federal agencies and the insular area governments have sponsored and participated in conferences, training sessions, and other programs to improve accountability, but knowing what has and hasn’t been effective and drawing the right lessons from this experience is hampered by a lack of formal evaluation and data collection, the diffusion of responsibility with little coordination between agencies, and no central access to information. The conscientious yet disparate efforts of many federal agencies now individually engaged in improving the insular areas’ economic development, fiscal stability, and financial accountability could make more efficient use of government and human resources. In a planned and well-coordinated effort, and with feedback mechanisms for continuing improvement of that effort, federal agencies can help the insular areas achieve the economic, fiscal, and financial conditions expected by nationals and citizens of a developed nation. We recommend that the Secretary of the Interior direct the Deputy Assistant Secretary for Insular Affairs to: Increase coordination activities with officials from other federal grant- making agencies on issues of common concern relating to the insular area governments, such as late single audit reports, high-risk designations, and deficiencies in financial management systems and practices. Conduct formal periodic evaluation of OIA’s conferences and business opportunities missions, assessing their impact on creating private sector jobs and increasing insular area income. Develop a framework for OIA employees to use in conducting site visits to help ensure objectives are achieved, to assure that relevant information is shared with the responsible officials, and to allow more efficient and effective monitoring of issues. Develop and implement procedures for formal evaluations of progress made by the insular areas to resolve accountability findings and set a time frame for achieving clean audit opinions. We received written comments on a draft of this report from DOI. In commenting on a draft of this report, DOI officials agreed with our conclusions and recommendations, stating that our recommendations are consistent with OIA’s top priorities and ongoing activities. DOI’s specific comments on each recommendation are summarized below. DOI officials agreed with our recommendation to increase coordination with officials from other federal grant-making agencies on issues of common concern. While DOI officials noted that it currently has processes to promote coordination with other federal agencies, additional coordination efforts are underway. Specifically, DOI officials stated that in fiscal year 2005, OIA began preparations for a conference to be held in June 2007 that will bring together officials from the federal grantor agencies and the insular areas, to coordinate efforts to address issues related to material findings identified in single audit reports and other financial management issues, including high-risk designations. We encourage OIA to utilize the planned conference to address accountability issues of common concern and use the results of the conference as a basis for regularly scheduled ongoing monitoring and followup on these issues. DOI officials commented that they agree with our recommendation that OIA conduct periodic evaluation of its conferences and business opportunities missions because such evaluation of all federal activities is worthwhile. DOI officials added that while these conferences and missions are the primary activities through which OIA pursues its top priority for the insular areas, the costs associated with these activities are only a fraction of a percent of OIA’s budget. Nevertheless, OIA supports evaluating these activities. DOI officials agreed with our recommendation that a framework be developed for OIA employees to use in conducting site visits to ensure objectives are achieved, assure that relevant information is shared with responsible officials, and to allow more effective monitoring of issues. In its comments, DOI officials referred to a form in its Financial Assistance Manual, that was modified during fiscal year 2006, to better ensure that the required grant and project information is included in the project file after each site visit. While inclusion of this information for individual grants or projects should be valuable, our recommendation envisions developing a broader framework that would include information beyond that dealing with individual OIA grants or projects to include information about each of the insular areas’ financial accountability environments. The information to be collected in this broader framework would include the status of required single audit reports, the progress of actions to resolve reported internal control weaknesses, and current needs for technical assistance, capacity building, and staff level expertise. This information should also be integrated into a comprehensive monitoring process. DOI officials also agreed with our recommendation that OIA develop and implement procedures for formal evaluations of progress made by the insular areas to resolve accountability findings and set a time frame for achieving clean audit opinions. In its comments, DOI officials noted that it has a formal process for monitoring and tracking the insular areas’ resolution of audit findings in place. DOI officials also indicated that they will consider establishing a timetable for achieving unqualified (“clean”) audit opinions after the insular areas have had sufficient time to fully implement corrective actions to resolve material findings identified in the fiscal year 2004 and 2005 single audits. While these actions directed at improved monitoring and resolution of audit findings are a step in the right direction, they do not specifically address the broader accountability issues highlighted in our draft report. In this regard, the inability of the insular areas to achieve unqualified audit opinions over a number of years indicates the need for more attention and formal evaluation of progress toward to resolving accountability problems as called for by our recommendation in this area. In addition to providing copies of this report to your office, we will send copies of this report to other appropriate committees. We will also provide copies of this report to interested Congressional Committees and to the Secretary of the Interior as well as to the governors and delegates of the insular areas. We will also make copies available to other interested parties upon request. 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 regarding this report, please contact Jeanette Franzel, Director, Financial Management and Assurance at (202)512-9471 or [email protected], or David Gootnick, Director, International Affairs and Trade at (202)512-4128 or [email protected]. 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 V. Appendix I: Matters Leading to Qualified Audit Opinions Unable to verify the accuracy of the due to/from other funds—pooled cash due to the lack of reliance on the internal control system. Unable to verify the amount due from other governments and advances from grantors of the Special Revenue Fund due to the condition of the insular area’s records. Unable to confirm the $182,320 due from American Samoa Medical Center Authority—Lyndon B. Johnson Tropical Medical Center (Medical Center) since another auditor disclaimed their opinion on the Medical Center. Unable to verify the accuracy of the physical inventory records. Unable to ensure the physical presence and cost of recorded fixed assets and the records were incomplete. Unable to obtain sufficient audit evidence to determine if bank overdrafts represented held checks (accounts payable) or actual overdrafts. No adjustments had been made to accounts payable. Unable to obtain and test detailed schedules of the immigration deposits. Unable to obtain from the Territory’s Attorney General an adequate discussion, evaluation, or estimation of pending or threatened litigation. Unable to obtain from the Attorney General any information on settlement negotiations with its former workers’ compensation carrier. Sufficient auditing procedures could not be performed on the compensated balances recorded as of September 30, 2001. In accordance with GASB 33, the insular area didn’t restate the beginning fund balance of the general fund for amounts that would have been deferred as of September 30, 2000. Unable to be satisfied as to the amounts due from other governments and advances from grantors of the Special Revenue Fund as of September 30, 2001, due to the conditions of the American Samoa Community College records. Unable to satisfy the validity of the amounts due from taxpayers due to the state of the insular area’s records. Accuracy of the beginning fund balance due to noted evidence of a failure of identified controls in preventing or detecting misstatements of accounting information and a lack of appropriate management oversight and review and approval of transactions. The insular area did not record a liability for workers’ compensation claims that occurred prior to 9/30/2003. Auditors disclaimed an opinion on the American Samoa Telecommunication Authority because the entity did not maintain accurate inventory records and was unable to reconcile the general ledger to the physical inventory, cost of PP&E was no longer available, and the account receivable subsidiary records include sufficient discrepancies causing the system to be unreliable. In the opinion of the American Samoa Telecommunication Authority’s auditor, PP&E not recorded at cost to conform with U.S. GAAP and the lack of evidence available to test the beginning of the year accounts receivable balance caused the auditors to be unable to form an opinion on the amount of operating revenues. Auditors disclaimed an opinion on the American Samoa Medical Center Authority—Lyndon B. Johnson Tropical Medical Center because the entity could not locate documentation supporting accounting records and auditors were unable to satisfy themselves regarding inventory quantities. The financial statements of the Medical Center were not audited. Inability to obtain response from CNMI’s Attorney General regarding litigation, claims, and assessments. Inability to determine the propriety of fixed assets and fund equity of the General Fixed Assets Account Group. Omission of the Northern Marianas College from the university and college fund type—Higher Education Fund. Omission of the Public School System from the component unit—School District. Omission of the Commonwealth Government Employees Credit Union from the component unit— Governmental Fund. Lack of recognition of certain tax revenues as nonexchange transactions. The propriety of receivables from federal agencies for the Fiduciary Fund Type—Agency Fund; and other receivables and accounts payable of the Northern Mariana Islands Government Health and Life Insurance Trust Fund. Unable to express an opinion on the General Long-Term Debt Account Group. Omission of the Commonwealth Utilities Corporation from the component units—Proprietary Funds. Inability to determine the propriety of receivables from federal and other agencies, advances, other liabilities and accruals, and reserve for continuing appropriations and their effect on the determination of revenues and expenditures for all governmental fund types. Inability to determine if the due to component units was fairly stated for all government funds due to inadequacies in the accounting records. Inadequacies in the accounting records regarding accounts payable. Inability to determine the propriety of inventory and capital assets of the Northern Marianas College. Inability to determine the propriety of taxes receivable. Inability to determine the propriety of inventory, due from grantor agencies, utility plant and obligations under capital lease of the Commonwealth Utilities Corporation. Inadequacies in the accounting records regarding tax rebates payable. Inadequacies in the accounting records regarding capital assets of the Northern Marianas College and inventory, federal agencies receivables, utility plant, accounts payable, and obligations under capital lease of the Commonwealth Utilities Corporation. Inability to access tax-related records or perform procedures as to the effectiveness of the systems tax-related balances. Incomplete inclusion of the Guam Department of Education within the general fund due to nonavailability of information from the Department. Incomplete presentation of the General Fixed Assets Account Group or incomplete presentation of capital assets. Accounting records inadequate to support capital assets amounts, net of accumulated depreciation. Incomplete presentation of the General Long-Term Debt Account Group. Lack of audited financial statements for the Tourist Attraction Fund, Territorial Highway Fund, the Port Authority of Guam, and the Guam Waterworks Authority. Lack of audited financial statements for or omission of the Guam Telephone Authority. Lack of audited financial statements for or omission of the Guam Memorial Hospital Authority. Omission of the Pension Trust Fund or lack of audited financial statements for the Government of Guam Retirement Fund. Omission of the Guam Council on the Arts and Humanities Agency, a Special Revenue Fund. Lack of audited financial statements for or omission of the Guam Community College. Lack of audited financial statements for or omission of the Guam Visitors Bureau. Omission of the Guam Rental Corporation. Lack of audited financial statements for or omission of the Guam Housing Corporation. Lack of audited financial statements for the Guam Economic Development and Commerce Authority. Inability to determine propriety of the General Fund continuing appropriations balance. Inability to determine propriety of the inventory balance for the State Agency Surplus, an Internal Service Fund—Proprietary Fund Type. Receivables recorded in the Solid Waste Management Fund and in the Federal Grant Assistance Fund were unsubstantiated. Absence of an accrual for the closure and postclosure costs of a solid waste landfill. Inability to determine the propriety of capital assets and related amounts for accumulated depreciation and depreciation expense. Not recording a provision for landfill closure and postclosure costs in governmental activities or general long-term debt account group or the effect of the exclusion of a provision on beginning net assets. Unable to obtain sufficient evidence that land held for sale (amounting to about $25 million) was fairly stated. Virgin Islands Lottery had not been audited for business-type activities. Omission of financial data of the Roy L. Schneider Hospital in the public benefit corporations column. Unable to determine the amount of cash on deposit with, and due from, the U.S. Virgin Islands Department of Finance as of September 30, 2001. Auditors of the Juan F. Luis Hospital were unable to satisfy themselves about management’s contention that the preautonomy accounts payable not recorded as a liability as of September 30, 2001, were the responsibility of the government. Omission of the general fixed assets account group. Not maintaining accounting records for income tax receivables stated at $87 million. Auditor of the VI Government Hospital and Health Facilities Corporation (Roy L. Schneider Hospital) was unable to satisfy themselves as to the propriety of certain transactions recorded in the statement of net assets. Auditor of the VI Housing Authority (VIHA) and VI Housing Finance Authority (VIHFA) financial statements, a discretely presented component unit, was unable to obtain sufficient evidence as to the propriety of the revenue and expenses reported by VIHA, or to determine whether capital assets were fairly stated. VIHA did not report an equity interest in a joint venture because it had not been able to determine its carrying value. Unable to determine the extent to which the unemployment insurance fund (a major fund) may have been affected by the exclusion of a receivable for unemployment insurance contributions due to inadequate records. Not maintaining accounting records for corporate income tax receivables related to tax year 2002 in the general fund and governmental activities. Unable to determine the extent to which the revenue, change in fund balance/net assets of the general fund and the governmental activities may have been affected by the exclusion of a receivable for corporate income taxes pertaining to tax year 2002 in the beginning net assets due to inadequate records. Government Employees’ Retirement System (GERS), a fiduciary component unit (pension trust fund), is not recording contributions pursuant to the Early Retirement Act of 1994, had asset valuation issues, and adjustments that may have been necessary to reflect certain balances with the USVI government’s Department of Finance. Unable to determine the effects of adjustments that might have been necessary if the other auditors had obtained sufficient audit evidence as to whether capital assets and land held for sale were fairly stated in the financial statements of VIHA and VIHFA, respectively. Omission of a liability for workers’ compensation claims from the basic financial statements. The American Samoan government has seen decreases in the number of material weaknesses and reportable conditions that auditors reported for internal control over financial reporting. The following table shows the numbers of material weaknesses and reportable conditions reported for internal control over reporting and compliance with requirements applicable to each major federal program, for fiscal years 2001-2004. In examining the internal controls the government of CNMI uses to provide reasonable assurance that it is properly recording financial transactions and safeguarding public funds, the auditors found 10 or more problems significant enough to warrant reporting. Most of these problems were material weaknesses in internal control over financial reporting. As shown in table 19, the auditors also reported numerous problems in compliance with the requirements for major federal programs. The numerous material weaknesses reported by Guam’s auditors reveal the lack of sound internal controls needed to ensure that (1) transactions are properly recorded, (2) assets are adequately safeguarded, and (3) federal funds are administered in accordance with the applicable requirements of laws, regulations, contracts, and grants. Table 20 shows the total number of findings from the financial statement audit as reported by the auditors on compliance with (1) internal controls over financial reporting and (2) with requirements applicable to each major federal program. USVI audit findings (material weaknesses and reportable conditions) for both internal controls over financial reporting and compliance with requirements for major federal programs ranged from a total of 31 to 61 for fiscal years 2001 through 2003, as shown in table 21. Audit Report, Assessment and Collection of Taxes, American Samoa Government. No. 2002-I-0003. Guam: November 15, 2001. Audit Report, U.S. Fish and Wildlife Service Federal Assistance Grants Administered by the American Samoa Government, Department of Marine and Wildlife Resources, from October 1, 2001, through September 30, 2003. No. R-GR-FWS-0013-2004. Reston, Va.: March 31, 2005. Audit Report, Saipan Harbor Improvement Project, Commonwealth Ports Authority, Commonwealth of the Northern Mariana Islands. No. 2003-I-0073. Washington, D.C.: September 30, 2003. Audit Report, U.S. Department of Defense Contract Funds, Department of Education, Government of Guam. No. 00-I-172. Washington, D.C.: January 10, 2000. Survey Report, Guam U.S. Passport Office, Government of Guam. No. 00- I-332. Washington, D.C.: April 14, 2000. Audit Report, Loan Programs, Guam Economic Development Authority, Government of Guam. No. 01-I-417. Guam: September 21, 2001. Audit Report, Qualifying Certificate Program, Guam Economic Development Authority, Government of Guam. No. 01-I-419. Guam: September 30, 2001. Audit Report, Bond Services, Lease Operations and Trust Fund Activities, Guam Economic Development Authority, Government of Guam. No. 2002-I-0016. Guam: March 28, 2002. Audit Report, Management of Federal Grants, Department of Mental Health and Substance Abuse, Government of Guam. No. 2002-I-0036. Guam: August 19, 2002. Audit Report, Guam Waterworks Authority, Government of Guam. No. 2003-I-0072. Washington, D.C.: September 30, 2003. Audit Report, U.S. Fish and Wildlife Service Federal Assistance Grants Administered by the Government of Guam, Department of Agriculture, Division of Aquatic and Wildlife Resources from October 1, 1999, to September 30, 2000. No. R-GR-FWS-0029-2004. Reston, Va.: March 4, 2004. Audit Report, Internal Controls over Cashier Operations, Government of the Virgin Islands. No. 00-I-166. Washington, D.C.: January 3, 2000. Audit Report, Administration of Federal Grants, University of the Virgin Islands. No. 00-I-216. Washington, D.C.: February 16, 2000. Audit Report, Head Start Program Grants, Department of Human Services, Government of the Virgin Islands. No. 00-I-499. Washington, D.C.: June 14, 2000. Audit Report, Low Income Housing Program Grants, Virgin Islands Housing Authority. No. 00-I-625. Washington, D.C.: August 24, 2000. Audit Report, Environmental Protection Agency Grants, Department of Public Works, Government of the Virgin Islands. No. 00-I-696. Washington, D.C.: September 2000. Audit Report, Administrative Functions, Legislature of the Virgin Islands. No. 01-I-107. Washington, D.C.: December 29, 2000. Audit Report, Administration and Collection of Excise Taxes, Bureau of Internal Revenue, Government of the Virgin Islands. No. 01-I-291. Washington, D.C.: March 30, 2001. Audit Report, Billing and Collection Functions, Virgin Islands Port Authority, Government of the Virgin Islands. No. 01-I-303. Washington, D.C.: March 30, 2001. Audit Report, Virgin Islands Lottery, Government of the Virgin Islands. No. 01-I-290. Washington, D.C.: May 11, 2001. Audit Report, Payroll Operations, Department of Education, Government of the Virgin Islands. No. 01-I-330. Washington, D.C.: May 14, 2001. Audit Report, Virgin Islands Fire Service, Government of the Virgin Islands. No. 2002-I-0001. (Virgin Islands: October 30, 2001). Audit Report, Job Training Partnership Act Programs, Department of Labor, Government of the Virgin Islands. No. 2002-I-0002. (Virgin Islands: November 7, 2001). Audit Report, Virgin Islands Housing Finance Authority, Government of the Virgin Islands. No. 2002-I-0009. Virgin Islands: December 31, 2001. Audit Report, Administrative Functions, Virgin Islands Police Department, Government of the Virgin Islands. No. 2002-I-0010. Virgin Islands: February 13, 2002. Audit Report, Federal Highway Grants, Department of Public Works, Government of the Virgin Islands. No. 2002-I-0042. Virgin Islands: August 16, 2002. Audit Report, Grants for the Construction of Health Care Facilities, Department of Health, Government of the Virgin Islands. No. 2002-I-0043. Virgin Islands: September 20, 2002. Audit Report, Professional Service Contracts, Government of the Virgin Islands. No. 2002-I-0046. Virgin Islands: September 30, 2002. Audit Report, Public Finance Authority, Government of the Virgin Islands. No. 2003-I-0002. Washington, D.C.: November 22, 2002. Audit Report, Compliance with the Memorandum of Understanding Between the Governor of the Virgin Islands and the Secretary of the Interior. No. 2003-I-0003. Virgin Islands: November 27, 2002. Audit Report, Grant for Solid Waste and Wastewater Disposal Projects, Department of Public Works, Government of the Virgin Islands. No. 2003- I-0012. Herndon, Va.: March 31, 2003. Audit Report, Grant for Hazard Mitigation Projects, Virgin Islands Police Department, Government of the Virgin Islands. No. 2003-I-0031. Herndon, Va.: March 31, 2003. Audit Report, Grant for Hurricane Recovery Projects, Government of the Virgin Islands. No. 2003-I-0032. Herndon, Va.: March 31, 2003. Audit Report, Follow-up of Recommendations Relating to Internal Revenue Taxes, Bureau of Internal Revenue, Government of the Virgin Islands. No. 2003-I-0059. Herndon, Va.: August 29, 2003. Audit Report, Emergency Services Surcharge Collections by Innovative Telephone Corporation on Behalf of the Government of the Virgin Islands. No. 2003-I-0067. Herndon, Va.: September 26, 2003. Audit Report, Use of Official Credit Cards, Government of the Virgin Islands. No. V-IN-VIS-0104-2003. Herndon, Va.: August 27, 2004. Audit Report, Financial Arrangements Between the Government of the Virgin Islands and Financial Institutions. No. V-IN-VIS-0069-2004. Herndon, Va.: September 30, 2004. Audit Report, Procurement Practices, Virgin Islands Port Authority, Government of the Virgin Islands. No. V-IN-VIS-0001-2004. Washington, D.C.: March 28, 2005. Audit Report, Grants for Waste Disposal Projects, Department of Public Works, Government of the Virgin Islands. No. V-IN-VIS-0072-2004. Washington, D.C.: May 11, 2005. Audit Report, Indirect Cost Fund, Government of the Virgin Islands. No. V-IN-VIS-0110-2003. Washington, D.C.: June 22, 2005. The following individuals made important contributions to this report: Norma Samuel, Emil Friberg, Jr., James Wozny, Maxine Hattery, Gina Ross, Sandra Silzer, Seyda Wentworth, and Elwood White. | The U.S. insular areas of American Samoa, the Commonwealth of the Northern Mariana Islands (CNMI), Guam, and the U.S. Virgin Islands (USVI), face long-standing economic, fiscal, and financial accountability challenges. GAO was requested to identify and report on the (1) economic challenges facing each government, including the effect of changing tax and trade laws on their economies; (2) fiscal condition of each government; and (3) financial accountability of each government, including compliance with the Single Audit Act, which applies to nonfederal entities that receive $500,000 or more a year in federal funding. The governments of the U.S. insular areas of American Samoa, the Commonwealth of the Northern Mariana Islands, Guam, and the U.S. Virgin Islands face serious economic, fiscal, and financial accountability challenges. The economic challenges stem from dependence on a few key industries, scarce natural resources, small domestic markets, limited infrastructure, shortages of skilled labor, and reliance on federal grants to fund basic services. To help diversify and strengthen their economies, OIA sponsors conferences and missions to the areas to attract U.S. businesses; however, there has been little formal evaluation of these efforts. After fiscal year 2001, government spending in the CNMI, Guam, and USVI exceeded revenues through fiscal year 2004 (the most recent year for which there is complete data on all four areas). As a result, their fiscal conditions weakened further during this period. CNMI and USVI ended fiscal year 2004 with negative net government assets. For American Samoa the picture was mixed, with more stability than the other areas in the period 2001 through 2003, but a downturn in the balance of governmental funds by the end of fiscal year 2004. Efforts to meet formidable fiscal challenges and build strong economies are hindered by delayed and incomplete financial reporting that does not provide timely and complete information to management and oversight officials for decision making. The insular area governments have had long-standing financial accountability problems, including the late submission of required single audits, the receipt of disclaimer or qualified audit opinions, and the reporting of many serious internal control weaknesses. These problems have resulted in numerous federal agencies designating these governments as "high-risk" grantees. The Department of the Interior and the federal agencies are working to help these governments improve their financial accountability, but greater coordination among the agencies would increase the effectiveness of their efforts. |
On the basis of interviews with individuals involved with the Lake Research subcontract and reviews of available files at FCS, Global Exchange, and Lake Research, we have put together the following chronology. In mid-February 1995, the Under Secretary for Food, Nutrition and Consumer Services presented the idea for this work during a private dinner meeting with the president of Lake Research, Inc. As stated in the firm’s promotional information, the president of Lake Research is one of the Democratic party’s leading strategists and pollsters. According to the president of Lake Research, she and the Under Secretary discussed conducting focus group research on food stamp reform for a price of $25,000. The following day, the president of Lake Research spoke with the Under Secretary’s Executive Assistant to further discuss the specifics of the work. According to the Executive Assistant’s notes from that discussion, she talked with Lake Research about holding four focus groups, each one costing $5,000, three of which would be with “swing voters.” Two of these focus groups were to be held in Topeka, Kansas. The location for the other two focus groups was to be determined later. The president of Lake Research confirmed this characterization of the discussion and said that, with $5,000 in travel expenses, the total cost of the work would be $25,000. On February 27, 1995, following discussions with the Under Secretary and her Executive Assistant, the Administrator of FCS held a meeting with several of his top managers to discuss the Under Secretary’s desire to conduct focus group research and her desire to use Lake Research to do this work. According to the Administrator, one of the purposes of this meeting was to discuss how this work could be legally accomplished. The decision was made that conducting the work as a task order under the Global Exchange contract was the best vehicle for accomplishing the Under Secretary’s objective. This way, Lake Research could be used as a subcontractor and the work could be performed as expeditiously as possible, as desired by the Under Secretary. FCS officials concluded that a separate procurement action would have taken too long. Also, according to the president of Lake Research, this approach had the advantage to USDA of not drawing as much attention to the work because using Lake Research as a subcontractor to Global Exchange appeared to distance USDA from Lake Research. On March 2, 1995, FCS’ Acting Director of the Office of Analysis and Evaluation (OAE) signed a procurement request authorizing the use of food stamp research and evaluation money to fund this work. That same day, FCS officials informed Global Exchange of its desire to have Lake Research perform this work and asked whether Global Exchange would agree to having Lake Research serve as a subcontractor. Global Exchange agreed. For its work, Global Exchange was authorized a fee of $8,000. On March 7, 1995, USDA added the focus group work to its prime contract with Global Exchange, through an additional task order to its contract. That same day, Lake Research signed a subcontract agreement with Global Exchange. According to representatives of Global Exchange, they were not involved in the selection of Lake Research as a subcontractor and, prior to their discussions with FCS officials, had never heard of Lake Research. According to representatives from Global Exchange, they were not invited to attend several key meetings between USDA and Lake Research. On March 10, 1995, the Under Secretary met with Lake Research, Global Exchange, and FCS’ top management to provide Lake Research with guidance on the specific direction of the work to be performed. The contracting officer’s representative—the FCS official responsible for providing technical oversight of the contract—said she went to the Under Secretary’s office to attend the meeting but, upon arriving, was asked not to attend. On March 28, 1995, the Under Secretary and her Executive Assistant, without participation by Global Exchange or FCS contracting officials, met with Lake Research to discuss the questions that would be used in the focus groups. According to representatives of Lake Research, the Under Secretary and her Executive Assistant reviewed the questions in detail during this meeting and approved their use. Over the next 2 days, Lake Research used the USDA-approved questions during its focus group sessions in Topeka, Kansas, and Indianapolis, Indiana. On April 20, 1995, Lake Research presented its findings in a memorandum to the Under Secretary and in an accompanying presentation to the Under Secretary, her Executive Assistant, and FCS’ top managers. During this presentation, USDA officials told us that they did not raise questions about the methodology underlying the work by Lake Research or the way the results were presented, despite the fact that the memo used terms such as “voters,” “our side,” and “the opposition.” On May 1, 1995, Lake Research delivered a draft report to USDA, detailing the findings of the focus groups. During its review of the draft, USDA officials again did not question the methodology of the work underlying the report. However, they did ask Lake Research to delete terms such as “voters,” “our side,” and “the opposition,” which had also been included in the April 20, 1995, memo. On May 23, 1995, Lake Research delivered five copies of its final report to FCS’ Office of Analysis and Evaluation. From there, the report had only limited distribution: Two copies were sent to the Under Secretary, the remaining three copies were retained in FCS’ OAE. Although the purpose of the work—as set forth in the statement of work—was to support the mission of the food stamp program, and USDA used food stamp research and evaluation money to fund this work, no copies of Lake Research’s report were provided to the Deputy Administrator of the Food Stamp Program. USDA’s subcontract with Lake Research was handled outside normal contracting practices. According to the President of Lake Research and the notes of the Executive Assistant to the Under Secretary, the idea of using Lake Research to conduct this work, the nature of the work to be performed, and the price to be paid were worked out between the office of the Under Secretary and the president of Lake Research prior to any official contract negotiations and without any involvement of FCS’ contracting office. Likewise, the conduct of the work, once contracted for, was managed in an unusual fashion. Federal statute and decisional law requires that when an agency wishes to acquire, by contract, services that are outside the scope of an existing contract, it should conduct a separate procurement action. FCS did not obtain this focus group work through a separate procurement. Instead, the agency issued a task order under an existing support services contract with Global Exchange, which in turn subcontracted the work to Lake Research. As discussed earlier, the arrangement with Global Exchange was made to ensure that the work was done expeditiously and to distance USDA from Lake Research. In our opinion, however, the work performed by Lake Research was outside the scope of the Global Exchange contract and therefore should have been the subject of a separate procurement action. The Global Exchange contract was to provide support services to assist FCS in conducting a national nutrition campaign, including the planning and development of educational materials and communication efforts. Among the overall objectives to be served by the Global Exchange contract were “marketing research, strategic planning, and development of current and future nutrition education marketing efforts.” By contrast, the statement of work for Lake Research’s subcontract was to conduct focus group research to assess the reactions of the general public and food stamp recipients to USDA’s proposals to change the food stamp program. Therefore, in our opinion, the work conducted under Lake Research’s subcontract was materially different from the scope of work described in Global Exchange’s contract and therefore should have been the subject of a separate procurement action. This $25,000 procurement should have been competitively conducted under the simplified procedures for small purchases authorized by the Federal Property and Administrative Services Act of 1949, as amended, and set forth in the Federal Acquisition Regulation. For procurements of this size, these procedures generally require federal agencies to promote competition to the maximum extent practicable by soliciting quotations from at least three sources. Such a procedure would have enabled USDA to obtain these services in an expeditious manner, as desired by the Under Secretary. We also believe that USDA failed to comply with the federal requirement governing the conduct of focus groups and other public opinion surveys, as set forth in the Paperwork Reduction Act. That act requires agencies planning to collect information from 10 or more persons to obtain the review and approval of the Office of Management and Budget (OMB) before the effort is undertaken. Under FCS’ own internal guidance, as well as OMB’s regulation, one condition of this approval is that the proposed information collection effort be necessary for the performance of the agency’s functions. FCS did not seek or obtain OMB’s clearance. Its failure to do so deprived USDA and OMB clearance officials of the opportunity to independently review the need for and the propriety of the focus group work. The approach and methodology used in conducting this focus group research were inconsistent with achieving the desired purpose of the work as set forth in the contract documents—obtaining the general public’s and food stamp recipients’ perceptions of USDA’s reform initiatives for the Food Stamp Program. As is necessary in conducting any focus group research, USDA and Lake Research (1) established where the focus groups would be held, (2) identified who would be included in the discussions, (3) prepared the questions that would be asked, and (4) determined how the results would be reported. In each of these areas, though, USDA and Lake Research used methodological approaches that severely limited the work’s value in capturing the general public’s and food stamp recipients’ perceptions of USDA’s reform initiatives. With respect to the issue of site selection, the focus groups were limited to two locations that were chosen for reasons unrelated to the purpose of the subcontract. Lake Research held four focus groups in March 1995—two in Topeka, Kansas, and two in Indianapolis, Indiana. According to the President of Lake Research, these were not sites that her firm had recommended or—at least in the case of Topeka—had ever done work in. She said that the sites were selected by USDA—not for any methodological reasons—but because they were in states with farm constituencies and were the home states of key Members of the House and Senate Agriculture Committees. Likewise, in identifying participants to include in the focus groups, USDA and Lake Research did not seek individuals who were typical of the general public or food stamp recipients. Instead, Lake Research used a telephone screener questionnaire to select individuals with very specific profiles. Three of the four focus groups were with individuals who were not food stamp recipients. For these three focus groups, Lake Research sought to select individuals who were (1) white, (2) registered to vote and who had voted in the last presidential election, (3) neither strong Democrats nor strong Republicans, (4) without personal or familial connections to state or local government, and (5) between the ages of 30 and 65. According to the notes of the Under Secretary’s Executive Assistant, the intention of this screener was to ensure that the participants represented “swing voters.” The fourth focus group was with food stamp recipients. These individuals were to be (1) white, (2) between the ages of 30 and 65, (3) without personal or familial connections to state and local government, (4) neither strong Democrats nor strong Republicans, and (5) responsible for at least some of their household food shopping. In the implementation of the telephone screener, as well as the focus group sessions themselves, no mention was made that USDA was sponsoring this research. In conducting these focus groups, USDA and Lake Research prepared a structured set of questions that, in some cases, had little to do with reforming the Food Stamp Program. For example, the focus group moderator asked questions about “the way things are going in the country these days” and whether “things are better or worse today than they were 5 years ago.” Furthermore, some questions seemed inherently biased. For example, the moderator asked, “What if I told you that consumer watchdog groups like Public Voice have endorsed these [USDA’s] reforms which they say ensure nutritious food for America’s hungry families, but cut down on fraud. How does that make you feel?” In addition, USDA and Lake Research sought reactions to the Congress’s proposed plans for reform. A number of these questions discussed the Republican leadership’s proposals for food stamp reform. For example, one set of questions asked: “What do you think would happen if all USDA food and nutrition assistance programs were turned over to the states to administer? The Republican leadership in Congress calls this part of the Contract with America the Personal Responsibility Act. How do you feel about that? Do you think it will pass?” Some of these questions also seemed to attempt to elicit a negative response toward the proposals: “What if I told you that if the Personal Responsibility Act passed, federal funding for food and nutrition assistance would fall by more than $3 billion in 1996 and by nearly $27 billion over 5 years? What do you think? Who would this affect? Can that much be cut from administration and not hurt the participants of the program?” “What if I also told you that by reducing federal support for food assistance, the Personal Responsibility Act would lower retail food sales, reduce farm income and increase unemployment? What do you think? Do you believe it?” “What if I told you that if the programs were given to the states to run, then all food and nutrition assistance would be forced to compete for limited funds? States’ ability to deliver nutrition benefits would be subject to changing annual appropriation priorities. What do you think?” “What if I told you that there is a proposal in Congress to put a ceiling or a cap on how many people can be on the program at once? How do you feel about that?” “Now that you know a little more about the House plan, what do you think? Would you support this plan? What do you think life would be like for food stamp recipients if this passed?” Lake Research presented its findings in a meeting on April 20, 1995, to the Under Secretary, her Executive Assistant, and FCS’ top management. A Lake Research memo addressed to the Under Secretary, outlining the focus group findings, was also distributed during that meeting. This memo presented the focus group participants’ perceptions of USDA’s suggested reforms and their views on proposed name changes to the food stamp program. The memo also provided strategies on how USDA could promote its ideas to the public. Among other things, this memo contained the following statements: “We need to translate the popularity of WIC [The Special Supplemental Food Program for Women, Infants, and Children] and school lunch to the food stamp program and make people associate children with food stamps.” “Our side has a powerful message in protecting children from hunger. Voters truly believe that no child in America should go hungry.” “This is still a tough fight, particularly when the opposition combines food stamps with welfare. Voters have a very developed critique of welfare and adamantly want it reformed.” This same language appeared in Lake Research’s draft report, which was delivered to USDA on May 1, 1995. Following objections raised by FCS managers, terms such as “voters” and several politically oriented references were removed from the final report. Lake Research delivered its final report to USDA on May 23, 1995. As of April 30, 1996, the Deputy Administrator of the Food Stamp Program had not received a copy of this report. Given her responsibilities for administering the Food Stamp Program, we would have expected this report to have been provided to her. In closing, Mr. Chairman, we found that USDA did not comply with the Federal Acquisition Regulation and the Paperwork Reduction Act and used a flawed methodology that would not allow the contract’s stated purpose to be achieved. On the basis of these problems, we believe that USDA exercised questionable judgment in conducting virtually every aspect of this work. I would have concerns if—on the basis of the results of this research—USDA made changes to a program that affects millions of American citizens. Mr. Chairman, this completes my prepared statement. I would be pleased to respond to any questions you or Members of the Committee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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A recorded menu will provide information on how to obtain these lists. | GAO discussed contracting problems involving a Department of Agriculture (USDA) subcontract for surveying the general public's and food stamp recipients' views of food stamp reform initiatives. GAO noted that: (1) USDA did not use normal contracting practices in procuring the subcontracted services; (2) USDA conducted price and scope of work negotiations prior to official contract negotiations and bypassed the appropriate contracting office; (3) USDA should have conducted a separate competitive procurement for the services, since the work done by the subcontractor was outside the scope of work of the original contract; (4) USDA failed to obtain required approval from the Office of Management and Budget before conducting its survey; (5) the approach and methodology used in conducting the survey were inconsistent with achieving the desired purpose of the work; and (6) the subcontractor appeared to target areas and groups of political significance and asked leading questions to produce biased results. |
The six agencies whose evaluations we reviewed focus on foreign assistance to varying degrees. DOD, HHS, and USDA provide foreign assistance as part of their larger portfolios of programs, while MCC, State, and USAID focus exclusively on foreign affairs or foreign assistance. DOD’s GT&E program provides training, equipment, and small-scale military construction activities to partner nations to build their capacity and enable them to conduct counterterrorism operations or to support ongoing allied or coalition military or stability operations that benefit the national security interests of the United States. HHS’s CDC implements a portion of the President’s Emergency Plan for AIDS Relief (PEPFAR) programs under the direction of State’s Office of the U.S. Global AIDS Coordinator and Health Diplomacy. MCC, a U.S. government corporation, provides aid to developing countries that have demonstrated a commitment to ruling justly, encouraging economic freedom, and investing in people. MCC supplies this assistance to eligible countries primarily through 5-year compacts with the goal of reducing poverty by stimulating economic growth. State, the lead U.S. foreign affairs agency, implements programs that provide, for example, counternarcotics assistance; refugee assistance; and support for democracy, governance, and human rights. USAID, the lead U.S. foreign assistance agency, implements programs intended to both further America’s interests and improve lives in the developing world. USAID’s broad portfolio includes programs that address democracy and human rights, water and sanitation, food security, education, poverty, the environment, global health, and other areas. USDA’s Foreign Agricultural Service (FAS) administers two nonemergency food aid programs: (1) The Food for Progress program supports agricultural value chain development, expanding revenue and production capacity, and increasing incomes in food-insecure countries; (2) The McGovern-Dole International Food for Education and Child Nutrition program supports education and nutrition for schoolchildren, particularly girls, expectant mothers, and infants. Each of the six agencies has adopted evaluation guidance for the programs included in our review. DOD’s November 2012 Section 1206 Assessment Handbook serves as a guide to evaluation planners and implementers for conducting evaluations of DOD’s GT&E programs as required by federal law. The fiscal year 2012 National Defense Authorization Act (NDAA) required DOD, no later than 90 days after the end of each fiscal year, to submit to Congress a report including an assessment of the effectiveness of GT&E programs conducted that fiscal year in building the capacity of the recipient foreign country. The fiscal year 2015 NDAA maintained this requirement through 2020. DOD did not have agency-wide evaluation guidance for security cooperation at the time we performed our review but issued such guidance in January 2017. For PEPFAR programs, including those implemented by HHS, State’s Office of the U.S. Global AIDS Coordinator and Health Diplomacy issued the PEPFAR Evaluation Standards of Practice in January 2014 and an updated version (version 2) in September 2015. MCC’s May 2012 Policy for Monitoring and Evaluation of Compacts and Threshold Programs requires that compact M&E plans identify and describe the evaluations that will be conducted, key evaluation questions and methodologies, and data collection strategies. State issued its current evaluation policy and an additional guidance document for evaluations in January 2015 and issued a revised and updated version of the guidance in January 2016. USAID lays out its evaluation policies in its Automated Directives System (ADS). USAID issued a fully revised ADS 201, addressing evaluation guidance, planning, and implementation, in September 2016. USDA’s FAS evaluations are guided by its May 2013 Monitoring and Evaluation Policy, which requires both interim and final program evaluations. With the exception of HHS, the agencies we selected for our review generally rely on outside contractors to conduct evaluations. DOD, MCC, State, and USAID directly contract for third-party evaluation services. The HHS PEPFAR evaluations we reviewed were prepared (1) by CDC staff using existing program data; (2) by an implementing partner as part of the partner’s cooperative agreement; or (3) in one instance, under a separate agreement. USDA implementing partners procured the USDA evaluations whose costs we reviewed. The six agencies track evaluation costs to varying extents. DOD, MCC, and State procured the evaluations we reviewed through centrally managed contracts, and cost information for these evaluations was available through the program or agency evaluation office. HHS’s PEPFAR, USDA, and USAID evaluations were often procured and managed at the country, mission, or implementing partner level. Cost information was not centrally available and could be obtained only from each mission or implementing partner. Foreign assistance evaluations may vary in type, timing, and method. Two common types of evaluation are the following: Performance evaluations assess the extent to which a program is operating as was intended or the extent to which it achieves its outcome-oriented objectives. Performance evaluations often judge program effectiveness against criteria, such as progress against baselines, whether program goals were met, or whether expected targets were met. Net impact evaluations assess the net effect of a program by comparing program outcomes with an estimate of what would have happened in the program’s absence. Net impact evaluations use a variety of experimental and quasi-experimental designs, including randomized methods in which participants are assigned to separate control or treatment groups to isolate the program’s effect. Net impact evaluations have more complex methodologies than the other evaluation types. Agencies may conduct evaluations during or after the completion of a program. Interim or midterm evaluations are conducted while a program is in progress, and final evaluations are conducted after the program ends. Baseline evaluations are also sometimes conducted before a program begins as a basis for determining any effects of the program. Evaluations may use one or more methods to produce their results. For example, evaluations may use random or nonrandom sampling from the target population to select cases for inclusion in the study. Evaluations may also use one or more methods to collect data on the chosen indicators and measures—for example, structured or unstructured interviews, focus groups, surveys, direct observations, or collection and analysis of existing data. Each of these methods has potential benefits and limitations that an evaluator must consider in assessing the evaluation’s evidence as a basis for its conclusions and recommendations. Overall, about three quarters of all 2015 foreign aid evaluations from the six agencies we reviewed generally or partially met the quality criteria we identified. The remaining evaluations did not meet one or more of these criteria or provided insufficient information. While we generally found that evaluations met quality criteria related to design, implementation, and conclusions, we more often found limitations in implementation—including sampling methods, data collection, and analysis. In addition, we found that the independence of evaluators was not always clearly evident. While the quality of evaluations varied by agency, we identified shortcomings at all six of the selected agencies that could limit evaluation reliability and usefulness. By reviewing policies of federal agencies, international organizations, and evaluation organizations, and our prior reporting, we identified common characteristics of high-quality evaluations, from which we developed eight criteria for assessing evaluation quality. These quality criteria are associated with the (1) design, (2) implementation, and (3) conclusions of an evaluation, as follows. (See app. I for a full description of how we developed our evaluation criteria.) Evaluation questions are aligned with program goals. Performance indicators are appropriate for measuring progress against program goals. Design is appropriate for answering the evaluation questions. Target population and sampling method are appropriate, given the scope and nature of the evaluation questions. Data collection is appropriate for answering the evaluation questions. Data analysis is appropriate to answer the evaluation questions. Conclusions are supported by the available evidence. Recommendations and lessons learned are justified by the available evidence. Based on an assessment of agency evaluations against these criteria, we rated 73 percent of all evaluations as high quality (26 percent) or acceptable quality (47 percent), because they generally or partially met all applicable quality criteria. We rated the remaining 27 percent as lower quality because they either did not meet or did not provide sufficient information related to at least one applicable criterion. These evaluations may not provide sufficiently reliable evidence to inform agency program and budget decisions. Overall, we encountered more instances when evaluations did not provide sufficient information about a certain criterion than instances when evaluations did not meet a quality criterion at all. Table 1 summarizes our observations about the quality of evaluations at the six selected agencies in our review. The quality of evaluations varied by the type of quality criterion we applied. As figure 1 shows, many evaluations generally met the criteria related to the appropriateness of evaluation design, implementation, and conclusions. However, overall, evaluations generally met fewer criteria related to implementation, reflecting limitations in the way evidence was collected or analyzed. A relatively high percentage of evaluations generally met each of the criteria we used to assess the alignment of the study questions with the program goals, the appropriateness of the evaluation design for the study questions, and the use of indicators for measuring progress. Alignment of questions with program goals. Evaluation questions generally aligned with one or more of the evaluated program’s goals in more than 90 percent of the evaluations. Thus, evaluations were designed to provide useful information about program results. Appropriate evaluation design for the study questions. About 80 percent of the evaluations used a design that was generally appropriate for the study questions, and the remainder of the designs was at least partially appropriate. Appropriate use of indicators. Indicators for measuring progress were generally appropriate in about 80 percent of the evaluations. As a result, successes or failures identified by these evaluations are likely to be directly relevant to assessing achievement of the evaluated programs’ goals. We found more limitations in the implementation of evaluations than in their design. On average, about 60 percent of evaluations generally met each of the criteria related to this aspect of quality—sampling, data collection, and analysis. Limitations we identified revealed that conducting evaluations overseas can pose challenges for evaluators. For example, travel to remote areas with safety and security concerns may limit an evaluator’s ability to conduct appropriate sampling and collect primary data for the study. Also, insufficient local resources to implement certain methodologies, such as implementing survey instruments, or a lack of local administrative data on the study population may constitute additional obstacles to sampling and data collection. About 40 percent of evaluations had limitations in, or provided insufficient information about, their sampling methodology. If an evaluation does not clearly describe how sampling was conducted, it may raise questions about the quality of the evidence, including concerns regarding selection bias of respondents, sufficiency of the sample size for the findings, and the relevance of the evaluation’s findings and conclusions for the entire study population. Sampling methods were particularly problematic or unclear in evaluations that used nonrandom sampling. For evaluations that relied primarily or exclusively on testimonial evidence, the method for selecting participants for interviews or focus group discussions was sometimes inappropriate or unclear. For example, one evaluation we reviewed relied largely on interviews but did not describe the process used for selecting participants, and it indicated that the available list of potential participants was incomplete and inaccurate. Several evaluations provided insufficient information about the target population, other than identifying them as program beneficiaries, and included no discussion of how participants were selected for interviews, focus groups, or surveys. Limitations in Data Collection Methods About 40 percent of the evaluations had limitations in, or provided insufficient information about, their data collection methods. We identified a number of deficiencies in the data collection process, including a lack of documentation of data collection instruments (DCI), such as questionnaires or structured interview protocols. In cases where evidence was gathered through a DCI, some evaluations were unclear about how the instrument was designed and administered. For example, an evaluation of a program intended to increase access to mobile technologies and improve mothers’ health used a survey to gather data. However, the evaluation did not provide sufficient details about the survey, such as the questionnaire itself or the sampling strategy, for the reader to be able to determine the validity and reliability of the data collected. In addition, about half of the evaluations did not collect baseline data from which to calculate change after the program was implemented, and about half generally did not set targets, which makes an assessment of progress toward meeting the goals of the program difficult. For example, an evaluation of two community training programs in an Asian country identified the study question but did not collect baseline data and did not establish targets. Although some baseline data may have been gathered by the implementing partner, such information was not used for comparative purposes, making it impossible to assess the net effects of the program. Further, an estimated 60 percent of the evaluations used data collection procedures that only partially ensured the reliability of the data, or there was not sufficient information to assess data reliability. For example, an evaluation of a small business program in Latin America acknowledged numerous data quality problems, including serious attrition among the group used as a comparison group to program participants. Such limitations raise questions about the strength of the conclusions. About 40 percent of evaluations did not demonstrate that they had conducted appropriate data analysis. These evaluations often did not specify the analysis methods for each question, such as how interview responses were analyzed. For example, an evaluation of a program serving women living with HIV analyzed data through a content analysis but did not clearly explain the categories created for the analysis or the numbers of individual responses that fell into each category. The lack of clarity in the analysis makes it difficult for the reader to determine whether the findings from this program have broader applicability. Several evaluations relied on focus group discussions but analyzed and reported the percentages of informants expressing the stated views in ways that did not appropriately account for the potential influence of other focus group members on informants’ responses. Evaluations that used some quantitative data analysis also had certain shortcomings. For example, an evaluation reported a statistically significant change from baseline but did not include a discussion of the type of statistical test that supported this result. Finally, while about 90 percent of the evaluations assessed processes such as program implementation, about half of those evaluations did not establish any criteria, such as evaluation plans, budgets, timeframes, and targets. Without such benchmarks, it is difficult to define what constituted success for the evaluated program. The majority of evaluations generally met each of our criteria related to conclusions. These evaluations considered the strengths and limitations of the available evidence from the evaluation’s design and implementation and included conclusions that were generally supported and recommendations that were generally justified. Conclusions supported by the available evidence. About 70 percent of the evaluations had conclusions that were generally supported by the evidence, and nearly all of the evaluations had conclusions that were partially supported. This indicates that these evaluations did not reach beyond what was supported by the evidence and justified given the limitations. Recommendations and lessons learned justified by the available evidence. About 75 percent of evaluations with recommendations included evidence that generally supported the recommendations, and all evaluations with recommendations included evidence that at least partially supported them. This indicates that the collected evidence justified the follow-up steps the evaluations recommended. Our analysis found that, in addition to meeting the eight criteria to varying extents, the evaluations did not always provide documentation of the evaluator’s independence and whether there were any potential conflicts of interest. In instances where an evaluation was not conducted by a third party, a statement about conflicts of interest may be especially important to forestall any potential concerns about the evaluator’s impartiality. In all, about 80 percent of the agency evaluations documented that they were conducted by third-party evaluators, while about 13 percent were not conducted by a third-party evaluator, and another 6 percent did not indicate whether they were performed by a third-party evaluator. About 70 percent of HHS evaluations, about 30 percent of State evaluations, and about 40 percent of USAID evaluations included a conflict-of-interest statement, while no DOD, USDA, or MCC evaluations included such a statement. If an evaluation does not address the independence of the evaluation organization and of individual evaluators, questions could arise about the objectivity and reliability of the evaluation’s findings. As table 2 shows, the extent to which the evaluations met each quality criterion varied among the six agencies we reviewed. While our assessments revealed strengths in each agency’s evaluations, all six agencies’ evaluations also showed shortcomings in quality that could limit the agencies’ ability to ensure the effectiveness of foreign assistance based on evaluation results. Each applicable quality criterion was generally met by a majority of HHS, MCC, and USAID evaluations. However, evaluations for all three agencies scored generally lower on the criteria related to evaluation implementation—that is, the appropriateness of the target population and sampling, data collection, and data analysis. While most HHS, MCC, and USAID evaluations used generally appropriate sampling methods, our analysis showed that overall about half of the evaluations did not use appropriate nonrandom sampling techniques. In addition, we estimate that overall only about half of the three agencies’ evaluations generally used data collection methods that ensured data reliability, and only about 10 to 20 percent of USAID and HHS evaluations generally specified the key assumptions of the data analysis methods used. DOD’s GT&E program evaluations’ study questions met the first quality criterion—aligning with the program’s goals—but overall did not generally meet the other criteria. For example, we identified weaknesses in the implementation of the evaluations’ designs in terms of target population and sampling, data collection, and analysis. In particular, some evaluations did not describe the target population and did not discuss the methods the evaluators used for their selection of the equipment items they observed or the persons they interviewed. In addition, we found limited discussion about how the data were summarized and analyzed, incomplete baseline metrics, and a lack of targets. Without systematic selection of equipment to observe or respondents to interview, it is difficult to know whether the selections were justifiable and selected in a way that supports the intervention’s objectives and the conclusions drawn. Because of these implementation weaknesses as well as a lack of discussion of study limitations, we determined that the DOD GT&E program evaluations provided only partial support for their conclusions. State and USDA evaluations each met more than one quality criterion about half the time or less. About half or fewer of State evaluations generally met four criteria: appropriate indicators, appropriate target population and sampling, appropriate data collection, and appropriate data analysis. Regarding the appropriateness of chosen indicators, less than a third of State evaluations had indicators with baselines or established criteria such as plans or budgets, and almost none of the evaluations had indicators with targets against which progress could be assessed. In addition, about 80 percent of State evaluations used a data collection process that did not generally ensure the reliability of the data, and about half of the State evaluations generally did not specify data analysis methods for each question and the key assumptions used in the analysis. State officials noted that their programs are often implemented rapidly in response to specific events, making it difficult to design an evaluation for the program and to gather baseline data. We estimate that overall about half of USDA evaluations had generally appropriate target population and sampling, generally appropriate data analysis, or support for conclusions. Most foreign aid evaluations we reviewed cost less than $200,000, but costs ranged widely and varied by agency and type. We identified costs for MCC, State, USAID, and USDA final evaluations but could not obtain specific cost information for DOD’s GT&E and HHS’s PEPFAR evaluations because these programs used procurement methods for their evaluations that did not separately track evaluation costs. Evaluation costs were related to the evaluation’s methodology and location, and higher-cost evaluations tended to meet more evaluation quality criteria, though we also identified lower-cost evaluations that met all quality criteria. Costs for the majority of the foreign aid evaluations whose costs we reviewed were less than $200,000, but the costs ranged widely and varied by type of evaluation and agency. Of the 76 MCC, State, USAID, and USDA evaluations, 48 cost less than $200,000 while 6 cost more than $900,000. The costs of net impact evaluations ranged from approximately $36,100 to $2.2 million, with a median of $117,500. The costs of performance evaluations ranged from $9,600 to $902,100, with a median cost of $169,600. While the median cost was higher for the performance evaluations than the net impact evaluations, the net impact evaluations had a higher average cost than the performance evaluations; five of the six evaluations that cost more than $900,000 were net impact evaluations. Net impact evaluations that used randomized controlled trials were the most expensive evaluations in our sample, with a median cost of $926,600 compared with $154,700 for all other evaluations. Figure 2 shows the range of costs for the net impact and performance evaluations whose costs we reviewed. Of the four agencies’ evaluations whose costs we reviewed, MCC’s evaluations had the highest median cost, at $268,900, and USDA’s evaluations had the lowest median cost, at $87,900 (see table 3). Seven of 12 MCC evaluations cost over $200,000, including 3 net impact evaluations that cost over $900,000. In contrast, 8 of the 10 USDA evaluations were performance evaluations that cost less than $200,000. Most State evaluations were performance evaluations, which were generally more expensive than performance evaluations at the other agencies. USAID costs for impact and performance evaluations both ranged widely, and USAID’s net impact evaluations had a lower median cost than its performance evaluations. Costs for DOD’s GT&E evaluations and HHS’s PEPFAR evaluations were not specifically identifiable because they were not separately tracked by the agencies, contractors, or implementing partners. The contract for the DOD GT&E evaluations included many activities in addition to the evaluations and was not structured to show the cost of each activity. Additionally, according to DOD officials, neither DOD nor the contractor separately tracked the evaluation costs in their financial records. However, on the basis of the contractor’s estimate of contract time spent on 20 GT&E evaluations in fiscal years 2012 through 2015 (including the four evaluations in our sample), we estimated the total cost of these evaluations at approximately $1.1 million—an average of approximately $56,300 per evaluation. According to DOD officials, actual costs likely varied across evaluations due to differences in the size of the evaluation teams, the foreign country in which the evaluation took place, and the amount of time each team spent abroad. HHS’s PEPFAR programs typically conduct evaluations as part of larger cooperative agreements that are not structured to specify evaluation costs. We reviewed cost information for 10 HHS evaluations. We identified a specific cost—$15,400—for only one evaluation, which was conducted under a cooperative agreement specifically for the evaluation; the remaining nine evaluations were conducted as part of cooperative agreements that did not specify evaluation costs. Using budget documents and informed estimates from CDC staff and implementing partners, we estimated that the costs of these nine evaluations ranged from $25,100 to $356,200. Additionally, 11 of the 34 HHS evaluations in our sample had no external costs because they were conducted solely by HHS staff using existing datasets. CDC officials stated that CDC intends to track evaluation costs in the future. For example, according to HHS, upon continuation of a cooperative agreement, an implementing partner will be required to report on progress on its Evaluation and Performance Monitoring Plan, as well as on expenditures to date and plans and budgets for the following year. Our analysis found that data collection methods, frequency of data collection, evaluation duration, and evaluation location all affect evaluations’ cost. For example, evaluations that collected data by surveying program beneficiaries had a median cost of $202,500— approximately $74,000 higher than the median cost of those that did not—and evaluations that collected data repeatedly over time had a median cost of $194,500—approximately $44,500 higher than those that did not. Evaluations that took longer to perform also tended to be more expensive. Other factors that might influence costs include unstable locations and evaluations conducted at multiple sites. For example, a performance evaluation conducted in an unstable country cost $365,700 for 78 days of work, and a performance evaluation that conducted data collection in 12 countries cost $902,100. In addition, conducting an evaluation in multiple sites within the same country might increase evaluation costs. For example, a performance evaluation conducted in eight cities and seven states in India cost $407,500, including the cost of a midterm evaluation that was also conducted in multiple cities. These costs greatly exceeded the median costs for all evaluations. Our analysis found that high-quality evaluations tend to be more expensive, but well-designed lower-cost evaluations also met the criteria we identified for a high-quality evaluation. Overall, as table 4 shows, the median cost of high-quality evaluations (i.e., evaluations that met all quality criteria) was $137,800 more than the median cost of acceptable- quality evaluations (i.e., evaluations that partially or generally met all quality criteria) and $208,600 more than the median cost of lower-quality evaluations (i.e., evaluations that did not meet, or provided insufficient information for, one or more quality criteria). High-quality evaluations also tended to include factors associated with higher evaluation costs. For example, the most expensive evaluation in our sample cost $2.2 million and generally met all quality criteria. This net impact evaluation assessed multiple civil society and governance programs in an African country using different methodologies, including a randomized controlled trial, over 4 years and conducted two rounds of surveys of program beneficiaries. Another high-quality evaluation cost $1.4 million and took almost 4 years to complete; this evaluation conducted three surveys of program beneficiaries and used a quasi- experimental methodology to assess the net impacts of energy-efficient stoves in Asia. However, some lower-cost evaluations also met all of the quality criteria. Of the 15 high-quality evaluations for which we identified costs, 4 cost less than $150,000. We assessed DOD’s, HHS’s, MCC’s, State’s, USAID’s, and USDA’s use of six dissemination practices that federal, AEA, and other guidance indicate agencies should generally use to ensure effective dissemination of evaluations. We found that the agencies varied in their performance of these practices for the fiscal year 2015 evaluations we reviewed (see table 5). All except USDA generally made nonsensitive evaluations publicly available online. These nonsensitive evaluations could generally be located with the agencies’ website search engines. However, some agencies’ evaluations were not posted in a timely manner. Each of the agencies posted its sensitive evaluations internally for access by internal users. Only USAID included dissemination plans in most nonsensitive evaluations to help ensure their dissemination to potential users of the evaluation, but most of the other agencies now require such plans to be prepared for future evaluations. In addition to publicly posting the report, all of the agencies used other means to actively disseminate evaluation findings. Following these practices can help agencies ensure that their evaluation reports are accessible, timely, and useful to decision makers and other stakeholders. Every agency with nonsensitive evaluations requires public, online posting of nonsensitive evaluation documents, and all except USDA publicly posted all of the nonsensitive evaluations we reviewed on publicly accessible websites. Making evaluation reports publically available on their websites helps agencies share evaluation findings with partners, program beneficiaries, and the wider public and facilitates the incorporation of evaluation findings into program management decisions. We examined the agencies’ dissemination of 193 evaluations. The agencies did not require 22 evaluations to be publicly posted due to their sensitivity—all 4 DOD evaluations as well as 17 evaluations from State and 1 from USAID. Of the remaining 171 nonsensitive evaluations, we found that more than three-quarters (133) were publicly posted. USDA did not publicly post any of its 38 nonsensitive evaluations. According to USDA officials, the department is in the process of developing procedures for making these nonsensitive evaluations public, which would include reviewing the documents to ensure that they did not contain, for example, personally identifiable or proprietary information. Without posting all nonsensitive evaluations online, agencies cannot ensure that the evaluations’ findings reach intended audiences and are available to inform future program design or budget decisions. Most of the nonsensitive, publicly posted evaluations we reviewed could be located with a search engine on the agencies’ websites. Providing a search engine that potential evaluation users can employ to find the evaluation reports ensures that users can locate the information they seek, in a format that matches their expectations. Websites at three of the four agencies with publicly posted evaluations—MCC, State, and USAID—have search engines that enable users to find each specific evaluation. The PEPFAR website, which hosts evaluations of PEPFAR programs implemented by CDC and other agencies, has these evaluations listed in a spreadsheet locatable on the site. Many evaluations of PEPFAR programs implemented by CDC can also be found using a search engine at a separate website, called “CDC Stacks.” According to CDC, almost all of the evaluations that we reviewed were posted on the CDC Stacks website. The agency reported that it is in the process of adding the remaining CDC evaluations from fiscal year 2015 to this website. Some of the nonsensitive evaluations we reviewed were not posted on the agencies’ websites within required timeframes. Making evaluation reports accessible in a timely manner ensures that interested parties can access the findings of these evaluations in time to incorporate them into program management decisions. MCC and HHS did not post some evaluations within the timeframes they require, limiting stakeholders’ ability to make optimal use of the evaluation findings. We found that MCC did not post 10 of its 16 evaluations, as MCC requires, within 6 months after MCC received them, and it did not post 8 of these 10 evaluations until a year or more after MCC received them. According to MCC officials, the agency’s internal evaluation quality review process for evaluations, in which the agency reviews the document before releasing it to the public, has been a major factor in these delays. MCC officials reported that for some of the evaluations—for instance, those written in a language other than English—this process took significantly longer than usual. HHS did not post 11 HHS evaluations in the timeframe required by the agency. It did not post 6 of these 11 evaluations online within 90 days as required by PEPFAR. PEPFAR guidance requires that evaluations be posted within 90 days of completion, while HHS requires that evaluations be publicly posted within a year of their completion. One HHS official stated that the delay in the posting of these six evaluations was due to the conflicting policies. However, the remaining five evaluations were also not posted within the year as required by HHS/CDC. These five evaluations have since been posted online. Since evaluated conditions may change over time, not posting evaluations online within the required timeframe limits internal and external stakeholders’ access to current, actionable information. In comments on a draft of this report, CDC noted that, as of December 2016, CDC is providing guidance that all evaluations be posted online within 90 days, as required by PEPFAR. CDC published this guidance in January 2017. Of the three agencies with sensitive evaluations—DOD, State, and USAID—all have websites to make these evaluations available to internal stakeholders. While sensitive evaluations are not required to be made available to the public on an agency’s website, disseminating sensitive evaluation findings to the appropriate audience will facilitate their use. DOD, State, and USAID all reported that they have internal websites that can be used to post sensitive evaluations. In addition, State updated its policy for 2015 to require that State officials post a nonsensitive summary of sensitive evaluations on State’s public website. While USDA does not currently publicly post its evaluations, USDA reported that it makes these evaluations internally available through its grant management system. HHS and MCC did not have sensitive evaluations in fiscal year 2015. USAID requires the development of dissemination plans and included evidence of such planning in the majority of the evaluations we reviewed, and all of the other agencies except State now require such plans for nonsensitive evaluations. Dissemination planning identifies potential users of an evaluation and describes an approach to providing users with the evaluation results. Such planning can help agencies ensure that evaluation reports are disseminated effectively Among the six agencies, only USAID required the development of dissemination plans for fiscal year 2015 evaluations and included evidence of such planning in the majority of the evaluations whose dissemination we reviewed. Of the 62 USAID evaluations, 44 included evidence that dissemination planning had been completed. HHS, MCC, State, and USDA did not require dissemination plans for their evaluations completed in fiscal year 2015. Agency officials at HHS and MCC provided evidence that dissemination planning took place for at least one of their respective evaluations we reviewed, but this dissemination planning was not required by agency policy, and therefore this planning was ad hoc. DOD plans for evaluation dissemination by identifying potential users of the evaluation and sending e-mails to these internal and congressional stakeholders after the evaluations are completed. HHS, MCC, and USDA guidance now require dissemination plans for future evaluations. State officials reported that, as of November 2016, State was planning to revise its policy to require the use of dissemination plans for evaluations but had not instituted this requirement. Without dissemination planning, State cannot ensure that its evaluations are disseminated as effectively as possible to potential users. In addition to posting evaluations online, each of the six agencies reported disseminating evaluation findings through other means. Our prior work has shown that taking such additional steps to actively disseminate evaluation reports—for example, briefing stakeholders on evaluation findings and distributing the evaluations to interested stakeholders via e- mail—facilitates dissemination of evaluation report findings and encourages their use. Agency officials reported using various means besides web posting to disseminate evaluation findings. For example, officials at all six agencies reported using briefings to share evaluation findings with various stakeholders within and outside of the agency. Additionally, HHS, State, MCC, and USAID officials reported that they shared evaluation results with interested parties at various professional conferences. USAID officials stated that the agency also disseminates evaluation findings by posting its evaluations on partner websites, creating video companions to evaluation reports to provide to stakeholders, and posting syntheses of evaluation findings on the agency’s website. Foreign assistance evaluations can be challenging to implement, but they are an essential tool for guiding agency decision making and allocation of resources. Agencies’ foreign assistance evaluations assess a wide variety of programs around the world, using many different designs and methodologies, and the wide range of evaluation costs reflects this diverse context. However, regardless of the location, design, or cost, an evaluation should provide sufficient and reliable evidence to support its findings. A high-quality evaluation helps agencies and stakeholders identify successful programs to expand or pitfalls to avoid. Evaluations that do not meet all quality criteria that we identified may not provide sufficiently reliable evidence to inform these decisions. In addition, for evaluations to inform decision making, stakeholders must be able to find them. While foreign assistance agencies have generally made their evaluations available online in a timely manner, several agencies can take additional steps to ensure that stakeholders have improved access to these evaluations to make better-informed decisions about future program design and implementation. A growing body of high-quality, broadly disseminated evaluations can help the United States continuously improve its foreign assistance programs and thereby support democracy, enhance security, reduce poverty and suffering, and achieve other U.S. foreign policy goals. To improve the reliability and usefulness of program evaluations for agency program and budget decisions, we recommend that the Chief Executive Officer of MCC, the Administrator of USAID, the Secretary of Agriculture, the Secretary of Defense, the Secretary of State, and the Secretary of Health and Human Services (in cooperation with State’s Office of the U.S. Global AIDS Coordinator and Health Diplomacy) each develop a plan for improving the quality of evaluations for the programs included in our review, focusing on areas where our analysis has shown the largest areas for potential improvement. To better ensure that the evaluation findings reach their intended audiences and are available to facilitate incorporating lessons learned into future program design or budget decisions, we recommend that the Secretary of Health and Human Services direct the Centers for Disease Control and Prevention to update its guidance and practices on the posting of evaluations to require PEPFAR evaluations to be posted within the timeframe required by PEPFAR guidance; the Chief Executive Officer of MCC adjust MCC evaluation practices to make evaluation reports available within the timeframe required by MCC guidance; the Secretary of State amend State’s evaluation policy to require the completion of dissemination plans for all agency evaluations; and the Secretary of Agriculture implement guidance and procedures for making FAS evaluations available online and searchable on a single website that can be accessed by the general public. We provided a draft of this report to DOD, State, HHS, MCC, USAID and USDA for review and comment. DOD, State, HHS, MCC, USAID, and USDA provided official comments, which are reproduced in appendixes III through VIII with, where relevant, our responses. DOD, HHS, and USAID also provided technical comments, which we incorporated as appropriate. The following summarizes DOD, State’s, HHS’s, MCC’s, USAID’s, and USDA’s official comments and our responses. DOD stated that it partially concurred with our recommendation, noting that in many cases, certain methodologies are not well suited for security assistance evaluation. DOD observed that, for example, it would be unethical to establish randomized control groups for security assistance evaluations and that foreign military organizations may be unwilling to provide DOD significant access to some military units solely for the purpose of the evaluation. We recognize that certain methodologies are not appropriate in every context, and we did not advocate the use of randomized control groups in the DOD evaluations we reviewed. Our main concerns about the DOD evaluations focused on implementation of the methods used. In particular, we found limitations in sampling methods including descriptions of the target population, data collection methods, and data analysis. We adjusted pertinent wording in our report to clarify these points. State concurred with our recommendations and noted that its forthcoming Program Design and Performance Management Policy for Programs, Projects, and Processes, recently published Program Design and Performance Management toolkit, and updated policy guidance will constitute a plan for improvement. We will monitor the implementation of this plan to verify that State takes appropriate steps to address our recommendation. HHS concurred with our recommendation that it update guidance and practices on the posting of PEPFAR evaluations and stated that CDC guidance now requires evaluation reports to be posted on a publically accessible website within 90 days of the evaluation’s completion. HHS did not comment on our recommendation that it develop a plan for improving the quality of evaluations. MCC stated that it welcomed our findings and recommendations for improvement but noted that it could not agree or disagree with our quality assessments because we did not provide data on our determinations for individual evaluations. In response to our observation that MCC evaluations did not contain conflict-of-interest statements, MCC noted that it has required independent third-party evaluation of all its projects since 2009 and that, in 2013, it standardized the language in its evaluation contracts to explicitly establish the independent role of evaluators. While these are positive steps, we believe that including in MCC’s published evaluations explicit statements about the evaluators’ independence and any potential conflicts of interest would bolster the evaluations’ credibility and usefulness. With regard to the timeliness of public access to its evaluations, MCC indicated that when it established its internal review process for evaluations in 2013, it did not anticipate the length of time that would be required to finalize evaluation reports. MCC noted that its forthcoming revised policy on monitoring and evaluation states that “MCC expects to make each interim and final evaluation report publicly available as soon as practical after receiving the draft report.” However, the revised policy does not establish a target time frame for completing internal reviews of the reports. Establishing such a time frame could help MCC ensure that evaluation reports are published in a timely fashion that maximizes their usefulness. USAID stated that it has established a plan to improve the quality of evaluations, including an update and clarification of the requirements and quality standards for evaluations. USAID also stated that it plans to provide additional training and other capacity-building efforts to help ensure that staff have the necessary skills to manage evaluations. We will monitor implementation of this plan to verify that USAID takes appropriate steps to address our recommendation. USDA agreed with our recommendations. To address the recommendations, USDA stated that it would update its guidance on reviewing evaluation terms of reference to include a section on quality that specifically focuses on the areas where the GAO analysis has shown the largest areas for potential improvement. USDA further stated that FAS will continue its current efforts to make nonsensitive evaluations publicly available online and will make them searchable as well. We are sending copies of this report to the appropriate congressional committees and to the Secretaries of Agriculture, Defense, State, and Health and Human Services; the Chief Executive Officer of the Millennium Challenge Corporation; and the Administrator of the U.S. Agency for International Development. In addition, the report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have questions about this report, please contact me at (202) 512-6991, or [email protected]. 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 major contributions to this report are listed in appendix IX. In response to congressional requests, we examined (1) the extent to which foreign assistance program evaluations met key evaluation quality criteria; (2) the costs of the evaluations, as well as factors that affect these costs; and (3) the extent to which the agencies ensure the dissemination of evaluation reports within the agency and to the public. To address our objectives, we identified the six major agencies administering the most foreign assistance on the basis of obligations reported to the U.S. Agency for International Development’s (USAID) U.S. Overseas Loans and Grants database for fiscal years 2008 through 2012. The six agencies we identified are USAID, the Department of State (State), the Millennium Challenge Corporation (MCC), the Department of Health and Human Services (HHS), the U.S. Department of Agriculture (USDA) and the Department of Defense (DOD). For the three agencies that are not focused exclusively on foreign aid or foreign affairs (HHS, USDA, and DOD), we limited our scope to selected programs. For HHS and USDA, we selected programs that account for the vast majority of foreign assistance program dollars that the agency implemented. At HHS we examined evaluations of the President’s Emergency Plan for AIDS Relief (PEPFAR) programs implemented by HHS’s Centers for Disease Control and Prevention (CDC). At USDA we examined evaluations for the Food for Progress and McGovern-Dole food assistance programs, implemented by the Foreign Agricultural Service (FAS). At DOD we examined evaluations prepared for the Global Train and Equip (GT&E) program. While our previous review of agency evaluation policies did not identify DOD-wide evaluation policies, we did identify GT&E as having relevant policies to guide its evaluations. To identify evaluations completed in fiscal year 2015, the most recently completed fiscal year as we undertook our review, we requested that each agency provide a list of all foreign aid evaluation reports completed in that year. We did not separately review agency files to identify if agencies had additional evaluations beyond those listed in the registries. To assess the reliability of the agency evaluation lists, we reviewed the documents provided to ensure that each was a completed evaluation and to confirm that the date of the document fell within our specified timeframe. If necessary, we followed up with agency officials to clarify the date or status of the document. Based on their responses, we removed documents that were not evaluations or fell outside of our timeframe. We also did not review evaluation reports that were not written in English. We determined that the data in the evaluation lists were sufficiently reliable for the purposes of this engagement. In all, we identified a study population of 361 evaluations: 4 DOD evaluations, 51 HHS evaluations, 17 MCC evaluations, 28 State evaluations, 221 USAID evaluations, and 40 USDA evaluations. We examined the evaluations themselves and any appendices that the agency provided which were directly referred to in the evaluations. We did not consider evaluation plans and protocols, underlying documents and other work papers as evidence that the planned design was implemented. Similarly, we did not consider contracts with third-party evaluators or evaluation organizations as evidence that the evaluator had maintained independence. Instead we required statements in the reports or methodological appendices that steps and procedures were actually taken and that no threats to independence have been identified. From the study population of fiscal year 2015 evaluations, we reviewed all DOD, MCC, and State evaluations; all USAID net impact evaluations; and a sample of HHS, USDA, and USAID performance evaluations. We randomly selected a probability sample from the study population of HHS, USDA, and USAID performance evaluations. With this probability sample, each member of the study population had a nonzero probability of being included, and that probability could be computed for any member. For USAID, we included all net impact evaluations in the sample because net impact evaluations constituted less than 20 percent of all the evaluations provided, and if we had not included them all, we would not have been able to comment on this type of evaluation. Based on the review of the evaluation documents after the initial screening, an additional 16 evaluations were found not to be within our scope, and we substituted for these evaluations when possible. For example, we excluded documents that did not evaluate a specific program, were monitoring or grant reports, or were plans for an evaluation rather than an evaluation report. We included two substitute HHS and two substitute USDA evaluations to replace those that were found to not be in scope and also reviewed additional USDA evaluations. However, because we had initially included all MCC, State, and USAID net impact evaluations, there were no additional evaluations available to substitute if those were excluded. The original sample and the final respondents across the six agencies can be found in table 6. Each sample selection was subsequently weighted in the analysis to represent the evaluations in the population that were not selected. We reviewed the full population of DOD, MCC, and State evaluations; therefore, our results from the quality review of these evaluations do not have an associated margin of error. The results from our review of the HHS, USDA, and USAID evaluations are reported with an associated margin of error. Because we followed a probability procedure based on random selections, our sample is only one of a large number of samples that we might have drawn. Since 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 samples we could have drawn. All percentage estimates for aggregated results from our review have margins of error at the 95 percent confidence level of plus or minus 8 percentage points or less, unless otherwise noted, and all percentage estimates for individual agencies from our review have margins of error at the 95 percent confidence level of plus or minus 11 percentage points or less, unless otherwise noted. To assess the extent to which the results of foreign assistance program evaluations are supported by their evidence and whether they assess if programs have met their goals, we assessed the sample of agency fiscal year 2015 evaluation reports against quality criteria we identified. We identified these criteria based on our review and analysis of evaluation guidance from agencies included in our review (including any agency internal evaluation review checklists), international organizations, evaluation organizations, and prior GAO reporting. These criteria include necessary high-level elements in designing, implementing and reporting on evaluations that could serve as standards across different agencies and evaluation types. Prior to undertaking our quality review, these criteria were discussed and reviewed within the engagement team, as well as by other GAO staff with experience in program evaluation and methodologies. We incorporated the identified criteria into a standardized data collection instrument (DCI) in order to consistently review the sampled evaluation reports. The DCI contained evaluative questions against which to assess evaluation quality as well as descriptive questions to gather information about the evaluations, such as its location and methodology. The high- level criteria each included subquestions about elements the reviewer should consider in making his or her overall decision. The evaluation quality criteria were judged on a four-part scale for most of the judgmental questions: generally addressed: the evaluation mostly addressed the key element(s) of the criterion but did not have to completely address all elements in the subquestions; partially addressed: the evaluation had one or more clear area(s) for improvement on the criterion; not at all addressed: the evaluation did not show that steps were taken to address the criterion; and insufficient information: reviewers could not make a determination due to a lack of information in the evaluation and any other associated materials. If a criterion was partially or not at all addressed, or if there was insufficient information in the evaluation to assess the criterion, we considered it a deficiency. We did not consider study protocols or design documents that indicated plans for a particular evaluation step as sufficient evidence that such a step was performed unless the evaluation report also provided evidence that it had. The descriptive questions in the DCI about evaluation types and methodology were based on prior GAO work and asked about designs that examined net impacts of interventions, outcomes of interventions, and processes. The questions on net impact evaluations asked about the type of design using four categories: (1) randomized controlled trials or groups, (2) comparison groups, (3) time series that would allow for trends to be determined pre- and post- intervention, and (4) quasi-experimental statistical modelling techniques. The questions on outcome and process evaluations asked whether baselines and targets had been established for the outcomes and whether criteria had been established to assess processes. From these types of evaluation, we created two broad categories to use in our analysis of evaluation cost and quality: net impact evaluations, and performance evaluations. The net impact category included all four impact design types, while the performance evaluation category included outcome and process evaluations as well as a few evaluations that did not fall within the outcome and process categories. The performance evaluations included some that had established targets or baselines and others that had not, while the process evaluations included some that had established criteria for assessment and others that had not. We noted some overlap between the net impact, performance, and process categories. For example, net impact evaluations often considered outcomes or processes, and performance evaluations often considered both outcomes and processes. This overlap was a key reason we decided to develop and analyze two broad types of evaluation categories rather than attempt to develop more refined types. A key assumption underlying our analysis was that different types of evaluations were appropriate for different types of study questions. The evaluative questions in the DCI were relative, rather than absolute, with respect to the study questions and were intended to be applicable across evaluation types. We did not assess the study questions in terms of their scope or rigor. We instead took the study questions as given, thereby giving every evaluation an equal chance to receive a high score if its design and implementation were appropriate for the study questions. Evaluation reviewers were instructed to consider design, implementation, and reporting in terms of the study questions the evaluations set out to answer rather than against an absolute standard. In this way, we determined that it would be as possible for a qualitative midterm evaluation that considered program implementation to achieve high scores as it would for a final net impact evaluation that considered effects attributable to the program. The main criteria questions in the DCI asked about the appropriateness of the design, implementation, and conclusions in light of the study objectives. We did not determine a single definition of appropriateness because we recognized that it is dependent on the study objectives and data collection conditions. For example, the standards for appropriateness of a final net impact evaluation of a pilot health care program that seeks to establish whether the intervention is achieving positive outcomes are different from the standards for a mid-term performance evaluation of a well-established water and sanitation program supported by a solid evidence base and focused on whether the program was implemented as planned. Given the variation in agency goals and programs, evaluation types, and evaluation timing, we determined that we would rely on expert professional judgment rather than attempt to use a single definition of appropriateness for every situation. While we designed our DCI to apply broadly across agencies and evaluation types, differences in agency evaluation practices and areas of responsibility may limit comparisons between the agencies. For example, the target audience of an evaluation may determine whether it includes certain reporting elements. HHS’s PEPFAR evaluations are generally produced for dissemination in research publications and journals, while USAID evaluations evaluate a wide range of programs and are generally directed to an audience of program officials and managers. In addition, the evaluations we reviewed assessed a wide range of foreign assistance programs with varying characteristics. These characteristics include the nature of the foreign assistance intervention, the type of program responsible for the intervention, whether the program was designed to be evaluated, and the timing of the evaluation. For example, some evaluations consider ongoing development assistance in areas such as education or health, while others consider emergency responses to humanitarian crises. Agency officials noted that it could be harder to ensure quality in an evaluation of a program that had to respond quickly to a crisis and therefore did not have the opportunity to plan for an evaluation. They also noted that if an evaluation is not started until after the program has begun, there may not be any baseline data available. The evaluation review consisted of multiple reviews by a team of GAO staff with experience and familiarity with research methods as well as with reviewing studies and evaluations across a wide range of subject areas and disciplines. After completing his or her initial review, the first reviewer notified the second reviewer that the evaluation report was available for his or her review. The second reviews were not independent; as the second reviewer saw the decisions made by the first reviewer and could review the first reviewer’s notes on sources and justifications for his or her decisions. The second reviewers read the evaluation and indicated whether he or she agreed with the first reviewers’ decisions or whether he or she proposed another decision. The first and second reviewers subsequently met to reconcile any differences. After the reconciliations were completed, a supervisor then reviewed the work of the two reviewers for internal consistency and completeness according to a standard protocol but did not re-review the evaluation documents. The supervisor related the identified issues as needed to the first and second reviewers, who addressed them before the supervisor recorded the review as final. We took several steps to ensure consistency among the reviewers. We conducted two pretests of the DCI on sample evaluations. The first pretest included members of the engagement team as well as GAO staff with experience in the design of survey instruments or in the review of foreign assistance evaluations. The second pretest included members of the evaluation review team. After each round of pretests, we made appropriate revisions to the DCI. To help ensure consistency of interpretation, we created a guidance document where reviewers recorded questions about certain decision rules to follow in specific instances. Answers to the questions were then posted after discussion among the review and engagement team members. Additionally, the engagement and review team held regular weekly meetings to discuss any methodological issues that arose and preliminary tabulations of the review data. To analyze the responses to the DCI, we examined how evaluations’ quality varied by the eight quality criteria, by agency, by timing of the evaluation relative to the stage of program implementation (midterm or interim vs. final), and type of evaluation (net impact vs. performance). While there were some differences between the final and midterm evaluations, these were not statistically significant. However, a higher percentage of evaluations that attempted to assess net impacts were of high quality than those that did not attempt to assess net impacts. We determined that these differences were due primarily to specific weaknesses in the implementation of the design of the evaluations. For example, performance evaluations used nonrandom sampling more often than net impact evaluations, which used at least some random sampling. While our DCI and subsequent analysis treated both methods of sampling equally, we focused our assessment on the extent to which each method had been appropriate for the study questions. We found that the performance evaluations’ nonrandom sampling was carried out appropriately less often than the random sampling typically used in net impact evaluations. In the body of our report, therefore, we focus on the specific weaknesses that we found, such as the one regarding nonrandom sampling, rather than differences at the level of the two broad evaluation types. Our analysis found a reasonably high degree of overlap between several approaches that we considered for categorizing the evaluations. For example, we categorized the evaluations into three groups: high quality, acceptable quality, and lower quality based on the number of quality criteria that were generally or partially met for each evaluation, as well as instances when quality areas were either not met or there was insufficient information to determine if a certain criterion was met by a particular evaluation. Those evaluations that fell into the lowest and middle categories based on these three categories also generally fell into the lowest and middle categories using another approach that we examined, as table 7 shows. This comparison also shows that some evaluations in the highest category had a relatively higher number of criteria generally met, while some in the middle category had a relatively lower number of criteria generally met. To determine the cost of foreign aid evaluations, we reviewed contracts, invoices, and related documents to determine the cumulative cost of final evaluations that were conducted by an outside evaluator. We defined the cumulative cost as the cost of the final evaluation and any related activities that informed the evaluation’s findings, such as a separate data collection effort or a midterm or baseline evaluation. We did not determine the cost of evaluations that had a midterm evaluation but not a final evaluation because midterm evaluation costs do not reflect the total cumulative cost of evaluating a program. State and USAID officials noted that some of their midterm evaluations may ultimately be a program’s only evaluation. We did not review the State and USAID fiscal year 2015 midterm evaluations to determine if the agency intends to conduct an additional, final evaluation or include these midterms in our cost analysis. Table 8 shows the total number of evaluations in GAO’s quality sample, the number of those evaluations whose costs we reviewed, and the number of evaluations whose costs we reviewed that we included in the statistical analysis by agency. We used contracts and invoices to determine the cost of 42 of the 76 MCC, State, USAID, and USDA final evaluations. To determine an evaluation’s cost, we used either the final invoiced amount or the contract’s total obligations. For each evaluation, we also read the statement of work to determine if the contract covered only the evaluation in our sample or if it covered additional activities as well. In some cases, while the contract covered additional activities, the evaluation’s cost was clearly identifiable in a separate line item or invoice. We identified the evaluation start and end dates using the period of performance in the contract or statement of work. In some cases we determined the period of performance using dates in the evaluation report if the contract’s period of performance covered a broader time period than the evaluation in our sample. For six USAID evaluations and nine State Department evaluations, we determined the evaluation cost using data from the Federal Procurement Data System – Next Generation (FPDS-NG). FPDS-NG provides a contract’s obligations, start and end dates, and other descriptive data. In each case, we confirmed that the contract covered only the evaluation in our sample by reviewing the statement of work or by confirming with agency officials. We used total obligations to determine the evaluation’s cost and also used the date signed and end date listed in FPDS-NG to determine the period of performance. To assess the reliability of the FPDS-NG data, we (1) reviewed related documentation, (2) traced to or from source documents, and (3) confirmed FPDS-NG data with knowledgeable agency officials. We determined that the FPDS-NG data were sufficiently reliable for the purposes of this engagement. For MCC, State, and USAID evaluations without clearly identifiable cost information from contract documents or FPDS-NG, we estimated the cost based on budget documents or cost estimates provided by the agency or contractor, where available. We relied on budgets or cost estimates to determine the cost of 5 MCC evaluations, 4 State Department evaluations, and 10 USAID evaluations. We excluded one MCC evaluation from the cost sample because MCC provided a wide range for the estimated cost, and we concluded that this range was not sufficiently reliable to report. We could not determine the cost of one State Department evaluation and one USAID evaluation that were each procured under large agreements that did not separately track evaluation costs. Additionally, USAID officials did not provide cost information for one evaluation. We report only limited data on the cost of DOD’s GT&E and HHS’s PEPFAR evaluations because the evaluation contracts or implementing partner agreements did not separately track evaluation costs, and we concluded that the available estimates were too limited to include in our statistical analysis. To estimate the cost of DOD’s GT&E evaluations, we reviewed the associated contract and invoices, which included the evaluations as well as additional services. Since the contract and related documents did not contain a separate line item for the evaluations, we requested a cost estimate from agency officials and the contractor. The contractor was able to provide only the broad estimate that we include in our report with appropriate caveats but which we concluded was not sufficiently reliable to include in our statistical analysis. The costs of the HHS PEPFAR evaluations were also not separately tracked by the agency and implementing partners. Evaluation costs were instead estimated by HHS country teams or implementing partners based on their review of previous years’ financial records, budgets, or cooperative agreements. Because of the volume of records involved, we judgmentally selected a subsample of 10 HHS evaluations to review the cost estimates provided by HHS officials. To review these estimates, we traced the estimates to source documentation and spoke with knowledgeable agency officials to understand the methodology used to prepare the source estimates. Because of the uncertainty of these cost estimates, we include them in our report with appropriate caveats but concluded that they were not sufficiently reliable to include in our statistical analysis. To determine the factors that are associated with the costs of foreign aid evaluations, we analyzed the costs of MCC, State, USDA, and USAID evaluations in relation to the data that we collected on these evaluations’ quality scores, duration, and other characteristics. We then produced summary statistics showing the cost differences of various characteristics. For example, we compared the average cost of evaluations with a survey to those without surveys. We conducted difference-in-means tests to determine if any of the characteristics were statistically significant at the 95-percent confidence level and reported characteristics that were significantly related to costs. We also reviewed the evaluations to obtain insights into other likely cost factors, such as unstable locations and the number of sites, for which systematic data were not available for difference-in-means tests. We included location among the characteristics we considered after observing that evaluations that were more costly than others that were of the same type, or required the same performance period to complete, tended to be conducted in unstable or multiple locations. To assess our third objective, we identified leading practices for the dissemination of evaluation findings. We identified these leading practices using federal guidance, including the President’s Open Government Directive and Office of Management and Budget (OMB) guidance, which encourages or requires the timely public posting of agency information on a searchable website, as well as plans and additional efforts to actively disseminate agency information. In addition to the federal guidance, we also used the American Evaluation Association’s (AEA) An Evaluation Roadmap for a More Effective Government (AEA Roadmap); the Organization for Economic Co-operation and Development, Development Assistance Committee’s (OECD DAC) Quality Standards for Development Evaluation and Evaluating Development Activities: 12 Lessons from the OECD DAC; and HHS and the General Services Administration’s (GSA) Research-Based Web Design and Usability Guidelines that cite timely public posting, dissemination planning, and additional active efforts to disseminate results as important communication tools for evaluations. We used these sources to identify six practices that agencies should use in order to successfully disseminate the results of foreign aid evaluations. We reviewed the dissemination of all evaluations from fiscal year 2015 for five of the agencies and a sample of USAID evaluations. In total, we examined the dissemination of 193 evaluations: 4 at DOD, 49 at HHS, 16 at MCC, 23 at State, 63 at USAID, and 38 at USDA. To assess the availability and timeliness of the dissemination of evaluation reports, we reviewed agency policies and websites and interviewed agency officials. We reviewed agency evaluation websites to determine if the evaluation reports in agency evaluation lists had been publicly posted. If an evaluation report had not been posted, we followed up with agency officials regarding the reasons it had not been. We also reviewed the evaluation reports to ensure the documents contained the information necessary for a user to determine if the findings were valid. For example, we reviewed evaluations to ensure that any related annexes had been included when the document had been posted. We examined each agency website to determine whether it provided a search engine that could be used to locate evaluations. We also checked whether the search engine included additional search filters such as the year the evaluation was completed or its location. To assess timeliness, we reviewed agency policies and guidance to determine how soon it required evaluation reports to be posted after the completion of the report. We compared the date an evaluation was considered complete by the agency to the date that it was posted online to determine whether it had been posted within the timeframe required by the agency. To determine whether sensitive evaluations were made available to identified stakeholders via an internal digital system, we reviewed agency lists of sensitive evaluations and interviewed agency officials about agency processes for making sensitive evaluations available internally. We also received an in-person demonstration of the internal posting of USAID’s sensitive evaluations and documentation of the internal systems that DOD and USDA use to post evaluations. To assess agency dissemination planning and its use of additional means for dissemination, we interviewed agency officials and reviewed agency policies, practices, and evaluation documents. To determine if the agency required dissemination planning, we reviewed the dissemination requirements in its evaluation guidance. If the agency required dissemination plans, we reviewed its evaluation reports, contracts, and related documents to determine if they included an identification of the potential users of an evaluation and a description of the approach that will provide users with the evaluation results. If the agency guidance did not require dissemination plans, we asked the agencies if dissemination planning had occurred without the policy in place. If such ad hoc planning had occurred, we asked that the agencies provide examples. We also provided written questions to agency officials regarding additional agency practices for disseminating evaluations other than posting the evaluation online. If agency officials identified additional means of dissemination, we reviewed additional documentary evidence that evaluation findings had been disseminated using these means. We conducted this performance audit from October 2015 to March 2017 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. Agencies varied in the extent to which they met the applicable quality criteria for evaluations that we identified. Tables 9 through 26 below provide further detail on the characteristics and quality of the design, implementation, and conclusions of fiscal year 2015 evaluations we reviewed summarized for all six agencies and then individually for (1) the President’s Emergency Plan for AIDS Relief (PEPFAR) programs implemented by the Centers for Disease Control and Prevention (CDC) of the Department of Health and Human Services (HHS), (2) the Millennium Challenge Corporation (MCC), (3) the Department of State (State), (4) the U.S. Agency for International Development (USAID) , and (5) the U.S. Department of Agriculture’s (USDA) Foreign Agricultural Service’s food aid programs. DOD partially concurs with our recommendation and notes that in many cases certain methodologies are not well suited for security assistance evaluation. DOD observed that, for example, it would be unethical for DOD to establish a randomized control group for security assistance evaluation and that some foreign military organizations may be unwilling to provide significant access to military units solely for the purpose of an evaluation. We recognize that certain methodologies are not appropriate in every context, and we do not advocate the use of randomized control groups in the evaluations we reviewed for DOD. Our main concerns about the DOD evaluations focus on implementation of the methods used. In particular, we found limitations in sampling methods, including descriptions of the target population; data collection methods; and data analysis. We adjusted pertinent wording in our report to clarify these points. 1. MCC notes that it has required independent third-party evaluation of all its projects since 2009 and that, in 2013, it standardized the language in its independent evaluation contracts to explicitly define an independent role for evaluators. While these are positive steps, we believe that including in MCC’s published evaluations explicit statements about the evaluators’ independence and any potential conflicts of interest would bolster the evaluations’ credibility and the usefulness. 2. MCC states that it had not anticipated the length of time required by the review process for all evaluations that it implemented beginning in 2013. MCC notes that its forthcoming revised policy on monitoring and evaluation will state that “MCC expects to make each interim and final evaluation report publicly available as soon as practical after receiving the draft report.” This revised guidance does not set a specific time frame for the reviews. While agency review efforts may help ensure quality, a specific target for the length of time for the reviews would provide a metric for assessing whether reports are being published in a timely fashion that maximizes their usefulness. In addition to the contact named above, James Michels, Assistant Director; Thomas Beall, Miranda Berry, Anthony Costulas, Gergana Danailova-Trainor, Martin De Alteriis, Neil Doherty, Mark Dowling, Laurie Ekstrand, Justin Fisher, Georgette Hagans, Kay Halpern, Reid Lowe, Luann Moy, Barry Seltser, Stephanie Shipman, Michael Simon, Douglas Sloane, and Gregory Wilmoth made key contributions to this report. | The U.S. government plans to spend approximately $35 billion on foreign assistance in 2017. Evaluation is an essential tool for U.S. agencies to assess and improve the results of their programs. Government-wide guidance emphasizes the importance of evaluation, and the Foreign Aid Transparency and Accountability Act of 2016 requires the President to establish guidelines for conducting evaluations. However, evaluations can be challenging to conduct. GAO has previously reported on challenges in the design, implementation, and dissemination of the evaluations of individual foreign assistance programs. GAO was asked to review foreign aid evaluations across multiple agencies. This report examines the (1) quality, (2) cost, and (3) dissemination of foreign aid program evaluations. GAO assessed a representative sample of 173 fiscal year 2015 evaluations for programs at the six agencies providing the largest amounts of U.S. foreign aid —USAID, State, MCC, HHS's Centers for Disease Control and Prevention under the President's Emergency Plan for AIDS Relief, USDA's Foreign Agricultural Service, and DOD's Global Train and Equip program—against leading evaluation quality criteria; analyzed cost and contract documents; and reviewed agency websites and dissemination procedures. An estimated 73 percent of evaluations completed in fiscal year 2015 by the six U.S. agencies GAO reviewed generally or partially addressed all of the quality criteria GAO identified for evaluation design, implementation, and conclusions (see fig.). Agencies met some elements of the criteria more often than others. For example, approximately 90 percent of all evaluations addressed questions that are generally aligned with program goals and were thus able to provide useful information about program results. About 40 percent of evaluations did not use generally appropriate sampling, data collection, or analysis methods. Although implementing evaluations overseas poses significant methodological challenges, GAO identified opportunities for each agency to improve evaluation quality and thereby strengthen its ability to manage aid funds more effectively based on results. Evaluation costs ranged widely and were sometimes difficult to determine, but the majority of evaluations GAO examined cost less than $200,000. Millennium Challenge Corporation (MCC) evaluations had a median cost of about $269,000, while median costs for the U.S. Agency for International Development (USAID), the U.S. Department of Agriculture (USDA), and the Department of State (State) ranged from about $88,000 to about $178,000. GAO was unable to identify the specific costs for the Department of Defense (DOD) and Department of Health and Human Services (HHS) evaluations. High-quality evaluations tend to be more costly, but some well-designed lower-cost evaluations also met all quality criteria. Other factors related to evaluation costs include the evaluation's choice of methodology, its duration, and its location. Agencies generally posted and distributed evaluations for the use of internal and external stakeholders. However, shortfalls in some agency efforts may limit the evaluations' usefulness. Public posting . USDA has not developed procedures for reviewing and preparing its evaluations for public posting, but the other agencies posted nonsensitive reports on a public website. Timeliness . Some HHS reports and more than half of MCC reports were posted a year or more after completion. Dissemination planning. State does not currently have a policy requiring a plan that identifies potential users and the means of dissemination. GAO recommends that each of the six agencies develop a plan to improve the quality of its evaluations and that HHS, MCC, State, and USDA improve their procedures and planning for disseminating evaluation reports. The agencies concurred with our recommendations. |
Lands managed by the Forest Service cover an area roughly equal in size to California, Oregon, and Washington. In 1994, the Forest Service reported more than 835 million recreational visits to these lands, an average of nearly three visits for each man, woman, and child in the United States. Recreational special-use permits are one way in which the Forest Service provides recreational opportunities on these lands. Permitted recreational special uses fall into two main categories, as follows: Commercial activities such as the operation of ski lodges and trails, resort lodges, marinas, and guide services. There were about 7,000 such permits in fiscal year 1994, generating sales of more than $1.2 billion a year to permit holders. Noncommercial activities ranging from the use of a cluster of cabins for a organizational camp and groupings of individual recreational cabins on lakes or in the woods to temporary one-day activities like church, club, or recreational events. There were about 18,000 such permits in fiscal year 1994. Most of these permits—about 15,200—are for lots where individuals are authorized to build private recreation houses or cabins. In fiscal year 1994, the fee revenue from recreation special-use permits was $36.8 million—about two-thirds of these fees were from commercial recreation activities. After timber sales, the special-use program is the second largest generator of revenue for the Forest Service. A number of statutes authorize the Forest Service to issue a broad range of special-use permits. For example, special recreation permits for uses such as group activities, recreation events, and other specialized recreational uses are authorized by the Land and Water Conservation Fund Act, as amended (16 U.S.C. 460l-6a(c)). Permits for hotels, resorts, summer homes, stores, and facilities for industrial, commercial, educational, or public uses are authorized by the Act of March 4, 1915, as amended (Term Permit Act) (16 U.S.C. 497). The policies governing the establishment of fees for these activities have been prescribed for decades. The primary authority for permit fees is provided by title V of the Independent Offices Appropriation Act of 1952 (IOAA), as amended (31 U.S.C. 9701). The IOAA authorizes an agency to issue regulations to assess a fair fee for a service or thing of value provided by the agency to an identifiable recipient beyond that provided to the general public. The Office of Management and Budget’s (OMB) Circular A-25 implements the fee requirements of the IOAA. Circular A-25 classifies charges under two categories, which are (1) special services and (2) lease or sale. When providing special services, an agency is to recover its costs of providing the service, resource, or good. For example, under the special service category, the Forest Service may recover its costs incurred in reviewing and processing permits. When the government sells or leases goods, resources, or real property, agencies are to establish user fees to recover the fair market value of the good, resource, or service provided. Most of the special-use permits that the Forest Service issues are analogous to leases because the government acts as a landowner in granting permittees long-term use and occupancy of its land. Under the provisions of the IOAA and OMB Circular A-25, fair market value should be obtained in the absence of specific legislation to the contrary. Finally, Forest Service regulations implementing its authority to issue special-use permits call for fees to be based upon the fair market value of the rights and privileges authorized by the special-use permits as determined by appraisals or other sound business management principles. In response to these requirements, the Forest Service uses two main fee-setting approaches for most of these recreational special uses, as follows: Fees for commercial operations or services. These annual fees are for activities in which the permit holder sells a service or use to the public, such as ski lifts, food, or guide services. Most of these fees are set using the Graduated Rate Fee System (GRFS). GRFS was developed about 30 years ago. Under this system, fees are calculated by applying a selected rate to gross sales in nine business categories. The rate applied to each business category is determined by the proportional relationship of sales to gross fixed assets. As sales increase, a higher rate is applied to the higher increment of sales, and, as a result, the total fee increases. Fees for sites of noncommercial recreation residences. These fees are based on an appraisal of the fair market value of a cabin lot sites. The fees for these sites, which represent the most common type of noncommercial permit, are based on 5 percent of each lot’s initial appraised value indexed annually for inflation. In addition to the special-use permit fees that are specifically for the use of the land, the Forest Service is authorized to recover the direct and indirect costs incurred in providing services that support the permitted activity. These costs could include things like administrative costs incurred in processing new permit applications, expenses for studying environmental impacts that might occur as a result of a new permit or the modification of an existing permit, or expenses for monitoring the construction of projects undertaken as part of a permitted activity and are in addition to the basic fee charged for the use of the land. The various approaches used by the Forest Service to calculate recreation special-use fees result in fees that are below fair market value. GRFS, which calculates fees for commercial recreational activities, limits the Forest Service’s fees to generally less than 3 percent of the permittees’ gross revenues while states receive 5 to 15 percent of gross revenues for similar uses of state lands. In addition, appraisals used to calculate fees for the use of about 15,200 lots for recreation residences—the largest single noncommercial recreational use of national forest lands—are nearly 20 years old, resulting in some fees being as low as one-third of estimated fees based on more recent land appraisals. The Forest Service relies on GRFS to calculate fair market fees for commercial recreation special uses. GRFS is a formula-based fee system that the agency has been using for decades. In 1994, total GRFS fees collected from about 7,000 permittees totaled about $26 million. The inability of GRFS to generate fees that reflect fair market value has been the subject of reports for nearly 15 years. On the basis of our judgmental sample of sites, fees charged by states for concessions activities are currently 2 to 7 times higher on average than GRFS-generated fees for similar activities on federal land. (See app. II for a description of our objectives, scope, and methodology and a more detailed discussion of our judgmental sample.) Many prior studies—including studies by the Forest Service, the Department of Agriculture’s Office of the Inspector General, and us—have criticized GRFS for generating fees that are lower than fair market value. For example, in 1988 and 1993, we reported that GRFS does not ensure that the government receives fees based on the fair market value for the use of its land. When GRFS was developed, about 30 years ago, the Forest Service’s intention was that the factors used in the formula for determining the fee rates would be adjusted periodically to reflect changes in economic conditions. However, the various factors in the GRFS formula have not been routinely updated. Thus, it is unlikely that the fees generated by GRFS approximate fair market value today. As part of the 1993 report, we estimated that GRFS-generated fees would, on average, be less than 3 percent of gross revenues. More recently, in 1994, Forest Service officials reported that commercial fees established under GRFS averaged about 2.2 percent of the gross receipts generated by commercial recreation permittees. Compared to similar activities on state lands, these fees are low. In an effort to compare state and federal fees for commercial recreational activities, we compared some Forest Service-authorized commercial recreational uses and fees in national forests that we visited to similar uses and fees on state lands. We found some similar comparisons in three of the five states we visited. In those instances—in California, Idaho, and Colorado—the states’ fees for commercial recreation uses ranged from 6 to 15 percent of gross sales or revenues, while the Forest Service’s fees averaged less than 3 percent. Specifically, in 1994, there were six authorized operators of commercial marinas in California state lands. The state fees paid by these operators averaged about 8 percent of gross revenue. In comparison, the 25 marinas and resorts operating in the national forests in California paid the federal government about 2.5 percent of their gross revenue. We found similar situations on state lands in Idaho and Colorado. Outfitters and guides in Idaho. Idaho’s fee for 12 of these activities is 5 percent of gross sales or $250 annually, whichever is greater. In comparison, the Forest Service’s fee for outfitters and guides is a maximum of 3 percent of gross revenues or $70, whichever is greater. Commercial recreational activities in Colorado. Eleven marinas operating on state lands paid fees averaging about 7 percent of gross revenue. In comparison, 11 marinas operating on lands in the national forests in Colorado paid fees that averaged about 2.8 percent. A 1995 survey of state land managers, conducted by the National Parks and Conservation Association (NPCA), supports the findings in the comparisons that we made. In this survey—an update of NPCA’s 1991 survey—state land managers provided data on the amounts charged by the states for commercial activities on their lands, including the operation of lodges and marinas, guide services, and food and beverage sales. According to NPCA, the survey results indicate that in 1995, the 48 responding states averaged a return of 10 percent of gross sale receipts. For the five states in which the nine national forests in our review were located, fee rates reported were all above the Forest Service’s average of about 2.2 percent. (See table 1.) For the largest group of noncommercial recreation permits—approximately 15,200 recreation residence permits—the Forest Service’s method of determining annual fees results in charges that frequently do not keep up with appreciation in land values. Accordingly, the fees are frequently lower than what they should be because they are based on out-of-date information. The Forest Service’s recreation residence program began nearly 75 years ago to stimulate the use of national forest land by providing individuals or families with the opportunity to own single-family recreation cabins in designated areas of the forests. This was accomplished by establishing tracts on recreation land and designating individual building sites within those tracts to be offered—under permit—for recreational enjoyment. The permit allows the holder to build a structure for recreational purposes but not as a permanent full-time residence. Under the Forest Service’s current policy, annual fees are determined by establishing a base fee, which is 5 percent of a site’s—land only—appraised value. Appraisals are currently updated every 20 years, with the most recent appraisals conducted between 1978 and 1982. To reflect changes in land values between the 20-year appraisal periods, the Forest Service adjusts the fee each year, using an inflation factor (the implicit price deflator for the gross domestic product). Given that current recreation residence appraisals are 14 to 18 years old, we determined whether fee adjustments using the implicit price deflator kept up with appraised values. We did this by judgmentally sampling lots in 5 of the 10 forests included in our review. We selected lots having waterfront access because they are typically the highest value lots. The five forests we selected had a large number of recreation residences. At each of the five forests, Forest Service officials identified what they considered to be a representative lot having water access for inclusion in our sample. For each of these five lots—one in each forest—we asked the local county tax assessor to estimate the current appraisal value of the lot on the basis of the value of similar lots in the vicinity. While our sample results may not be representative of all recreation residences, the results indicated that during this time period the implicit price deflator did not result in fee adjustments that kept pace with changes in land values since the last appraisals. In the five forests, the estimated current values for the lots ranged from 2 to 14 times higher than the 1978 to 1982 appraisals. To determine what the current fee would be for these lots, we used the local county tax assessor’s estimate of current appraisal value based on the value of similar lots in the vicinity. Since the Forest Service’s fee is based on 5 percent of the appraised value, we multiplied the county assessors’ estimated current values by 5 percent. Compared with the existing fees established under the old appraisals and adjusted using the implicit price deflator, the fees if based on current estimates of land values would be 5 percent to over 350 percent higher than existing fees. (See app. III for the details of this analysis.) Furthermore, Forest Service officials told us that, in their opinion, the conditions we found in our sample were probably indicative of the situation that exists for most lots having waterfront access on national forest lands. Similarly, the officials told us that in their view, it is likely that many of the nonwaterfront lots also have fees that have not kept pace with appreciating land values. The Forest Service’s Chief Appraiser also told us that appraisals may result in significant increases in lot values and associated fees for lots having waterfront access in many areas. However, regarding nonwaterfront lots the Chief Appraiser had a somewhat differing view. According to the Chief Appraiser, when new appraisals are done, the value and fees for most nonwaterfront lots will rise but not increase appreciably and in some instances, because of market conditions, they may actually decline. The situation the Forest Service now faces is the same as the agency faced when it last appraised the value of recreational residences in 1978 to 1982. At that time, the appraisals for many lots contributed to permit fees increasing dramatically. Such large increases in fees caused many permittees to protest and appeal to the Congress for relief. As a result, the Congress included language in appropriations legislation that statutorily limited fee increases from fiscal year 1983 through fiscal year 1986. As a result, the Forest Service rolled back appraisal valuations and phased in the fee increases. The net effect of these actions essentially limited any fee increases to no more than $75 in any one year. Overall, this action significantly contributed to lowering the initial base fee resulting from the 1978 to 1982 appraisals and slowing the rate of fee increases since the last appraisal. Forest Service officials estimated that the agency received an estimated 6,500 applications for new special-use permits and changes to existing permits in 1994. Forest Service officials estimate that about half of these new permit and change requests—about 3,250—are related to recreational special-use activities. The costs incurred in reviewing and processing these recreation special-use applications were estimated to be about $6.5 million. Furthermore, for 1995, the agency estimates that because of increased trends in recreational use, the number of new applications and the costs of reviewing and processing them will surpass the 1994 levels. While the Forest Service has been authorized under the IOAA to seek reimbursement of these costs from the applicants, the agency has never done so. In order to recover these costs, the Forest Service is required to promulgate regulations explaining how the agency will implement its authority. The implementing regulations have never been issued. As a result, these costs are not being recovered. As individuals, groups, and businesses pursue opportunities to use national forest land for recreational purposes that require occupancy, use, rights, or privileges above those available to the general public, they are required to get special-use permits from the Forest Service. To get these permits, those pursuing opportunities to use national forests are required to submit applications to the Forest Service describing the intended use of the land and requesting authorization for using it as planned. New applications must be submitted for first-time users as well as for existing users seeking modifications to their permits. For example, putting an addition on an existing recreation residence would require the user to submit an application in order to get an authorized modification for an existing permit. The Forest Service estimated about 6,500 new special-use permit applications and changes to existing permits were submitted to forest officials for review and approval in 1994. Forest Service officials estimated that about one half of these applications were for recreational special uses, which ranged from requests involving relatively simple 1-day group recreation events to complex projects such as ski area developments. Forest Service officials estimated that the number of applications would increase in 1995. The Forest Service’s process for reviewing these applications varies according to the scope and complexity of the proposed activity and its potential impact on the environment. For example, a simple permit application requesting approval for a 1-day temporary recreational event—such as a 5K Fun Run—on existing trails or roads would not require extensive analysis and could be approved relatively quickly. On the other hand, an application for a major new ski area, or even significant modifications to an existing one, would require substantial collecting of environmental data to determine the suitability and compatibility of use, evaluating financial and business plans, and providing for public meetings to describe the proposed action and obtain comments. These analyses frequently require members of special disciplines such as biologists, hydrologists, and engineers. As the potential impact of a proposed permit application becomes more significant, more specialists are needed and more public review and debate is sought, and the costs of reviewing the permit application increase substantially. The Forest Service does not know the actual costs of reviewing permit applications. According to the Service’s Associate Deputy Chief for Administration, the agency’s current system for maintaining cost data does not enable the Service to associate the costs incurred in generating revenues from the various forest uses. In order to fully recover the costs of the special-use permit program, the Forest Service would need a cost-accounting system that would accurately track costs. In commenting on a draft of this report, agency officials indicated that the Department of Agriculture (USDA) does not have cost-accounting standards, and any cost-accounting system that is implemented should not just be for the special-use permit program, but rather, in concert with USDA’s cost-accounting standard as a whole. USDA plans to implement a cost-accounting system by the end of fiscal year 1998. However, in the Forest Service’s 1995 task force study on special-use permit management, permit administrators surveyed in 44 of the agency’s 118 administrative units estimated the average cost of processing a new permit at about $2,000. Assuming that this is an average Forest Service-wide cost, the total cost for processing the 3,250 recreational special-use applications received in 1994 would be about $6.5 million. For all 6,500 applications for special-use permits—which include both recreation and nonrecreation permits—estimated costs for processing and reviewing permits in 1994 would have been about $13 million. Because of the lack of a cost-accounting system, Forest Service officials were not able to provide us with information on the overall cost of administering the recreation special-use permit program, which would not only include processing and reviewing applications for permits, but also include activities such as annual billing, conducting inspections, and training staff. The authority for the Forest Service to seek reimbursement of expenses incurred in reviewing and approving permits is contained in the IOAA. The IOAA authorizes executive branch agencies to recover the direct and indirect costs incurred in providing services that confer a special benefit to identifiable recipients above and beyond those that accrue to the general public. OMB Circular A-25 implements the fee requirements of IOAA and establishes the policy for executive branch agencies to recover the full cost of rendering special services such as processing a permit. However, the IOAA entitles an agency to recover costs only if it issues regulations specifically addressing its authority to recover costs. But even after more than four decades, the Forest Service has never issued the necessary regulations. Without cost recovery regulations, or a cost-accounting system to accurately track costs, the Forest Service does not have the basis to recover the costs incurred in processing and reviewing new applications. Not having cost recovery regulations deprives the federal government of a source of revenue—possibly as much as $13 million in 1994. Forest Service headquarters and forest-level staff we talked to said that recovering costs for these activities—as authorized—would make good business sense. Taking such action is not unique for federal land management agencies. The Bureau of Land Management (BLM), under the same statutory authorities governing the recovery of costs for processing applications, adopted cost recovery regulations in 1981. Under BLM’s regulations, a new permit applicant is required to (1) submit data deemed necessary for review of the application and (2) pay a nonrefundable application processing fee. The Forest Service initiated action to develop cost recovery regulations three times in the last 10 years, but according to the Deputy Director of the Lands Division, the first two were abandoned because of higher priorities within the Forest Service. The most recent effort is a joint effort by the Forest Service and BLM to issue similar regulations on cost recovery. For the BLM, this effort would be a revision of its existing regulations. Each agency plans to publish a draft proposed rule in the Federal Register for public comment in 1997. Many of the Forest Service officials we talked with—both in headquarters and in the forests—acknowledge that the relatively small size of this program has translated into little recognition or priority being given to it. Despite the 26,000 existing permits, the $37 million in annual fee revenue, and about 3,250 new permit applications or modifications each year, the recreation special-use program is small compared with the Forest Service’s timber program. In comparison, the agency’s timber program generates approximately $911 million in sales receipts. Evidence of the low priority for this program at the national level can be seen in the lack of resources dedicated to improve known program weaknesses. As a result, these weaknesses have not been addressed. For example, since as far back as 1982 we and others have criticized the Forest Service’s GRFS for obtaining fees that are lower than fair market value. Furthermore, many of the forest officials we contacted during this review questioned the ability of GRFS to obtain fair market value, particularly in light of higher fees charged for commercial activities on state lands. To date, GRFS remains unchanged. Another example of the low priority given to this program is the agency’s failure to develop needed cost recovery regulations. Even though the Forest Service has had the authority to recover costs since 1952, it has not developed the needed regulations to do so. At least two times since the IOAA was enacted in 1952, the Forest Service developed draft regulations for recovering costs that, if enacted, would have allowed forest managers to recover costs for new permit applications. These efforts occurred in 1987 and 1995. Neither time were the draft regulations finalized or published because, according to Forest Service headquarters officials, the staff resources assigned to develop and publish the regulations were diverted to other higher-priority tasks. Forest Service officials could not provide us with an explanation as to why no initiative was taken to develop regulations between 1952 and 1987. In addition to a lack of priority, there is a lack of incentives for forest managers to seek higher permit fees. Even though updating and collecting fees are labor-intensive efforts, the permit program provides no direct financial benefit to the forest unit that collects the money or the agency as a whole. For the most part, fee revenues generated from permits for recreational special uses—as with all of the Forest Service’s permit fees—are deposited in the U. S. Treasury. As a result, efforts to get fees more in line with fair market values generally have no direct financial benefit to the Forest Service. In fact, Forest Service officials believe that efforts to get more accurate fees are a disincentive in terms of the additional staff workload, administrative effort, and costs that the agency and the individual forests incur, with little or no benefit returning to the nation’s forests. This additional workload and cost must be absorbed by each forest unit. The net result is that the effort to raise fees generally increases fee revenues to the U.S. Treasury, but at a cost of thinning the available resources in the individual forest budgets. Consequently, the needed work does not get done, and fees become out of date. In recent years, it has become clear that the federal government needs to operate in a more business-like manner. As companies are accountable to shareholders, the federal government is accountable to taxpayers. Under these conditions, combined with today’s budget constraints and the continued recreational demands being placed on the Forest Service, it is reasonable to expect that the agency pursue opportunities to (1) get a better return on the use of the nation’s resources and (2) recover the costs of programs to the extent reasonable. However, the Forest Service’s recreation special-use program is not receiving fair market value or recovering the costs of the program. This is largely due to the relatively low priority of the program and the lack of incentives to address critical program needs. Incentives for moving the agency to a more business-like approach to this program would be provided if the individual forest managers were permitted to keep the cost recovery revenues to offset the costs incurred for this program. However, permitting the Forest Service to retain fees may raise questions of oversight and accountability, as well as scoring and compliance issues under the Budget Enforcement Act. These issues need to be weighed in considering fee retention proposals. We recommend that the Secretary of Agriculture direct the Chief of the Forest Service to do the following: Update the methods used to calculate fees for commercial and noncommercial special-use permits so they better reflect fair market values and comply with the requirements of the Independent Offices Appropriations Act of 1952 and OMB Circular A-25. To minimize any impact that large increases in fees could have on permittees, the agency may wish to consider phasing in new fees. In addition, once the fees are updated, the agency needs to routinely keep them up to date. Develop and issue cost recovery regulations so that the agency has the proper legal basis for recouping the administrative costs incurred in reviewing and processing special-use permit applications. In order to fully implement this recommendation, it will be necessary for the agency to develop a cost accounting system. The Secretary should also consider seeking legislation permitting the agency to retain application and processing fees in the Forest Service unit where the costs were incurred. Permitting the agency to retain the revenues necessary to offset the costs of the program would provide additional incentive and resources for getting the necessary work done. We provided a draft of this report to the Forest Service for its review and comment. We met with agency officials, including the Deputy Director of the Lands Staff, to discuss their comments. The officials generally agreed with the report’s findings, conclusions, and recommendations. With regard to developing a cost-accounting system to accurately track costs, the officials said that USDA does not currently have cost-accounting standards. According to these officials, any cost-accounting system that is implemented should be in concert with USDA’s cost-accounting standards as a whole and not just address the special-use permit program. We agree, and the report has been modified to reflect this point. In the discussion comparing the appraised values of recreation residences’ sites with estimates of current values from county tax assessors, agency officials said that the report should clearly state that using tax assessors’ estimates is not a valid representation of the fair market value of these sites. An appraisal of a site, performed by a qualified appraiser, would be the best way to assess its value. We agree. The information on tax assessors’ estimates of the value of recreation residence sites was used as a gross indicator of value and is not reliable as a site-specific estimate of fair market value. Agency officials also provided some technical clarifications, which have been included in the report. We conducted our review from July 1995 through October 1996 in accordance with generally accepted government auditing standards. We performed our work at Forest Service headquarters and field offices. We also contacted state and local officials in the areas where we did our field work. Appendix II contains further details on our objectives, scope, and methodology. We are sending copies of this report to the Secretary of Agriculture; the Chief of the Forest Service; and the Director, Office of Management and Budget. We will also make copies available to others on request. Please call me at (202) 512-3841 if you have any questions about this report. Major contributors to this report are listed in appendix IV. To increase the efficiency of the special-use program, the Forest Service has recently begun a study to streamline the special-use permit process. Among other things, the goal is to design a work process that reduces the time required to process applications. This effort began in mid-1996, and the report is due early in 1997. However, it should be noted that similar attempts to improve the system have been made in recent years but have met with little success. A recent example was a National Task Force on Special-Use Management, done in 1993 to 1994, which addressed issues similar to the current streamlining effort. The task force identified numerous program problems and developed suggested ways to streamline the permit process and make the program more consistent Service-wide. But, none of the task force’s recommended actions were adopted because, like several of the other situations described earlier in this report, Forest Service officials told us that the initiative was discontinued because of other agency priorities. In light of the early stage of the newly initiated streamlining effort and the lack of follow through on previous efforts, it is too early to determine what, if any, improvements will arise from the current effort. A key to the success will be the commitment of the Forest Service leadership to support the findings and provide resources needed to implement recommended actions. As a part of our review, we identified a number of actions that need to be considered by the new study team and the agency as a whole to better administer the program within existing resource constraints. Many of these actions are already being used by individual regions, forests or individual districts within forests and could have broader applicability as best practices throughout the agency. In addition to actions already being taken, administrators in the forests and regions provided us with many suggestions for improving efficiency. The specific efforts and suggestions we identified are summarized in table I.1. At many forests, billing responsibility rests with administrators in each forest ranger district. Some forests we reviewed have centralized billings in the forest supervisor’s office. Contributes to consistent billing practices across participating forest units resulting in improved permit fee accuracy, and program administrative cost savings. Establishing “expert zones” for managing certain types of permits. In many forests, permit management is divided by district with someone at each district responsible for all permits. At several forests we reviewed, permit managers with knowledge in outfitter and guides or resorts administered those types of permits in multiple districts. Fosters consistent treatment of similar types of permit applicants and holders across forest units. Develops a cadre of experts who work expeditiously and can further improve the permit administration processes. Some administrators have suggested that establishing a flat fee for some commercial uses (such as outfitters and guides) may be preferable to the complex computation, documentation, and permittee review that GRFS requires. Results in easy to understand fee rate that requires less computation time and fewer checks to ensure documents submitted by the permittee are accurate. Flat rate fees would likely not result in reductions to current fees, and would allow field resources dedicated to fee review to focus on other permit issues. Many administrators thought permit administration guidance was confusing and hard to follow, and expressed a need to update, consolidate and simplify the organization of permit direction provided in Forest Service manuals, handbooks, and regulations. Provides a clear blueprint for special-use permit administration that reduces the potential for misinterpretation by providing a usable, single desk reference. Making this process more understandable may save resource time and effort and provide consistent administration of permits. (continued) Some administrators believed that common standards for permit review and processing, performance monitoring and inspection were needed and should be adopted system-wide. Provides a consistent “core” approach to administration between forest units, and provides some flexibility for “unique” permit situations. A thorough review of standards will likely identify areas where current standards could be reduced. Administrators raised concern about their ability to provide proper resources to special-uses administration. They noted a lack of funding, staff, and commitment which delays or prevents some permits. Provides equitable sharing of resources to ensure reasonable response time to special-uses program new applicant and permittee requests. We were asked by the Chairman of the Subcommittee on Oversight of Government Management and the District of Columbia, Senate Committee on Government Affairs to determine (1) whether the fees currently charged for recreation special-use permits reflect fair market value; (2) whether permit processing and review costs are recovered; and (3) if fees do not reflect fair market value and costs are not being recovered, why not. As agreed, we focused our review on the Forest Service’s management of commercial and noncommercial recreation special-use permits because these permits account for approximately 73 percent of the annual fee revenue received from all Forest Service special-use permits. We used the Forest Service’s 1994 Forest Level Use Report database to identify the number and type of recreation special-use permits located in each of the Forest Service’s nine regions. We selected four Forest Service regions that had a large number of recreation special-use permits and provided geographic diversity. The four regions were Region 1-the Northern Region; Region 2-Rocky Mountain Region; Region 5-Pacific Southwest Region; and Region 9-Eastern Region. We also visited Region 4-Intermountain Region (Bridger National Forest) during the survey stage of this review. Overall, the five regions account for about two thirds of the Forest Service’s total authorized recreation special-use permits and two-thirds of total annual fees collected from these permitted uses. In each region, we selected two or three National Forests that had a large number and diverse mix of recreation special uses: Region 1-Lolo National Forest in Montana and the Panhandle National Forest in Idaho; Region 2-Pike-San Isabel and White River National Forests in Colorado; Region 5 -Shasta-Trinity, Stanislaus, and Inyo in California; and Region 9 -Chippewa and Superior National Forests in Minnesota. To determine federal policy for charging permit fees, we reviewed federal laws, regulations, and guidelines. To determine whether the Forest Service is charging fair market value for recreational special-use permits, we met with officials at Forest Service headquarters and field locations, and reviewed GAO, Department of Agriculture Inspector General, and other reports to obtain views on the ability of the Forest Service’s fee systems to achieve fair market value. In addition, at the five national forests visited, we asked forest officials to select permits in their forests that were representative of commercial activities (outfitter and guides and marinas) and noncommercial individual use (recreational residences). We reviewed permit documentation to determine the Forest Service’s fee methods and the annual fee charged for these activities and visited sites where possible. To assess the fair market value of fees for commercial activities, we compared the average Forest Service fee for commercial activities with the average fee charged by states for similar commercial activities. We spoke with state officials responsible for commercial permits in the five states in which the nine forests we visited were located (California, Colorado, Idaho, Minnesota, and Montana). In addition, we talked with officials at the National Parks and Conservation Association, who provided preliminary information on a recent updated survey of fee rates for commercial activities in state parks. To assess the fair market value of fees for noncommercial activities, we limited our review and comparison to recreation residence permit sites. We judgmentally identified five forests (Chippewa, Panhandle, Lolo, Stanislaus, and Pike-San Isabel) as locations to select recreation permit sites for fee comparison because we visited recreation residences lots in those forests. At each of the recreation areas we visited, we asked forest recreation residence permit administrators to identify a waterfront lot that was representative of the waterfront lots in the area. To compare fees, we asked local county assessors to estimate the current appraised value of the representative lot, calculated the Forest Service fee based on that value, and compared it to the actual 1995 fee paid for the lot. To determine whether permit processing and review costs are being recovered, we contacted Forest Service officials at the headquarters, regional, forest and district levels. We also reviewed Forest Service task force reports on the special-uses program and talked with officials from the USDA’s Office of General Counsel. To determine the causes of program problems and what can be done to improve agency management, we interviewed Forest Service headquarters and field officials to obtain their views on major factors contributing to problems and suggestions on what can be done to help improve the program. All lots are similar to lots in the vicinity. All but the Chalk Creek lot are lakefront lots. The Chalk Creek site is 20 feet from a stream. Doreen S. Feldman A. Richard Kasdan 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. 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 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. | Pursuant to a congressional request, GAO reviewed the Forest Service's management of the recreation special-use program, focusing on whether: (1) the fees currently charged for recreation special-uses reflect fair market value; (2) application processing and review costs are recovered; and (3) fees reflect fair market value and costs are not being recovered, and if not, why. GAO found that: (1) in many instances, the Forest Service is not getting fair market fees for commercial and noncommercial recreation special-use permits; (2) the Forest Service's fee system that sets fees for most commercial uses has not been updated in nearly 30 years and generally limits fees to less than 3 percent of a permittee's gross revenues; (3) in comparison, fees for similar commercial uses of nearby state-held land average 5 to 15 percent of a permittee's gross revenues; (4) fees for holders of recreation residence permits are based on out-of-date assessments of the value of the land and, as a result, fees for many of these permit holders are lower than they should be on the basis of current market conditions; (5) while the Forest Service has been authorized to recover costs incurred in reviewing and processing all types of special-use permit applications since as far back as 1952, it has not done so; (6) on the basis of Service-provided information, GAO estimated that in 1994 the costs to review and process special-use permits were about $13 million, but this would not represent the cost to run the entire program, which also includes activities such as annual billing, conducting inspections, and training staff; (7) Service officials acknowledge that because they do not have a cost accounting system, they do not know the cost of administering all aspects of the special-use permit program; (8) the lack of priority given to the program by agency management and the lack of incentives to correct known problems contribute to the Service's problems in collecting fees and recovering costs; (9) as a result, resources needed to improve known program weaknesses have not been made available; and (10) since additional fees collected would generally be returned to the U.S. Treasury and not benefit the forest, there is a lack of incentive for the Service to dedicate the additional resources to address these issues. |
The Voting Rights Act was intended, among other things, to protect the voting rights of U.S. citizens of certain ethnic groups whose command of the English language may be limited. Language minority provisions contained in Section 203 require covered states and covered jurisdictions—political subdivisions—that meet the act’s coverage criteria to provide written materials and other assistance, in the language of certain “language minority groups,” in addition to English. Section 203 defines these language minorities as persons who are of Alaskan Native, American Indian, Asian American, or Spanish heritage. (See app. II for the specific criteria for determining which jurisdictions are to be covered under Section 203 and a list of the covered jurisdictions.) Where the applicable language minority groups have a commonly used written language, Section 203 requires covered jurisdictions to provide written election materials in the languages of the groups. Where the language of the applicable minority group is oral or unwritten, or in the case of American Indian and Alaskan Native languages if the predominant language is historically unwritten, only oral information and assistance is required. With respect to all covered jurisdictions, DOJ guidance provides that oral assistance and publicity (e.g., public information advertisements on the radio) should be provided to the extent needed to enable members of the applicable language minority group to participate effectively in the electoral process. Section 203 requirements apply to the entire election process—from voter registration through Election Day—for all federal, state, and local elections in the covered jurisdictions. The DOJ Civil Rights Division is to enforce the covered states and jurisdictions’ compliance with the Section 203 bilingual language requirements. Where covered states and jurisdictions fail to comply with the provisions, DOJ may bring a civil action to enforce compliance with the bilingual language provisions. DOJ may also choose to enter into a settlement agreement, memorandum of agreement, or consent decree with a jurisdiction to ensure compliance. These agreements, which may vary from jurisdiction to jurisdiction, outline the steps necessary to comply with the language provisions and may cover issues such as the number of bilingual poll workers needed or the materials to be translated. (See app. III for a list of jurisdictions that have been subject to DOJ actions related to Section 203 since 1980.) DOJ has published general guidance for election officials on how to comply with Section 203 in the Code of Federal Regulations and on its Web site. This guidance provides broad information about a number of topics, including determining the exact language covered within the Alaskan Native, American Indian, Asian American, or Spanish heritage language groups and the activities affected by the language provisions. For example, according to DOJ, jurisdictions should take all reasonable steps to allow members of applicable language minority groups to be effectively informed and participate effectively in the electoral process, but may also exercise some discretion as to where they focus their efforts. DOJ guidance notes that a jurisdiction need not, for example, provide bilingual assistance to all of its eligible voters if it effectively targets its bilingual program to those in actual need of assistance. In addition, DOJ guidance advises that compliance is more likely to be achieved when jurisdictions work with local language minority groups to determine the best methods to inform the language minority community about available assistance. Additionally, DOJ instructs that when evaluating whether a jurisdiction has provided a level of oral assistance needed to enable applicable language minority groups to participate effectively in the electoral process, DOJ will consider the number of bilingual poll workers utilized. It also stresses the importance of accurately translated materials. Furthermore, the DOJ Civil Rights Division states that its guidance cannot be prescriptive because election systems and the circumstances of language minority communities vary widely across the United States. Instead, DOJ provides guiding principles and practical suggestions to election officials. Apart from DOJ’s compliance guidelines, election jurisdictions, including those covered by Section 203, may also receive information from the EAC designed to assist election officials in meeting the needs of limited-English proficient voters. The Help America Vote Act of 2002 (HAVA) established the EAC to assist in the administration of federal elections and to otherwise provide assistance with the administration of certain federal election laws and programs, to establish minimum election administration standards for states and units of local government with responsibility for the administration of federal elections, and for other purposes. Section 202 of HAVA, in general, directs the EAC to serve as a national clearinghouse and resource for the compilation of information and review of procedures with respect to the administration of federal elections. In addition, Section 801 of HAVA transferred to the EAC all clearinghouse functions that the Office of Election Administration—established within the Federal Election Commission—exercised before the enactment of HAVA. These responsibilities included providing recommendations and tools so that election officials could provide materials in alternate languages for limited English proficiency voters. Furthermore, HAVA requires the EAC to conduct periodic studies, as the EAC may determine, to include: (1) methods of ensuring the accessibility of voting, registration, polling places, and voting equipment to all voters, including individuals with disabilities (including the blind and visually impaired), Native American or Alaska Native citizens, and voters with limited proficiency in the English language, and (2) the technical feasibility of providing voting materials in eight or more languages for voters who speak those languages and who have limited English proficiency. The U.S. election system is highly decentralized, with primary responsibility for managing, planning, and conducting elections residing at the local jurisdiction level. As we reported in June 2006, there are about 10,500 local government jurisdictions responsible for conducting statewide and federal elections nationwide. Of these jurisdictions, only 296 are covered by Section 203. States can be divided into two groups according to how they delegate election responsibilities to local jurisdictions: Most states delegate statewide and federal election responsibilities primarily to counties, with a few of these states delegating these responsibilities to some cities. One state, Alaska, is divided into four election regions comprised of boroughs, municipalities, and other census areas known by the U.S. Census Bureau as county equivalents. State personnel in these regions are responsible for conducting statewide and federal elections. This first group of states contains about one-fourth of the local election jurisdictions nationwide. The remaining states delegate these election responsibilities to subcounty governmental units know by the U.S. Census Bureau as minor civil divisions. These include entities such as cities, towns, villages, and townships. This second group of states contains about three-fourths of the local election jurisdictions nationwide. Nearly all of the 296 jurisdictions covered under Section 203 are counties, but they also include county equivalents in some states and minor civil divisions. In addition to all elections conducted by these jurisdictions, the provisions of Section 203 also apply to the local elections conducted by sub-jurisdictions, such as cities, towns, school districts and other special purpose districts, contained within these listed jurisdictions. Local election jurisdictions vary widely in size and complexity, ranging from small New England townships to Los Angeles County, Calif., whose number of registered voters exceeds that of many states. Our election system is based upon a complex interaction of people (voters, election officials, and poll workers), processes (controls), and technology that must work effectively together to achieve a successful election. Every stage of the election process—registration, absentee and early voting, preparing for and conducting Election Day activities, and provisional voting—is affected by the interface of people, processes, and technology. (See table 1 for a discussion of the stages of the election process.) Over the years we have completed a number of reviews related to elections. In 1986 and 1997 we issued reports addressing the types of bilingual assistance provided by covered jurisdictions, as well as the cost of this assistance. In our 1997 report, we found that most jurisdictions reportedly were providing both oral and written assistance. We also issued a series of reports following the November 2000 general election addressing a range of issues that emerged during that election and identifying challenges that election officials reported facing throughout the election process. In addition, we have issued reports since the November 2004 general election on voter registration issues and security and reliability of electronic voting. In 2006, we reported on a wide array of election issues including discussing, at each major stage of the election process, changes to election systems since the 2000 election, and challenges encountered in the November 2004 general election. (See related GAO products at the end of this report for a list of our prior work.) In addition to our work on elections, professors at Arizona State University released a comprehensive study in March 2006 regarding language minority assistance practices in public elections. Their study, based on survey data obtained from jurisdictions currently or previously covered by Section 203, updated the information from our 1986 and 1997 reports regarding the costs associated with providing language assistance and also discussed the types of assistance provided. About half of the surveyed jurisdictions responded, and of the respondents, a majority was unable to provide the costs of their bilingual assistance programs. Additionally, just over 80 percent of responding jurisdictions reported providing some type of language assistance. Election officials in 13 of the 14 jurisdictions included in our review reported providing some type of bilingual voting assistance at each stage of the election process but also reported challenges in providing this assistance. In part because DOJ’s guidance intentionally provides jurisdictions some flexibility in how they implement bilingual voting requirements and the needs and preferences of language minority communities vary from jurisdiction to jurisdiction, election officials in these 13 jurisdictions reported using varying strategies to organize their bilingual voting assistance program staff and offices, work with CBOs, recruit bilingual poll workers, determine where to target their bilingual voting assistance programs, and conduct outreach to the language minority community. In addition, election officials in these 13 jurisdictions also reported experiencing a variety of challenges in providing bilingual assistance, with the key challenges being: (1) recruiting and ensuring quality performance of bilingual poll workers; (2) targeting bilingual voting assistance; (3) designing and translating bilingual voting assistance materials; and (4) allocating sufficient resources to provide bilingual voting assistance. Although election officials in 12 jurisdictions reported receiving some degree of guidance or assistance for addressing Section 203 requirements from DOJ and other sources, officials in 9 jurisdictions reported wanting additional guidance or assistance. The EAC has taken recent steps to provide additional guidance and information to jurisdictions on providing bilingual assistance. Election officials in 13 of the 14 jurisdictions reported providing some type of written assistance and/or oral assistance for language minority voters. This assistance was provided throughout the election process—from voter registration to Election Day. Written assistance included such things as translated voter registration forms, ballots, sample ballots, instructions, and signs. Oral assistance included bilingual phone and in-office assistance, translated audio instructions and ballots, bilingual poll workers, and bilingual in-person outreach activities. The various types of bilingual voting assistance and the numbers of jurisdictions that reported providing each type of assistance at each stage of the election process are summarized in table 2. Election officials in 12 jurisdictions reported providing some type of bilingual voter registration assistance and 11 of these jurisdictions reported offering both oral and written assistance. All but four election offices included in our study reported providing translated voter registration forms and all but two reported conducting in-person voter registration outreach activities targeted at the language minority community. Election offices reported a wide range of venues and methods—such as staff participation in community parades and at swearing in ceremonies for new citizens—to conduct voter registration outreach to the language minority community. In addition to these outreach activities, representatives of most election offices also reported offering bilingual voter registration assistance to individuals who phoned or visited the election office. (See table 3 for examples of written and oral bilingual assistance reportedly provided to assist language minority community voters with voter registration.) Election officials in 13 of the 14 jurisdictions included in our study reported providing some form of bilingual voting assistance for absentee and/or early voting. The most common type of assistance (12 jurisdictions) was bilingual ballots or separate translated ballots for absentee or early voters. Other types of assistance provided by varying numbers of jurisdictions included bilingual or separate translated absentee voter registration forms; sample ballots and voting instructions; bilingual phone assistance; bilingual in-office assistance; and bilingual poll workers at early voting locations. (See table 4 for examples of written and oral bilingual assistance reportedly provided to minority language absentee and early voters.) Election officials in 13 of the 14 jurisdictions reported providing some type of written and/or oral assistance for language minority voters on Election Day. As with absentee and early voting assistance, one of the most common types of written assistance reportedly provided on Election Day was bilingual ballots or separate translated written ballots, which were reportedly provided in 12 of the jurisdictions. The most common form of oral bilingual voting assistance reportedly provided on Election Day was bilingual poll workers, who were provided in 13 jurisdictions. Two jurisdictions reportedly provided audio translations for largely unwritten Native American languages. (See table 5 for examples of written and oral bilingual assistance reportedly provided on Election Day.) See appendix IV for examples of bilingual materials reportedly available to voters in some of the locations we visited. CBOs reported providing various types of bilingual voting assistance in nine of the jurisdictions included in our study. Seven key types of assistance that CBOs reported providing were: Informing the language minority community about voting (reportedly provided by CBOs in nine jurisdictions); Registering language minority voters (8); Providing assistance to language minority voters on Election Day (7); Helping determine the types of bilingual voting assistance needed and which voters need it (7); Informing language minority voters about early and/or absentee voting (6); Recruiting and training bilingual poll workers (6); and Helping translate or design the bilingual or translated ballot (4). The bilingual voting assistance provided by CBOs generally took one of three forms: supplementing election office efforts, working with election offices to provide assistance, or providing assistance that otherwise was not provided by the election office. For example, some CBO representatives reported providing types of assistance similar to those offered by election offices, such as registering language minority citizens to vote or answering voters’ questions. Other CBO representatives reported helping election officials provide assistance, such as helping to recruit bilingual poll workers or translating official election materials. Finally, some CBO representatives reported conducting activities related to bilingual voting assistance that election officials did not do, such as employing poll monitors and providing language minority voters with transportation to the polls on Election Day. Some examples of the specific activities the 38 CBOs included in our study reported undertaking as part of their bilingual voting assistance efforts are summarized in table 6. Election officials in jurisdictions included in our review reported using varying strategies to implement their bilingual voting assistance programs. These strategies included combinations of (1) employing bilingual voting assistance coordinators; (2) working with CBOs; (3) recruiting bilingual poll workers; (4) determining where to target their bilingual voting assistance programs; and (5) conducting outreach to the language minority community. The range of election office strategies may be due in part to the flexibility of the guidance that the DOJ Civil Rights Division provides to help covered jurisdictions address the requirements of Section 203, as the guidance places the responsibility of determining how best to provide the required assistance with the individual jurisdictions. DOJ states that its guidance is intentionally flexible because the needs and preferences of language minority communities vary from jurisdiction to jurisdiction. This flexibility allows election offices to tailor their programs to try to meet their jurisdiction’s unique needs. Election officials in nine of the jurisdictions included in our study reported that they employed dedicated coordinators to manage their bilingual voting assistance programs. Officials in two of these offices noted that employing a bilingual voting assistance coordinator who was familiar with the demographics of the local language minority communities was particularly helpful in effectively determining where to target their bilingual voting assistance. In addition, election offices in four of the six jurisdictions that were required to provide assistance in more than one language reported having at least one designated staff for each covered language minority group. For example, the Orange County, Calif., registrar of voters reported having one or two bilingual “community program specialists” devoted to bilingual voting assistance in each of its covered languages—Chinese, Korean, Spanish, and Vietnamese. Election officials in 10 of the 14 jurisdictions reported that they worked with CBOs in providing bilingual voting assistance. Of these, officials in seven reported having formal election advisory committees or task forces that included CBO representatives. Election officials reported that some of these advisory committees provided input such as feedback on elections, comments on translated election materials, and suggestions for targeting bilingual voting assistance. For example, in King County, Wash., the election office reportedly received guidance and assistance from a “Section 203 Community Coalition,” which was comprised of five CBOs representing the Chinese community. According to coalition members, the coalition worked closely with the election office, meeting as often as twice a month. In one example of their collaboration, King County’s “Section 203 Community Coalition” reportedly introduced the idea of conducting surname analysis to identify Chinese-speaking potential voters and then mail the identified individuals a postcard notifying them about bilingual voting assistance and encouraging them to return the postcard to the King County Elections Department if they would like to receive future elections materials in Chinese. The coalition conducted the analysis, the county paid for the mailing, and both parties told us it was a very successful collaborative effort. The three elections offices that reported working with CBOs but did not report having formal advisory committees reportedly worked with CBOs in other ways. For example, Seward County, Kans., election officials reported working with CBOs on voter outreach to minority language voters by distributing bilingual voter registration cards. Similarly, Suffolk County, N.Y., election officials reported working and communicating regularly with a network of CBOs to disseminate election information to language minority voters through churches, community centers, and households. Suffolk County election officials stated that their relationships with CBOs were very helpful because they facilitated voter outreach and expanded the Bureau of Elections’ access to people in the language minority community. Election officials in 13 jurisdictions we contacted reported recruiting bilingual poll workers through a combination of efforts. These efforts included: (1) contacting CBOs and language minority media, (2) posting recruitment materials in language minority neighborhoods, (3) contacting potential poll workers directly, (4) recruiting from the public and private sector employers, and (5) conducting direct mailings. According to officials in nine jurisdictions, one method of recruiting bilingual poll workers was communication with representatives of CBOs or the minority community who facilitated contacting and recruiting bilingual poll workers. In addition, election officials in some jurisdictions reported using language minority media such as in-language radio, television, and newspapers to encourage members of the language minority community to serve as bilingual poll workers. For example, an election official in King County, Wash., reported success with a televised public service announcement featuring a Chinese American former Governor of Washington State encouraging other Chinese Americans to volunteer as bilingual poll workers. Five elections offices reported posting signs in language minority neighborhoods—in schools, libraries, stores, and civic associations—to recruit bilingual poll workers. In the City of Los Angeles, election officials reported posting signs in ethnic grocery stores in language minority neighborhoods to recruit bilingual poll workers. Election officials in five jurisdictions also reported recruiting bilingual poll workers through in-person contact with potential applicants at language minority community events, through e-mail messages, and by making targeted phone calls. Other jurisdictions reported more success in recruiting either high school or college students to be bilingual poll workers than did those who tried recruiting bilingual poll workers from the private sector. Representatives of several election offices reported supplementing these efforts by recruiting local government employees to be bilingual poll workers. Finally, in three of the election offices we contacted, officials stated that direct mailings were used to recruit bilingual poll workers. To determine where to target their bilingual voting assistance efforts, election officials in many of the jurisdictions we contacted reported using some combination of surname analysis, reviews of U.S. Census Bureau and other demographic data, input from CBOs, and analysis of voter requests for bilingual voting information. Specifically, these efforts included the following: Analyzing surnames: Election officials in eight jurisdictions reported using surname analysis to try to identify those areas within a jurisdiction that contain a higher concentration of voting age citizens with surnames indicative of the covered minority language. A few election officials stated that surname analysis was most helpful in identifying language minority individuals in largely homogeneous communities or in identifying neighborhoods that were undergoing demographic transitions and experiencing an influx of new language minority communities. Other election officials reported that although surname analysis may not have been an accurate tool, it was an approach prescribed in a legal agreement negotiated with the DOJ Civil Rights Division. As a result, officials chose to use surname analysis, but in combination with other targeting approaches. Officials with the DOJ Civil Rights Division noted that in many of the agreements reached between the Civil Rights Division and local election officials, surname analysis was used—in the absence of other reliable data—as a starting point for determining appropriate sites for bilingual poll workers. Analyzing demographic data: Election officials in some jurisdictions reported using demographic data and information from the U.S. Census Bureau and other sources to identify language minority communities within their jurisdictions. For example, due to concerns that surname analysis alone was not allowing them to effectively target assistance, election officials in Harris County, Tex., told us they hired a contractor to use Census data to identify areas with population concentrations of language minority individuals within their jurisdiction. Election officials in Montgomery County, Md., reported using a combination of Census data and other data sources such as demographic statistics on students in the jurisdiction’s public school system to target those precincts with the greatest need for bilingual voting assistance. Obtaining input from CBOs: Election officials in nine jurisdictions reported obtaining input from CBOs to better target their bilingual voting assistance programs. Officials in seven of the election offices we contacted reported seeking targeting guidance from their language minority advisory committees. For example, an election official in Montgomery County, Md., reported that their multicultural outreach committee has been very helpful in identifying which voters need bilingual voting assistance, the types of assistance to be provided, and at which precincts assistance needs to be provided. In Los Angeles County, Calif., election officials stated that they obtained input from CBOs as part of their systematic targeting process to identify precincts that may need bilingual voting assistance—if a community partner organization indicated that a neighborhood should be targeted for a particular language, the polling places in that neighborhood were considered “targeted.” Analyzing voter requests: Officials in four election offices reported utilizing records of past voter requests for or use of bilingual voting assistance to target future bilingual voting assistance efforts. For example, some officials reported collecting data on requests for bilingual assistance noted on voter registration cards, absentee ballot request forms, and phone calls to the elections office. In addition, election officials in three jurisdictions reported asking poll workers to record the number of requests for bilingual voting assistance on Election Day. Election officials in Los Angeles County, Calif., for example, reported that they tracked requests for language assistance by precinct and had poll workers use a “multilingual tally card” to keep track of the numbers of voters requesting language assistance on Election Day. (An example of a multilingual tally card used in Los Angeles County is provided in app. IV.) Election officials in five jurisdictions, however, stated that they did not or could not track voter requests for assistance. For example, Seward County, Kans., election officials stated that Kansas state law forbids the election office from tracking individuals’ requests for bilingual voting assistance. Similarly, an election official in Montgomery County, Md., reported that due to personal privacy concerns, the county did not track usage of bilingual voting assistance. Election officials in Harris County, Tex., noted that their state-issued voter registration forms did not have a place for registrants to indicate their preferred language; therefore, it was not possible for the local jurisdictions to track requests for assistance using voter registration forms. Election officials in 13 jurisdictions told us that they used various strategies to reach out to language minority voters to inform them of the availability of bilingual voting assistance and to educate them about the election process. These strategies included working with CBOs; using ethnic media outlets; conducting in-person contacts; and posting bilingual voting information on the Internet. Specifically, these efforts included the following: Working with CBOs: Election officials in nine jurisdictions reported working with representatives of CBOs to conduct bilingual outreach and voter education. For example, Suffolk County, N.Y., election officials stated that they worked closely with the network of organizations active in their language minority communities to disseminate election information to churches, community centers, and households in their efforts to reach language minority voters. Election officials in the City of Boston reported that they communicated regularly with the CBO representatives that participate in the city’s Voter Outreach and Education Task Force, and that the CBOs played an active, necessary role in disseminating bilingual voting assistance information. Similarly, election officials in King County, Wash., reported that CBOs provided substantial amounts of outreach, workshops, and seminars informing and educating language minorities of the availability of election materials and how to use the new voting system implemented in the jurisdiction. Using media outlets: Jurisdictions reported using a variety of media outlets to conduct bilingual outreach and voter education. Election officials in most of the jurisdictions included in our study reported using print media, radio or televised public service announcements to conduct bilingual outreach, and the types of media used sometimes varied among the targeted language minority communities. For example, election officials in Orange County, Calif., reported using Spanish-speaking television stations to target information to the Latino community but that using Vietnamese radio stations and newspapers were more effective for reaching the Vietnamese community. Election officials in the City of Boston reported that they worked with the Ethnic Media Studies Department at the University of Massachusetts to determine what ethnic media outlets were most used by the language minority community in their jurisdiction. Finally, election officials in six jurisdictions also reported using targeted translated mailings to inform the covered language minority community about election processes and important voter information. These included translated voter registration forms, sample ballots, and voting instructions. Using in-person contact: Election officials in 11 jurisdictions reported using in-person contact with the language minority community as another means to inform targeted individuals about the availability of bilingual voting assistance and to educate them on election processes. For example, election officials for the City of Boston reported that in- person contact was the most effective outreach method in their jurisdiction. As a result, their staff attended and registered voters at language minority community forums and swearing-in ceremonies for new citizens. Election officials in other jurisdictions also reported that they visited language minority community events or locations such as festivals and libraries to conduct voter outreach and education. For example, an election official in King County, Wash., stated that she participated in voter education forums held by a CBO to talk through the voter’s pamphlet with Chinese-speaking voters, provide instructions on how to fill out the ballot, and encourage participants to share their knowledge with others in the language minority community. Posting information on the Internet: Officials in 11 of the election offices we contacted reported posting bilingual voting assistance materials and information on their websites, though to varying extents. For example, election officials in Harris County, Tex., told us they translated aspects of their Web site to provide language minority individuals with essential voting information, including important dates, early voting and Election Day information, sample ballots, and information on how to operate the jurisdiction’s voting system. In contrast, Orange County, Calif., election officials reported that nearly all of the web content provided in English is available in each of the four covered languages. Los Angeles County, Calif., election officials reported focusing their Web site’s language content on frequently utilized materials while working to make more election procedures available in the county’s required minority languages. All 14 jurisdictions we contacted reported experiencing challenges in providing bilingual assistance, with the key challenges related to: (1) recruiting and ensuring quality performance of bilingual poll workers, (2) targeting bilingual voting assistance, (3) designing and translating bilingual voting assistance materials, and (4) allocating sufficient resources to bilingual voting assistance. In addition to identifying these key challenges, officials in nine jurisdictions expressed a desire for more guidance or assistance on providing bilingual voting assistance. Election officials in nine of the jurisdictions stated that they had difficulty recruiting bilingual poll workers for a variety of reasons. For example, five jurisdictions reported that recruiting was difficult because of the long hours and minimal pay provided to bilingual poll workers—they believed that many individuals in the language minority communities had multiple jobs and could not afford to commit to the long hours required of a bilingual poll worker on Election Day. Election officials in five jurisdictions also added that it was a challenge to recruit bilingual poll workers who were willing to serve at a polling place outside their home precinct. In their experience, some bilingual poll workers either did not have the means to travel to other polling sites or were reluctant to do so. In addition, demographic shifts in some jurisdictions reportedly created recruiting challenges. For example, representatives of four election offices stated that recruiting was especially challenging for new language minority communities with only a very limited pool of potential bilingual volunteers or when members of the language minority community that are fluent in the covered language are decreasing in numbers due to aging. In one jurisdiction, an election official reported that some voters who reside in areas that are not historically language minority communities do not want to be identified as language minority speakers; therefore, they hesitate to volunteer. In addition to recruiting problems, representatives of election offices from two jurisdictions reported that they experienced challenges related to bilingual poll worker performance. For example, election officials in Los Angeles County, Calif., stated that, in their experience, the performance of bilingual poll workers has been adversely affected by poor treatment by other poll workers that did not recognize the importance of providing bilingual voting assistance. Election officials in this jurisdiction also stated that CBOs have complained in the past that some of the bilingual poll workers were unwilling to assist language minority voters due to differences in their personal and cultural backgrounds, noting that acculturating new bilingual poll workers into the election environment was an issue they needed to address. In addition, election officials in this jurisdiction mentioned that while cultural sensitivity and diversity training was included in their general poll worker training, it was very difficult to spend sufficient time on the topic when there was a great deal of material to cover during the brief poll worker training time available. Similarly, election officials in the City of Boston reported difficulty managing some veteran poll workers who were reticent to use the training associated with the bilingual voting aspects of their job. According to these officials, expanding the length of training to address these issues has not been an option because trainees’ attention to the material covered was limited to a certain amount of time, attendance is not required, and it could increase costs associated with the training. Election officials in eight of the jurisdictions we contacted reported that limitations in surname analysis, U.S. Census Bureau data, or demographic shifts in their jurisdictions made it difficult to effectively target bilingual voting assistance. Election officials in several jurisdictions reported that surname analysis did not accurately indicate whether individuals were actually limited-English proficient or proficient in the covered language, and added that surname analysis may overstate the need for bilingual assistance in particular precincts. Election officials in Los Angeles County, Calif., also noted that surname analysis was not useful in jurisdictions containing multiple language minority groups, especially those with many overlapping surnames. For example, these officials reported that it was very difficult to correctly distinguish between members of the Filipino and Spanish-speaking communities using surname analysis because Filipino surnames overlap with Spanish surnames. Election officials in some jurisdictions also asserted that U.S. Census Bureau data are not accurate or detailed enough to enable them to effectively target language minority voters or, in some cases, determine the precise dialect a covered language minority community speaks. For example, Suffolk County, N.Y., election officials reported that they have had challenges targeting language minority individuals who are eligible to register and vote due to the number of undocumented persons included in Census data who are not registered to vote. In addition, election officials for Kenai Peninsula Borough, Alaska, explained that while the Census data identified the jurisdiction as requiring bilingual voting assistance in American Indian and Aleut languages, it is not clear what specific languages or dialects officials should target. Some election officials also explained that targeting bilingual voting assistance can be more difficult when the language minority communities are not concentrated in discrete geographic areas within the jurisdiction. For example, Los Angeles County, Calif., election officials reported that the diversity of the county’s population and its constant demographic shifts require their office to modify their targeted precincts every 2 years, whereas Census data for jurisdictions covered under Section 203 are currently updated every 10 years. Election officials in nine jurisdictions reported difficulties designing or translating their bilingual voting assistance materials. Election officials reported that translating ballot language was particularly challenging because of differences in the meanings of words in various dialects of a given language or difficulties finding comparable phrasing in the covered language. Some election officials reported that this challenge was exacerbated by the limited time they had to review and correct errors before printing and distributing the election materials. For example, election officials in Montgomery County, Md., reported that they operated under short time frames with the vendors that produced their materials and had just 7 days to proof the ballot layout, design, spelling, audio pronunciation, touch screen text, and optical scan text before the materials had to be printed. In addition, some election officials noted that a translated ballot in a minority language is often longer than the English version—this difference in text length made it difficult to design a user- friendly bilingual ballot. Election officials in 11 jurisdictions reported that they had difficulty allocating either sufficient staff or financial resources to their bilingual voting assistance efforts. Election officials in five jurisdictions stated that additional staff would allow them to more effectively conduct outreach to the language minority communities. For example, an election official from Miami-Dade County, Fla., stated that having limited staff available to send to language minority communities has made it more difficult to educate language minority voters about the election process. Additionally, election officials in two jurisdictions stated that having sufficient staff would allow them to more effectively translate and review the written and oral assistance provided. In Montgomery County, Md., election officials reported that they rely heavily on unpaid community volunteers but with additional funding the county could conduct more outreach activities. Although officials in 12 jurisdictions reported receiving some degree of guidance or assistance from DOJ or other sources, officials in 9 jurisdictions also reported that more guidance or assistance may be helpful. For example, election officials in the City of Boston stated that they received some assistance from DOJ in the past, but that additional guidance and greater coordination among jurisdictions that provide bilingual voting assistance would also be beneficial. These officials told us they had taken the initiative to communicate with other covered jurisdictions to learn about their approaches to providing bilingual voting assistance but believed that a more organized system for information sharing between jurisdictions would be useful. These same views were echoed by election officials participating in discussion sessions we held on bilingual voting assistance during two national election conferences on election issues sponsored by the Election Center in 2007. Specifically, in both discussion sessions, several election officials noted that additional guidance and greater coordination among jurisdictions that provide bilingual voting assistance would be beneficial. In addition, an official from a jurisdiction included in our study stated that the Secretary of State’s Office and DOJ had offered assistance, but little to none had been received. Election officials in five jurisdictions that reported receiving guidance or assistance from DOJ stated that some of the assistance was not helpful, accurate, or reliable. Officials with the DOJ Civil Rights Division stated that their office offers guidance and assistance to local election officials on how to comply with Section 203, but it is the responsibility of covered jurisdictions to determine what languages, forms of languages, or dialects will be effective in their jurisdictions. Furthermore, these officials stated that its guidance is intentionally flexible because election systems and the circumstances of language minority communities vary widely across the United States. Instead, DOJ states that it provides guiding principles and practical suggestions for election officials to use. DOJ officials also noted that they have taken steps to make covered jurisdictions aware of this guidance, including conducting in-person visits with newly-covered jurisdictions as well as making presentations to state and local election officials through national groups and associations. The EAC has taken steps to provide guidance on bilingual voting assistance as part of its responsibilities under HAVA to serve as a national clearinghouse and resource for information with respect to the administration of federal elections. For example, the EAC formed a Language Accessibility Program that has taken steps to provide recommendations and tools to election officials on providing bilingual voting assistance. In April 2007, the EAC published English-to-Spanish and Spanish-to-English versions of a glossary of over 1,800 election terms and phrases used in the administration of elections. The glossary was designed to assist state and local election officials in providing translated election materials that are culturally and linguistically appropriate. In addition, in September 2007, the EAC awarded a contract to translate this glossary into five additional languages covered under Section 203: Chinese, Japanese, Korean, Tagalog, and Vietnamese, with an anticipated glossary publication date of May 2008. The EAC also issued two guidebooks on recruiting and training poll workers that included suggestions on serving the needs of language minority voters. For example, one of the guidebooks included a section on partnering with civic organizations to recruit bilingual poll workers, and the other guidebook included a chapter on recruiting bilingual college students to serve as poll workers. In addition to its completed publications, the EAC has other assistance efforts planned in response to recent concerns voiced by election officials to the EAC regarding the need for additional guidance and information on providing bilingual assistance. For example, the EAC plans to dedicate a future chapter of its set of Election Management Guidelines to the topic of language accessibility. EAC officials reported that this language accessibility chapter (and accompanying brochure) will address strategies for election officials to consider and implement when providing elections services to voters with limited English proficiency throughout the election process. The EAC plans to develop this guidance by consulting election officials and professionals with first-hand experience managing elections in order to identify and develop the key content the publications should address. EAC officials noted that this process should begin in April 2008, and final publications should be released to the public by the end of that year. After its initial set of Election Management Guidelines has been completed, the EAC plans to regularly assess the need to cover other topic areas and update previous materials to maintain current and relevant information in the guidelines. Although we identified little data measuring the usefulness of various types of bilingual voting assistance, election officials in eight jurisdictions and CBO representatives in seven jurisdictions in our study told us that they believed certain forms of assistance were more useful than others. In addition, none of the jurisdictions had formally evaluated the effectiveness of their bilingual voting assistance programs, although most had used some means of gathering information about elements of the assistance provided. Election officials in 10 jurisdictions and CBO representatives in 9 jurisdictions also stated that modifications could be made that would improve the usefulness of the bilingual services provided to voters. While the use of formal program evaluation tools has proven to be a successful means for federal agencies to improve program effectiveness, accountability, and service delivery, conducting formal evaluations of the usefulness and effect of bilingual voting assistance is difficult for a variety of reasons. Three key difficulties include (1) identifying the objectives and appropriate indicators of success, (2) determining how to measure these indicators once they have been identified, and (3) isolating the effects of bilingual voting assistance efforts on language minority voters from more general voter outreach efforts or other influences on election processes. Although the election jurisdictions and CBOs we met with had not conducted any formal evaluations of the bilingual assistance they provided, the majority of both believed that the assistance that the election offices provided was useful to language minority voters. Specifically, election officials we met with in 12 of 14 jurisdictions and leaders of CBOs in 10 of 11 jurisdictions believed that the bilingual voting assistance provided by the election offices was useful to language minority voters and helped improve their participation in the voting process. However, some types of bilingual assistance were viewed as more useful than others. (See table 7 for the types of bilingual voting assistance identified as most useful.) Both election officials and CBO representatives generally agreed that having bilingual poll workers available on Election Day was among the most useful forms of assistance to voters. As noted above, election officials and CBO representatives in some jurisdictions also believed that having translated written materials was among the most useful forms of assistance. For example, a CBO representative in Harris County, Tex., told us that having bilingual voting guides, sample ballots, and other election materials was more useful to voters than having bilingual poll workers available on Election Day. He explained that members of the community preferred to have translated written materials that they could study in their homes and discuss with family members prior to the election rather than waiting to get assistance from bilingual poll workers on Election Day. In limited instances, bilingual voting assistance was not viewed as useful. In two jurisdictions, the limited use of the bilingual voting assistance by voters led election officials to question its usefulness. For example, officials with the Harris County, Tex., tax assessor’s office (which is responsible for voter registration in the county) provided us with some data that indicated a low usage of translated voter registration applications. During calendar year 2006 and through June 2007, the office distributed roughly 97,000 voter registration applications in Vietnamese and roughly 173,000 in Spanish by placing them at branches of the tax assessor’s office, public libraries, and Texas Department of Public Safety locations, as well as distributing them during community outreach events. However, the office received back only 2 of the Vietnamese and 309 of the Spanish registration applications. While the officials did not speculate as to the reasons for the low usage of the translated forms, they noted that since they are required to provide the forms in both languages they would continue doing so. CBO representatives in two jurisdictions also told us that they did not believe that the bilingual voting assistance provided by the election offices was always useful. For example, a CBO representative in Jackson County, S. Dak., noted that bilingual voting assistance was not needed because about 95 percent of people in the covered language group can read and understand English. This opinion was also similar to that of a group of senior citizen Filipino voters we met with through a CBO in Los Angeles County, Calif. These voters had mixed views on the usefulness of the bilingual voting assistance they received. Some of these voters indicated that the quality of the translated ballots was poor; therefore, they instead voted using the English version of the ballots. However, these voters also noted that Filipinos generally know how to read and speak English; thus, the assistance was not necessary. Yet, these voters also wanted the same benefits (i.e., translated election materials) provided to them that other language minority groups received under Section 203. Election officials and CBO representatives in some jurisdictions stated that modifications could be made that would improve the usefulness of the bilingual assistance currently provided to language minority voters. For example, election officials in four jurisdictions and CBO representatives in nine jurisdictions believed that the usefulness of bilingual voting assistance provided by the election office could be improved through additional community outreach and education efforts. Election officials in five jurisdictions and CBO representatives in six jurisdictions noted that improvements in the translation of bilingual voting materials would improve their usefulness to language minority voters. Finally, election officials in three jurisdictions and CBO representatives in seven jurisdictions believed that improvements in the recruiting and training of bilingual poll workers would improve the usefulness of bilingual voting assistance. (See table 8 for a list of specific suggestions from election officials and CBO representatives for improving the usefulness of bilingual voting assistance.) None of the jurisdictions we included in our study had formally evaluated the effectiveness of their bilingual voting assistance programs, although most had used some means of gathering information about the assistance provided. Election officials in two jurisdictions told us that formal evaluations of their bilingual voting assistance programs were unnecessary, since even if they discovered that voters had not used the assistance or did not find it useful, the jurisdictions were still required to provide it. Further, officials in one of these jurisdictions said it is inappropriate for the jurisdiction to conduct such a study because of the risk of perceived political motivations to do away with bilingual voting assistance, as well as the potential for legal action if the evaluation results were used to try to justify not providing bilingual voting assistance. Election officials in 12 of the 14 jurisdictions reported they used various informal means to get information about the effectiveness of certain aspects of their bilingual voting assistance programs. For example, election officials in six jurisdictions told us they used feedback from voters, community groups, advisory committees, phone calls to a language telephone hotline, and other public contacts to determine if the bilingual assistance was useful and whether any modifications were needed. Election officials in one jurisdiction said their CBO partners were their “eyes and ears”—providing significant input if the bilingual voting assistance they provided was not effective or needed improvement. These officials commented that they believed obtaining feedback from CBOs was the best way to know how they were doing, and told us that DOJ had acknowledged that using CBOs for feedback is a good idea. Election officials in another jurisdiction reported that they reviewed Election Day call-center logs to determine whether voters or others had reported any problems related to bilingual voting assistance, and that if any problems were identified the jurisdiction worked to address them. Election officials in four jurisdictions reported they had conducted post-election surveys of or obtained comments from poll workers, either to determine the number of voters who had used bilingual assistance at the polls on Election Day or to obtain feedback about election judges’ and poll workers’ experiences concerning the assistance provided. Finally, election officials in two jurisdictions noted that they reviewed changes in the numbers of language minority voters voting or requesting non-English ballots to gauge the effectiveness of their efforts. Representatives from CBOs in three jurisdictions reported that their organizations had conducted some type of evaluation of the bilingual assistance provided by their election jurisdiction in the November 2006 general election or had collected other information about the bilingual voting assistance provided in their jurisdictions. For example, representatives of a CBO in one jurisdiction told us they had conducted exit polling with all voters, not just language minority voters, in the November 2006 general election. Leaders from CBOs in another jurisdiction reported conducting focus groups with county leaders, voters, and callers to a phone bank regarding the usefulness of the bilingual voting assistance provided in their jurisdiction. In addition, representatives of a CBO that was involved in two jurisdictions noted that their organization collected data on Election Day regarding the presence and activity of bilingual poll workers and the display of translated voting materials in polling places. Representatives with one CBO told us their method of evaluation relied on informal feedback from community members. While formal program evaluation tools have proven to be successful means for federal agencies to improve program effectiveness, accountability, and service delivery, election offices face many difficult issues in evaluating the effectiveness, or outcomes, of the bilingual voting assistance they provide. Among these, three key issues are (1) identifying the objectives of the bilingual voting assistance program and criteria for achieving these objectives, (2) determining how to measure these criteria once they have been identified, and (3) isolating the effects of the bilingual assistance from other influences on language minority voters when they vote. (See app. V for a discussion of additional challenges to evaluating the usefulness of bilingual voting assistance.) Identifying the objectives and criteria: The identification of appropriate objectives and criteria for achieving them is basic to any evaluation of effectiveness, as an effective program must move toward the achievement of an identified purpose. Examples of objectives for bilingual assistance could be (1) increased language minority voter turnout, (2) increased independence demonstrated by language minority voters when voting, and (3) language minority voters who are better informed when casting their ballots. Determining how the objectives and criteria will be measured: Once objectives and criteria have been established, it is then necessary to determine how they will be measured. For a number of reasons, measuring the effectiveness of bilingual voting assistance is difficult. For example, to measure the effectiveness of bilingual voting assistance on language minority voter turnout, if a jurisdiction keeps records on which voters have indicated needing bilingual assistance, poll books can be checked to see whether these voters have voted and the numbers of such voters can be tracked across elections. However, officials in one jurisdiction told us that state law prohibited them from indicating either a person’s race or their primary language in their voter registration records. Additionally, a jurisdiction could track the number of ballots printed in a covered language that had been used by voters. However, the number of ballots would not be a useful measure if both English as well as the covered language are printed on the same ballot. Measuring other potential indicators could be even more difficult. For example, one objective of bilingual voting assistance could be to enable language minority voters to cast their ballots independently—for example, without the need for someone to accompany them into the polling booth to provide language assistance. However, without information on the number and percentage of voters who needed assistance to cast their ballot prior to the implementation of bilingual voting assistance, jurisdictions could not measure the effect of the assistance on this indicator accurately. Isolating the effects from other influences: Isolating the effects of bilingual assistance on voter behavior would be extremely difficult because a number of factors influence voter behavior—such as age, party affiliation, or social organizations to which voters belong. For example, turnout among Hispanic voters could increase in the first election following the implementation of bilingual assistance. This same election could feature one or more Hispanic candidates on the ballot or one of the candidates could have taken a position deemed as “anti-immigrant.” It could be difficult to determine the contribution of each of these factors to the increased Hispanic voter turnout. The two general approaches that are often used to help isolate the effects, or impact, of a program would be difficult to use in evaluating bilingual voting assistance. The first approach involves having baseline data—data from the period before a program is implemented—along with data collected from the period after a program is implemented and comparing the two periods to determine whether there are differences in the indicators being measured. However, this approach could be very difficult, if not impossible, to use because jurisdictions might not have collected the relevant data from previous elections. Also, as mentioned earlier, unless there is some ability to determine the contribution of other factors that might influence voter behavior, it could be difficult to determine the specific effect bilingual assistance has had. The second approach is to have a comparison or control group and involves collecting data from a separate group of individuals who do not participate in the program but have characteristics similar to those who do participate in the program to determine whether there are any differences between these groups on the indicators being measured. With bilingual voting assistance, this would mean collecting data on groups of language minority voters who do not receive any bilingual assistance, and comparing the results to data collected from language minority voters who received the assistance. However, it would be very difficult, if not impossible, to keep a control group of language minority voters from hearing or seeing pre-election bilingual assistance provided through the media. Further, unless conducted in a simulated way, such as in a mock election, a jurisdiction covered under Section 203 seeking to use such a methodology with respect to language minority voters would appear to face the additional challenge of meeting the Section 203 requirements as well as complying with other applicable federal and state voting rights protections. Most election officials we met with supported providing bilingual voting assistance and took actions to implement this assistance in their respective jurisdictions; however, many of them also expressed uncertainty on how best to assess and meet the needs of language minority voters. DOJ provides guidance on bilingual assistance under Section 203, and it is intentionally flexible in nature to allow covered election jurisdictions to tailor their bilingual voting assistance programs to the specific needs and resources of their communities. At the same time, this flexibility has led to uncertainty among election officials as to whether their bilingual programs are actually meeting requirements or the needs of language minority voters. Moreover, although we have noted in prior work that federal agencies have successfully used formal program evaluation tools to improve federal program effectiveness, accountability, and service delivery, the methodological difficulties election officials and others would likely face in trying to formally assess the effectiveness of their bilingual assistance programs for language minority voters make formal evaluations of these programs very difficult. As a result, the extent to which bilingual voting assistance programs are meeting the needs of language minority voters is unknown. However, the difficulty in conducting formal evaluations does not mean that election jurisdictions would not benefit from additional feedback or information about their own or other jurisdictions’ bilingual voting assistance programs. The EAC’s recent efforts to develop and provide guidance to election jurisdictions regarding the translation of election terminology and recruiting bilingual poll workers address two of the challenges we identified in this report. Similarly, the EAC’s planned development of additional management guidelines for election officials on how to provide bilingual voting assistance might also help jurisdictions in providing this type of assistance. However, because the specific content of these management guidelines has yet to be determined, whether they will provide election officials with the information they seek is unknown. Nonetheless, while these guidelines may not provide election officials with feedback about their specific language assistance programs, making such information available from a central, easily accessible source could help jurisdictions address challenges they face in determining how to provide bilingual voting assistance that will be useful to the language minorities in their communities. Finally, although it is difficult to evaluate the effect of bilingual assistance, in the absence of better data on the extent to which the assistance is both used and helpful to voters with limited-English proficiency, there is likely to continue to be debate about the merits of bilingual voting assistance. We provided a draft of this report to DOJ and the EAC for review and comment. DOJ did not provide comments on the draft of this report but did provide technical edits, which we incorporated where appropriate. The EAC provided written comments on December 21, 2007, which are presented in appendix VI. The EAC presented additional details on its efforts to provide election officials and the public with information on bilingual voting assistance. We are sending copies of this report to interested congressional committees, the Attorney General, the Commissioners of the U.S. Election Assistance Commission, and other interested parties. In addition, the report will be available at no charge on the GAO Web site at www.gao.gov. Please contact William Jenkins at 202-512-8777 or [email protected] if you or your staff have any questions concerning this report. 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 VII. This review examined the provision of bilingual voting assistance by selected jurisdictions covered under Section 203 of the Voting Rights Act. Specifically, our objectives were to provide information on: the ways that selected jurisdictions covered under Section 203 of the Voting Rights Act have provided bilingual voting assistance as of the November 2006 general election, and the challenges they reportedly faced in providing such assistance; and the perceived usefulness of this bilingual voting assistance, and the extent to which the selected jurisdictions evaluated the usefulness of such assistance to language minority voters. For both objectives, we conducted site visits or obtained information electronically from 14 selected jurisdictions covered by Section 203. However, before opting for this approach, we considered other options: (1) a survey of all 296 covered Section 203 jurisdictions along with a probability sample of all local government jurisdictions, including cities, towns, school districts and relevant special districts, contained within these covered jurisdictions that conduct their own local elections; and (2) a survey of only the 296 jurisdictions listed in the Federal Register, an option similar to the methodology we used in our 1997 report. We chose to focus on the efforts of selected jurisdictions and not to survey all jurisdictions for several reasons. First, while we had a list of the 296 jurisdictions covered by Section 203, we were unable to locate an inventory of the complete population of the sub-jurisdictions contained within these jurisdictions that conducted their own elections from either the Department of Justice (DOJ) or the Census Bureau. The Chief of the Census Bureau office that prepares the determinations for Section 203 of the Voting Rights Act told us that it might be possible to develop an inventory of all sub-jurisdictions contained within the 296 covered jurisdictions through a complicated merge of Census’ Topologically Integrated Geographic Encoding and Referencing (TIGER) system data files with its Census of Local Government data files. However, she said the Census of Local Government data do not indicate whether local governments hold elections or, if they do, who administers the elections. Therefore, to identify sub-jurisdictions that conduct their own elections and contacts within these entities, we would have needed to either canvass election officials in all 296 counties or other covered areas, as well as state elections officers, or construct a population of all sub-jurisdictions from Census Bureau data and then select a probability sample of sub- jurisdictions to survey and develop our own contact information. We believed this approach would have been very difficult, costly, and time consuming. In addition, we learned that prior to testimony given at the summer 2006 hearings for the reauthorization of the Voting Rights Act, a team of researchers at the University of Arizona had already surveyed all 296 jurisdictions listed in the Federal Register, in addition to hundreds of other jurisdictions, about similar issues. We were reluctant to resurvey jurisdictions about related matters so soon thereafter. For our chosen methodology, we selected a sample of 14 covered jurisdictions in 12 states. We selected these jurisdictions because they reflected a variety of characteristics, such as size (i.e., voting age population), geographic diversity, varying language minority groups and their size relative to the voting age population, early voting provisions, and the longevity of each jurisdiction’s coverage under the Section 203 bilingual voting provisions; and, we wanted a diverse group of sites to allow us to report on a wide range of jurisdictions’ experiences with providing bilingual voting assistance. (See table 9 for a listing of the jurisdictions included in our study and the criteria used to select them.) Because we selected a nongeneralizable sample of election jurisdictions, the experiences and views discussed in this report cannot be generalized to all 296 jurisdictions required to provide bilingual voting assistance under Section 203 of the Voting Rights Act or to the community-based organizations (CBO) in these jurisdictions. Generally, we obtained information from the single office responsible for conducting elections in each of these jurisdictions. However, in two jurisdictions—Cook County, Ill., and Harris County, Tex.—we met with officials in two separate offices because each office had separate responsibilities for statewide and federal elections held in the jurisdiction. In Cook County, the Chicago Board of Elections Commissioners is responsible for administering these elections in the portion of Cook County that is Chicago, and the Cook County Clerk is responsible for administering elections in the remainder of Cook County. In Harris County, the tax assessor/collector is responsible for voter registration, and the County Clerk is responsible for the remainder of election activities. Due to numerous scheduling conflicts, we were unable to arrange a visit to Sandoval County, N. Mex.; however, we did obtain written responses to our questions from an election official in Sandoval County via electronic means. In one jurisdiction—Kenai Peninsula Borough, Alaska—we interviewed not only a local government official who has responsibility for local elections but also state officials, as the state has responsibility for overseeing federal and statewide elections in Alaska jurisdictions. Also, we selected 2 sub-jurisdictions among the 14 covered jurisdictions to learn about the bilingual voting assistance these localities provided in local elections. We identified these sub-jurisdictions by asking election officials about what localities within their jurisdictions conducted their own local elections. These localities were: Los Angeles City, Calif., and Kadoka City, S. Dak. In addition to obtaining information from election officials, we also selected 38 CBOs that represent relevant language minority communities in 11 of the 14 jurisdictions. We selected the CBOs through inquiries with election officials, contacts with national level advocacy groups to learn of local counterparts, contacts with the CBOs themselves to learn of additional groups in their communities, and Internet searches. In our discussions with representatives with a few CBOs, we were able also to speak with a few language minority voters (in one case with the help of an interpreter) who said they had used the bilingual assistance provided by their jurisdiction. We either conducted on-site interviews with or obtained information electronically from election officials and CBO representatives regarding the bilingual voting assistance provided in the November 2006 general election and any subsequent elections through June 2007. Using a semi- structured interview guide, we obtained information from the election offices about office staff assigned to provide bilingual assistance; the office’s strategy for identifying needs and providing bilingual assistance; the type(s) and availability of bilingual assistance provided at different stages of the election process for the November 2006 general election and any subsequent elections, including voter education efforts, voter registration, early voting and absentee voting, recruiting and training poll workers, ballot design and voting systems, Election Day activities, and the usefulness of this assistance to voters; and supporting documentation as evidence of the types of bilingual voting assistance (e.g., sample ballots, pamphlets, voter education materials, etc.) provided to language minority voters in these jurisdictions. Using a semi-structured interview guide, we also obtained information from CBO representatives about their roles in providing bilingual voting assistance in the November 2006 general election and any subsequent elections; their views about the bilingual assistance provided by the election office in these elections; and the usefulness of this assistance. We also interviewed officials and obtained documents from other relevant parties. Interviews and documents were obtained from the DOJ Civil Rights Division, which is responsible for providing program guidance and enforcing compliance with the requirements under Section 203 of the Voting Rights Act. We also interviewed officials from the EAC, which was established by the Help America Vote Act of 2002 to, among other things, act as a clearinghouse and resource for information and review of procedures with respect to the administration of federal elections. Additionally, we interviewed the Chief of the Census Bureau office that prepares the determinations for Section 203 of the Voting Rights Act. We reviewed pertinent federal laws, regulations, and agency guidance pertaining to the bilingual voting provisions. We also reviewed extensive prior GAO work, other national studies, reports, and news articles; attended several national conferences; and interviewed the secretary of state for one state with jurisdictions covered by Section 203 to gain further insight regarding these issues. We conducted this performance audit from October 2006 to January 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 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. Section 203 of the Voting Rights Act provides specific criteria for determining which states and jurisdictions are covered by the Section 203 language minority provisions. The Director of the Census Bureau has responsibility for making the official determinations regarding which political subdivisions are covered under section 203. To make its determinations, the Census Bureau reevaluates the jurisdictions covered by Section 203 every 10 years using new Census data as they become available. The number of covered jurisdictions has risen from 227 in 1975, the first year jurisdictions were required to comply with Section 203, to 296 jurisdictions in 30 states in 2002, the year of the most recent determination. The Census Bureau uses classifications—states, counties, minor civil divisions, or tribal areas—and variables such as voter age, language proficiency, and citizenship as self-reported on Census forms to determine the jurisdictions to be covered under Section 203. The following material in figure 1 describes the coverage criteria. The Director of the Census Bureau applied these criteria to the data obtained from the 2000 census (the most recent census) to determine which jurisdictions are covered under Section 203. The Director of the Census Bureau identifies the relevant language groups for the covered jurisdictions. Because the Census Bureau data used to determine the covered language are self-reported, the specific language an individual speaks is not always identified and thus jurisdictions may not know the specific language for which they are to provide assistance. For example, an individual may identify their language as “Indian language,” but this does not clarify for the jurisdiction what specific Indian language assistance it is to provide. Also, some Section 203 covered jurisdictions have more than one language group for which they are required to provide voting assistance. (See table 10 for the list of jurisdictions covered under Section 203 and the respective language groups, as of July 2002.) The following are excerpted examples of bilingual voting materials provided by election officials in covered jurisdictions. In addition to the three key issues discussed earlier in this report, other difficult issues also face election offices in evaluating the bilingual voting assistance they provide, including: (1) how to appropriately sample, or select, polling places and language minority voters to include in an evaluation; (2) the receptivity of language minority voters to participation in a study; (3) having data collectors who can speak fluently the specific language, and possibly dialect, of language minority voters in a jurisdiction; (4) having the necessary staff and technical expertise to conduct a methodologically sound evaluation; and (5) the likely expense of an evaluation. Determining how to sample: When determining how to gather data from the language minority voting population, a jurisdiction must decide whether to conduct a census (collect data from everyone) or to select a sample of the population from whom to get information. Depending on various factors, including the numbers of precincts and the numbers of voters in the jurisdiction, collecting information from all members of a given population, such as all language minority voters could be very costly, as well as logistically difficult to do in evaluating the usefulness of bilingual voting assistance. Therefore, selecting a probability or nonprobability sample can be a more cost-effective alternative. For example, if a jurisdiction was unable to collect data from all voters on Election Day, it could select a probability sample of voters in an exit poll. To be able to generalize the results to all language minority voters, such an exit poll would need to be based on a probability sample of precincts in the jurisdiction and voters voting within each selected precinct throughout Election Day. Alternatively, jurisdictions could collect information from language minority voters through methods such as comment cards soliciting feedback about bilingual voting placed on tables in precincts on Election Day, or they could log individuals’ calls to a telephone hotline to report voting problems. While useful information could be obtained, there would be no guarantee that the voters who completed the cards or called the hotline were statistically representative of all voters who used the bilingual voting assistance. As a result, a jurisdiction would need to be cautious about interpreting the information obtained from this source because the information could be biased. Identifying willing participants: It is necessary to have language minority voters who are receptive to participation in an evaluation. In some locations, language minority voters may be sensitive about their English language skills, and consequently, there may be some embarrassment about needing to use bilingual voting assistance or about the extent to which the assistance is helpful. In these instances, it may be difficult to get language minority voters to cooperate, or, if they do cooperate, difficult to obtain accurate information about their experiences in using the assistance provided. Obtaining data collectors with language skills: Any evaluation of bilingual voting assistance must use individuals trained in data collection methods. These individuals would also need to speak fluently the specific language, and possibly dialect, spoken by language minority voters in a jurisdiction in order to effectively communicate with language minority voters asked to participate in a study. Having the necessary staff: Election offices face the difficult issues of having the necessary staff and technical expertise to conduct methodologically sound evaluations in evaluating the effectiveness of the bilingual voting assistance provided. Since the purpose of election offices is to conduct elections, it is unlikely that election offices will have staff available who either have the time or professional expertise to conduct an evaluation. Therefore, election offices would likely need to seek outside professional assistance, such as through a contract with a consultant, to do so. Having sufficient resources: Efforts to evaluate program effectiveness can be expensive. Unless an election office received special funding to evaluate its bilingual assistance program, it would likely have to rely on existing operating budgets that may already be limited. Officials in five jurisdictions said they had no money or staff to evaluate the assistance they provided. The election administrator in one jurisdiction stated that their top funding priorities were for operational needs, not for conducting such a study. In addition to those named above, Dawn E. Hoff, Assistant Director; David Alexander, Assistant Director; Claudia K. Becker; Natalie Chaney; Geoffrey Hamilton; Linda Miller; Hugh C. Paquette; Deena D. Richart; and Clarence Tull, Sr., made key contributions to this report. Elections: Further Testing Could Provide Increased but Not Absolute Assurance That Voting Systems Did Not Cause Undervotes in Florida’s 13th Congressional District. GAO-08-97T. Washington, D.C.: October 2, 2007. Elections: Status of GAO’s Review of Voting Equipment Used in Florida’s 13th Congressional District. GAO-07-1167T. Washington, D.C.: August 3, 2007. Elections: Action Plans Needed to Fully Address Challenges in Electronic Absentee Voting Initiatives for Military and Overseas Citizens. GAO-07-774. Washington, D.C.: June 14, 2007. Elections: All Levels of Government Are Needed to Address Electronic Voting System Challenges. GAO-07-741T. Washington, D.C.: April 18, 2007. Elections: All Levels of Government Are Needed to Address Electronic Voting System Challenges. GAO-07-576T. Washington, D.C.: March 7, 2007. Elections: DOD Expands Voting Assistance to Military Absentee Voters, but Challenges Remain. GAO-06-1134T. Washington, D.C.: September 28, 2006. Elections: The Nation’s Evolving Election System as Reflected in the November 2004 General Election. GAO-06-450. Washington, D.C.: June 6, 2006. Elections: Absentee Voting Assistance to Military and Overseas Citizens Increased for 2004 General Election, but Challenges Remain. GAO-06-521. Washington, D.C.: April 7, 2006. Election Reform: Nine States’ Experiences Implementing Federal Requirements for Computerized Statewide Voter Registration Lists. GAO-06-247. Washington, D.C.: February 7, 2006. Elections: Views of Selected Local Election Officials on Managing Voter Registration and Ensuring Eligible Citizens Can Vote. GAO-05-997. Washington, D.C.: September 27, 2005. 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: Additional Data Could Help State and Local Elections Officials Maintain Accurate Voter Registration Lists. GAO-05-478. Washington, D.C.: June 10, 2005. Department of Justice’s Activities to Address Past Election-Related Voting Irregularities. GAO-04-1041R. Washington, D.C.: September 14, 2004. 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. Elections: Perspectives on Activities and Challenges across the Nation. GAO-02-3. Washington, D.C.: October 15, 2001. Elections: Statistical Analysis of Factors That Affected Uncounted Votes in the 2000 Presidential Election. GAO-02-122. Washington, D.C.: October 15, 2001. Elections: Status and Use of Federal Voting Equipment Standards. GAO- 02-52. Washington, D.C.: October 15, 2001. Voters with Disabilities: Access to Polling Places and Alternative Voting Methods. GAO-02-107. Washington, D.C.: October 15, 2001. Elections: Voting Assistance to Military and Overseas Citizens Should Be Improved. GAO-01-1026. Washington, D.C.: September 28, 2001. Comparison of Voting Age Population to Registered Voters in the 40 Largest U.S. Counties. GAO-01-560R. Washington, D.C.: March 23, 2001. Elections: The Scope of Congressional Authority in Election Administration. GAO-01-470. Washington, D.C.: March 13, 2001. Bilingual Voting Assistance: Assistance Provided and Costs. GAO/GGD-97-81. Washington, D.C.: May 9, 1997. Puerto Rico: Confusion over Applicability of the Electoral Law to Referendum Process. HRD-93-84. Washington, D.C.: May 28, 1993. Voting: Some Procedural Changes and Informational Activities Could Increase Turnout. PEMD-91-1. Washington, D.C.: November 2, 1990. Bilingual Voting Assistance: Costs of and Use during the November 1984 General Election. GGD-86-134BR. Washington, D.C.: September 15, 1986. Justice Can Further Improve Its Monitoring of Changes in State/Local Voting Laws. GGD-84-9. Washington, D.C.: December 19, 1983. | The Voting Rights Act of 1965, as amended, contains, among other things, provisions designed to protect the voting rights of U.S. citizens of certain ethnic groups whose command of the English language may be limited. The Department of Justice (DOJ) enforces these provisions, and the Election Assistance Commission (EAC) serves as a national clearinghouse for election information and procedures. The Fannie Lou Hamer, Rosa Parks, and Coretta Scott King Voting Rights Act Reauthorization and Amendments Act of 2006 mandated that GAO study the implementation of bilingual voting under Section 203 of the act. This report discusses (1) the ways that selected jurisdictions covered under Section 203 of the Voting Rights Act have provided bilingual voting assistance as of the November 2006 general election and any subsequent elections through June 2007, and the challenges they reportedly faced in providing such assistance; and (2) the perceived usefulness of this bilingual voting assistance, and the extent to which the selected jurisdictions evaluated the usefulness of such assistance to language minority voters. To obtain details about this voting assistance, GAO obtained information from election officials in 14 of the 296 jurisdictions required to provide it, as well as from community representatives in 11 of these jurisdictions. These jurisdictions were selected to reflect a range of characteristics such as geographic diversity and varying language minority groups. All but 1 of the 14 election jurisdictions GAO contacted reported providing some form of oral or written bilingual voting assistance through such things as the use of bilingual poll workers, and each of the 14 jurisdictions reported challenges in providing assistance. Election offices reported providing similar types of oral and written bilingual voting assistance at each stage of the voting process--from voter registration to Election Day--for the November 2006 and subsequent elections. In nine of the jurisdictions, this bilingual assistance was supplemented by efforts of community-based organizations. In part because DOJ guidance intentionally provides jurisdictions flexibility in how they implement bilingual voting requirements, election offices used varied strategies to implement bilingual programs. Election officials in each of the 14 jurisdictions reported challenges in implementing bilingual assistance programs, including difficulty in recruiting bilingual poll workers and effectively targeting where to provide bilingual voting assistance. Officials in nine jurisdictions also noted they would benefit from additional guidance for providing bilingual assistance. The EAC has taken steps to provide additional guidance to jurisdictions, including plans to develop a set of management guidelines for jurisdictions to use in implementing their programs. GAO identified little quantitative data measuring the usefulness of various types of bilingual voting assistance. Election officials and community-based organization representatives noted that certain forms of assistance, such as having bilingual poll workers, were more useful than others. Some jurisdictions stated that modifications, including outreach to language minority groups, would improve the usefulness of bilingual assistance. While none of the 14 jurisdictions had attempted to formally evaluate their assistance, most reported gathering information about the usefulness of certain aspects of the assistance. While formal evaluations have proven to be a successful means to improve program effectiveness, conducting formal evaluations of the usefulness and effect of bilingual voting assistance is difficult. Key difficulties include identifying the appropriate indicators of success and isolating the effects of bilingual assistance efforts on voters from other influences on election processes. We provided a draft of this report to DOJ and the EAC for comment. DOJ provided no comments, and the EAC's comments described its recent activities on bilingual voting assistance. |
Prior to the passage of ATSA in November 2001, only limited screening of checked baggage for explosives occurred. When this screening took place, air carriers had operational responsibility for conducting the screening, while the Federal Aviation Administration (FAA) maintained oversight responsibility. With the passage of ATSA, TSA assumed responsibility for ensuring that all checked baggage is properly screened for explosives at airports in the United States where screening is required, and for the procurement, installation, and maintenance of explosive detection systems used to screen checked baggage for explosives. Airport operators and air carriers continued to be responsible for processing and transporting passenger checked baggage from the check-in counter to the airplane. Explosive detection systems used to screen checked baggage include EDS and ETD machines. EDS machines, which cost between about $300,000 and $1.2 million each, use computer-aided tomography X-rays adapted from the medical field to examine the objects inside baggage to automatically recognize the characteristic signatures of threat explosives. TSA has certified, procured, and deployed EDS machines made by three manufacturers. ETD machines, which cost approximately $40,000 to $50,000 each, work by detecting vapors and residues of explosives. Because human operators collect samples by rubbing bags with swabs, which are then chemically analyzed in the ETD machines to identify any traces of explosive materials, the use of ETD is more labor-intensive and subject to more human error than the automated process of using EDS machines. ETD is used for both primary, or the initial, screening of checked baggage, and secondary screening, which resolves alarms from EDS machines that indicate the possible presence of explosives inside a bag. As we reported in March 2005, to initially deploy EDS and ETD equipment to screen 100 percent of checked baggage for explosives, TSA implemented interim airport lobby solutions and in-line EDS baggage screening systems. The interim lobby solutions involved placing stand- alone EDS and ETD machines in the nation’s airports, most often in airport lobbies or baggage makeup areas where baggage is sorted for loading onto aircraft. For EDS in a stand-alone mode (not integrated with an airport’s or air carrier’s baggage conveyor system) and ETD, TSA TSOs are responsible for obtaining the passengers’ checked baggage from either the passenger or the air carrier, lifting the bags onto and off of EDS machines or ETD tables, using TSA protocols to appropriately screen the bags, and returning the cleared bags to the air carriers to be loaded onto departing aircraft. In addition to installing stand-alone EDS and ETD machines in airport lobbies and baggage makeup areas, TSA collaborated with some airport operators and air carriers to install integrated in-line EDS baggage screening systems within their baggage conveyor systems. In March 2005, we reported that TSA used most of its fiscal year 2002 through 2004 checked baggage screening program funding to design, develop, and deploy interim lobby screening solutions rather than install more permanent in-line EDS baggage screening systems. We also reported that during our site visits to 22 category X, I, and II airports, we observed that in most cases, TSA used stand-alone EDS machines and ETD machines as the primary method for screening checked baggage. Generally, this equipment was located in airport lobbies and in baggage makeup areas. In addition, in our survey of 155 federal security directors, we asked the directors to estimate, for the 263 airports included in the survey, the approximate percentage of checked baggage that was screened on or around February 29, 2004, using EDS, ETD, or other approved alternatives for screening baggage such as screening with explosives detection canines, and physical bag searches. As shown in table 1, the directors reported that for 130 large to medium-sized airports in our survey (21, 60, and 49 category X, I, and II airports, respectively), most of the checked baggage was screened using stand-alone EDS or ETD machines. On average, the percentage of checked baggage reported as screened using EDS machines at airports with partial or full in-line EDS capability ranged from 4 percent for category II airports to 11 percent for category X airports. In addition, the directors reported that ETD machines were used to screen checked baggage 93 to 99 percent of the time at category III and IV airports, respectively. Since its inception in November 2001 through June 22, 2006, TSA has procured and installed about 1,600 EDS machines and about 7,200 ETD machines to screen checked baggage for explosives at over 400 commercial airports. For the most part, TSA deployed EDS machines at larger airports and ETD machines at smaller airports, resulting in primary screening being conducted solely with ETD machines at over 300 airports. TSA installed ETD machines instead of EDS for primary screening at these airports because of the configuration of screening stations, the costs associated with procuring EDS, and the low passenger volume at smaller airports. Table 2 summarizes the location of EDS and ETD equipment at the nation’s airports by airport category as of June 22, 2006. Stand-alone EDS and ETD machines are both labor- and time-intensive to operate since each bag must be physically carried to an EDS or ETD machine for screening and then moved back to the baggage conveyor system prior to being loaded onto an aircraft. With an in-line EDS system, checked baggage is screened within an airport’s baggage conveyor system, eliminating the need for a TSO or other personnel to physically transport the baggage from the check-in point to the EDS machine for screening and then to the airport baggage conveyor system. Further, according to TSA officials, ETD machines and stand-alone EDS machines are less efficient in the number of checked bags that can be screened per hour per machine than are EDS machines that are integrated in-line with the airport baggage conveyor systems. According to TSA estimates, the number of checked bags screened per hour can more than double when EDS machines are placed in-line versus being used in a stand-alone mode. Table 3 identifies TSA’s estimates for bags screened per hour by EDS machines in stand- alone and in-line configurations and ETD machines. TSA has reported that in-line systems create significant efficiency benefits. In January 2004, TSA, in support of its planning, budgeting, and acquisition of security screening equipment, reported to the Office of Management and Budget (OMB) that the efficiency benefits of in-line rather than stand- alone EDS were significant, particularly with regard to bags per hour screened and the number of TSOs required to operate the equipment. According to TSA officials, at that time, a typical lobby-based screening unit consisting of a stand-alone EDS machine with three ETD machines had a baggage throughput (bags screened per hour) of 376 bags per hour with a staffing requirement of 19 TSOs. In contrast, TSA estimated that approximately 425 bags per hour could be screened by an in-line EDS machine with a staffing requirement of 4.25 TSOs. In order to achieve the higher throughput rates and reduce the number of TSOs needed to operate in-line baggage screening systems, TSA (1) uses a screening procedure known as on-screen alarm resolution and (2) networks multiple in-line EDS machines together, referred to as multiplexing, so that the computer-generated images of bags from these machines are sent to a central location where TSOs can monitor the images of suspect bags centrally from several machines using the on- screen alarm resolution procedure. A TSA official estimated that the on- screen alarm resolution procedure with in-line EDS baggage screening systems would enable TSA to reduce the number of bags requiring the more labor-intensive secondary screening using ETD machines by 40 to 60 percent. In estimating the potential savings in staffing requirements, TSA officials stated that they expect to achieve a 20 to 25 percent savings because of reductions in the number of staff needed to screen bags using ETD to resolve alarms from in-line EDS machines. According to TSA officials, as of June 22, 2006, all airports with EDS equipment use on- screen alarm resolution protocols and 16 airports had networked in-line systems. In May 2004, TSA conducted a limited, retrospective cost-benefit analysis at the nine airports that signed letter of intent (LOI) agreements and found that significant savings and other benefits could be achieved through the installation of these systems. This analysis was conducted to estimate potential future cost savings and other benefits that could be achieved from installing in-line systems instead of using stand-alone EDS systems. We reported in March 2005 that, according to TSA’s analysis, in-line EDS would reduce by 78 percent the number of TSA TSOs and supervisors required to screen checked baggage at these nine airports, from 6,645 to 1,477 TSOs and supervisors. The actual number of TSOs and supervisor positions that could be eliminated would be dependent on the individual design and operating conditions at each airport. TSA estimated that in-line baggage screening systems at these airports would save the federal government about $1.3 billion compared with stand-alone EDS systems and that TSA would recover its initial investment in a little over 1 year. According to TSA’s analysis of the nine LOI airports, in-line cost savings critically depend on how much an airport’s facilities have to be modified to accommodate the in-line configuration. Savings also depend on TSA’s costs to buy, install, and network the EDS machines; subsequent maintenance costs; and the number of screeners needed to operate the machines in-line instead of using stand-alone EDS systems. In its analysis, TSA also found that a key factor driving many of these costs is throughput—how many bags an in-line EDS system can screen per hour compared with the rate for a stand-alone system. TSA’s analysis also provided data to estimate the cost savings resulting from installing in-line EDS checked baggage screening systems for each airport over the 7-year period. According to TSA’s data, federal cost savings varied from about $50 million to over $250 million at eight of the nine airports, while at one airport, there was an estimated $90 million loss. In February 2006, TSA reported that a saving of approximately $4.7 billion could be realized over a period of 20 years by installing optimal checked baggage screening systems at the 250 airports with the highest checked baggage volumes. This savings represents the difference between TSA’s compliance only strategy—which assumes minimum capital expenditures and no additional investment in in-line systems in order to comply with the mandate to screen all checked baggage using explosive detection systems—and its preferred strategy, which is based on using optimal checked baggage screening systems, including in-line EDS systems, for the 250 airports. TSA estimated that the compliance only strategy would cost $27.05 billion and the preferred strategy would cost $22.39 billion over 20 years, creating a saving of $4.66 billion. TSA reported that many of the initial in-line systems have produced a level of TSO labor savings insufficient to offset up-front capital costs of constructing the systems. According to TSA, the facility and baggage handling system modification costs have been higher than expected, with the nine airports with LOIs having incurred or projecting to incur up to $6 million or more in infrastructure costs for every EDS machine required. TSA stated that the keys to reducing future costs are establishing guidelines outlining best practices and a set of efficient design choices, and using newer EDS technology that best matches each optimally scaled design solution. In February 2006, TSA reported that recent improvements in the design of the in-line EDS checked baggage screening systems and the EDS screening technology now offer the opportunity for higher- performance and lower-cost screening systems. A safety benefit of in-line EDS systems is the potential to reduce on-the job injuries. TSA reported that because procedures for using stand-alone EDS and ETD machines require TSOs to lift heavy baggage onto and off of the machines, the interim lobby screening solutions used by TSA led to significant numbers of on-the-job injuries. Additionally, in responding to our survey about 263 airports, numerous federal security directors reported that on-the-job injuries related to lifting heavy baggage onto or off the EDS and ETD machines were a significant concern at the airports for which they were responsible. Specifically, these federal security directors reported that on-the-job injuries caused by lifting heavy bags onto and off of EDS machines were a significant concern at 65 airports, and were a significant concern with the use of ETD machines at 110 airports. To reduce on-the-job injuries, TSA has provided training to TSOs on proper lifting procedures. However, according to TSA officials, in-line EDS screening systems would significantly reduce the need for TSOs to handle baggage, thus further reducing the number of on-the-job injuries being experienced by TSA TSOs. Use of in-line EDS systems can also provide security benefits at airports where they are installed by reducing congestion in airport lobbies and reducing the need for TSA to use alternative screening procedures at airports. During our site visits to 22 large and medium-sized airports, several TSA, airport, and airline officials expressed concern regarding the security risks caused by overcrowding due to ETD and stand-alone EDS machines located in airport lobbies. The location of the equipment resulted in less space available to accommodate passenger movement and caused congestion due to passengers waiting in lines in public areas to have their checked baggage screened. TSA headquarters officials reported that large groups of people congregating in crowded airport lobbies increases security risks by creating a potential target for terrorists. TSA also reported that airports favor replacing stand-alone EDS machines with in-line systems to mitigate the negative effects of increased congestion and passenger processing times. TSA further reported that in-line systems are more secure than stand-alone EDS machines because the baggage screening is performed away from passengers who otherwise could tamper with the baggage. Another potential security benefit of in-line EDS systems is the reduction of the need for TSA to use alternative screening procedures. In addition to screening with standard procedures using EDS and ETD, which TSA had determined to provide the most effective detection of explosives, TSA also allows alternative screening procedures to be used when volumes of baggage awaiting screening pose security vulnerabilities or when TSA officials determine that there is a security risk associated with large concentrations of passengers in an area. These alternative screening procedures include the use of EDS and ETD machines in nonstandard ways, and also include three procedures that do not use EDS or ETD— screening with explosives detection canines, physical bag searches, and matching baggage to passenger manifests to confirm that the passenger and his or her baggage are on the same plane. TSA’s use of alternative screening procedures has involved trade-offs in security effectiveness. However, the extent of the security trade-offs is not fully known because TSA has not tested the effectiveness of alternative screening procedures in an operational environment. As part of our ongoing work on TSA’s use of alternative screening procedures to screen checked baggage, we found that the superior efficiency of screening with in-line EDS compared to screening with stand- alone EDS may have been a factor in reducing the need to use alternative screening procedures at airports where in-line systems were installed. After in-line EDS systems are installed and staffing reductions are achieved, redistributing the screening positions to other airports with staffing shortages may reduce airports’ need to use alternative screening procedures. In addition to deploying more efficient checked baggage screening systems, TSA is pursuing other mitigating actions to reduce the need to use alternative screening procedures. These factors include strengthening its coordination with groups such as tour operators, deploying “optimization teams” to airports that were frequently using alternative screening procedures to determine why the procedures were being used so often and to suggest remedies; and deploying additional EDS machines. Although TSA officials have estimated that a low percentage of checked baggage is currently screened using alternative screening procedures, in February 2006 TSA reported that the use of alternative screening procedures will increase at some airports because of rising passenger traffic. TSA has projected that the number of originating domestic and international passengers will rise by about 127 million passengers over current levels by 2010. If TSA’s current estimate of an average of 0.76 checked bags per passenger were to remain constant through 2010, TSA would be screening about 96 million more bags that it now screens. This could increase airports’ need to rely on alternative screening procedures in the future in the absence of additional or more efficient EDS machines, including in-line EDS systems. TSA has made progress in its efforts to systematically plan for the optimal deployment of checked baggage screening systems, but resources have not been made available to fund these systems on a large-scale basis. In March 2005, we reported that while TSA has made progress in deploying EDS and ETD machines, it had not conducted a systematic, prospective analysis of the optimal deployment of these machines to achieve long-term savings and enhanced efficiencies and security. We recommended that TSA assess the feasibility, expected benefits, and cost to replace ETD machines with stand-alone EDS machines for the primary screening of checked baggage at those airports where in-line EDS systems would not be either economically justified or justified for other reasons. In February 2006, in response to our recommendation and a legislative requirement to submit a schedule for expediting the installation and use of in-line systems and replacement of ETD equipment with EDS machines, TSA completed its strategic planning framework for its checked baggage screening program. This framework introduces a strategy intended to increase security through deploying in-line and stand-alone EDS to as many airports as practicable, lower life-cycle costs for the program, minimize impacts to TSA and airport/airline operations, and provide a flexible security infrastructure for accommodating growing airline traffic and potential new threats. The framework is an initial step in addressing the following areas: Optimized checked baggage screening solutions—finding the ideal mix of higher-performance and lower-cost alternative screening solutions for the 250 airports with the highest checked baggage volumes; Funding prioritization schedule by airport—identifying the top 25 airports that should first receive federal funding for projects related to the installation of explosive detection systems based on quantitative modeling of security, economic, and other factors; Deployment strategy—developing a plan for the acquisition of next- generation EDS systems, the redeployment of existing EDS assets, and investment in life-cycle extension programs; EDS Life-Cycle Management Plan—structuring guidelines for EDS research and development investment, procurement specifications for next-generation EDS systems, and the redeployment of existing EDS assets and investment in life-cycle extension programs that minimize the cost of ownership of the EDS systems; and Stakeholder collaboration plan—working with airport operators and other key stakeholders to develop airport-specific screening solutions, refine the nationwide EDS deployment strategy, and investigate alternative funding programs that may allow for innovative as well as non-federal sources of funding or financing, including formulas for sharing costs among different government entities and the private sector. TSA said it is continuing its efforts in these areas as it works toward completing a comprehensive strategic plan for its checked baggage screening program. TSA expects to complete the strategic plan in early fall 2006. While TSA has begun to conduct a systematic prospective analysis to determine at which airports it could achieve long-term savings and enhanced efficiencies and security by installing in-line systems or by making greater use of stand-alone EDS machines in lieu of ETD machines, resources have not been made available on a large-scale basis to fund these systems. In-line baggage screening systems are capital-intensive because they often require significant airport modifications, including terminal reconfigurations, new conveyor belt systems, and electrical upgrades. According to TSA, lessons learned from the first airports where in-line systems were built identified that facilities and infrastructure modifications accounted for up to 50 percent of the total cost of in-line screening systems, and modifications and upgrades to the baggage handing system typically accounted for another 25 percent of the total cost. In February 2006, TSA estimated that the total cost of installing and operating the optimal checked baggage screening systems, including in- line EDS machines, at the 250 airports is approximately $22.4 billion over 20 years, of which about $6 billion is for installation, life-cycle replacement, existing committed funding, and equipment maintenance costs. According to TSA officials, the estimated costs to install in-line baggage screening systems would vary greatly from airport to airport depending on the size of the airport and the extent of airport modifications that would be required to install the system. In March 2005 we reported that while we did not independently verify the estimates, officials from the Airports Council International-North America and American Association of Airport Executives estimated that project costs for in-line systems could range from about $2 million for a category III airport to $250 million for a category X airport. TSA’s February 2006 strategic planning framework identified that because many of the EDS and ETD machines were deployed in 2002 and 2003 to comply with ATSA and subsequent deadlines for achieving the 100 percent checked baggage screening mandate, a large share of the EDS machines will incur life-cycle replacement obligations during the 2013 to 2014 time period. Although TSA has not completed its efforts to develop a life-cycle cost model, TSA’s February 2006 strategic planning framework identified that a substantial funding requirement for EDS equipment life-cycle replacement will compete with funding requirements for new in-line systems in approximately 8 to 9 years. Further, in June 2006, as discussed in the framework, TSA officials reported that if the top 25 airports do not receive in-line checked baggage screening systems, they will require additional screening equipment to be placed in airport lobbies and additional TSO staffing in order to remain in compliance with the mandate for screening all checked baggage using explosive detection systems. In March 2005, we reported that TSA and airport operators were relying on several sources of funding to construct in-line checked baggage screening systems. One source of funding airport operators used was FAA’s Airport Improvement Program, which traditionally funds grants to maintain safe and efficient airports. In fiscal years 2002 and 2003, 28 of the 53 airport officials we interviewed reported that their airports either had constructed or were planning to construct in-line systems relying on the Airport Improvement Program as their sole source of federal funding. With Airport Improvement Program funds no longer available after fiscal year 2003 for this purpose, airports turned to other sources of federal funding to construct in-line systems. The fiscal year 2003 Consolidated Appropriations Resolution approved the use of LOIs as a vehicle to leverage federal government and industry funding to support facility modification costs for installing in-line EDS baggage screening systems. Between June 2003 and February 2004, TSA issued eight LOIs to reimburse nine airports for the installation of in-line EDS baggage screening systems for a total cost of $957.1 million to the federal government over 4 years. That cost represents 75 percent of the facility modification costs, with the airport funding the remaining costs. TSA also uses other transaction agreements as an administrative vehicle to directly fund, with no long-term commitments, airport operators for smaller in-line airport modification Under these agreements, as implemented by TSA, the airport projects.operator also provides a portion of the funding required for the modification. As of June 2006, TSA reported that about $140 million had been obligated for other transaction agreements for in-line EDS systems. To fund the procurement and installation of explosive detection systems in-line, TSA also uses annual appropriations and the $250 million mandatory appropriation of the Aviation Security Capital Fund. For example, in fiscal years 2005 and 2006, TSA received appropriations of $175 million and $180 million, respectively, for the procurement of explosive detection systems and received $45 million each year for the installation of explosive detection systems. For fiscal year 2007, DHS requested $91 million for the procurement of explosive detection systems and $94 million for the installation of such systems. Of the $250 million available through the Aviation Security Capital Fund, $125 million is designated as priority funding for LOIs. The remaining $125 million is to be allocated in accordance with a formula based upon the size of the airport and risks to aviation security. Congress also authorized an additional appropriation of $400 million per year through fiscal year 2007 for airport security improvement projects that relate to the use of in-line EDS systems. However, appropriations have not been made under this authorization. In July 2004, as part of this subcommittee’s hearing on TSA’s progress in deploying in-line systems, TSA reported that there were nine in-line systems in place and an additional nine were due to be completed by 2006. In March 2005, we reported that 12 airports had operational in-line systems airportwide or at a particular terminal or terminals. As of June 2006, 25 airports had operational in-line EDS systems and an additional 24 airports had in-line systems under development. Additionally, TSA reported that it has received requests from an additional 50 airports either seeking funding to construct in-line EDS systems or reimbursement for already completed in-line systems. Table 4 provides information on the status of in-line system deployment as of February 2006. In a May 2006 meeting of the Aviation Security Advisory Committee, TSA reported that under current investment levels, installation of optimal checked baggage screening systems would not be completed until approximately 2024. TSA further reported that unless investment is accelerated, substantial investment will be needed to replace EDS and ETD machines at the end of their life cycles and to refurbish suboptimal systems. TSA is currently collaborating with airport operators, airlines, and other key stakeholders to develop a cost-sharing study that identifies funding and cost-sharing strategies for the installation of in-line baggage screening systems. TSA plans to use the results of this study to finalize its checked baggage screening program strategic plan, which TSA expects to complete by early fall 2006. In its May 2006 report to the Aviation Security Advisory Committee, TSA outlined financing options including leasing equipment, sharing savings from in-line systems with airports, and enhancing eligibility for the Passenger Facility Charge, LOIs, and tax credit bonds. In this meeting, TSA reported that tax credit bonds had the most potential support among stakeholders. As TSA moves forward with planning for the deployment of checked baggage screening systems and identifying funding and financing options, it is also important for TSA to engage in planning to focus its research and development efforts. To enhance checked baggage screening, TSA is developing and testing next-generation EDS machines. According to TSA, manufacturers have only marginally improved false alarm rates and throughput capabilities of the equipment since the large-scale deployment of EDS machines in 2002 and 2003. The maximum number of bags an EDS machine can screen per hour is 500, which can be achieved only when the machines are integrated in-line with the baggage conveyor system. New EDS equipment was certified in 2005, including a smaller EDS machine designed to replace ETD machines used for primary screening and an upgraded large EDS machine. In September 2005, TSA entered into a $24.8 million contract to purchase 72 smaller EDS machines to be installed at 24 airports. The President’s fiscal year 2007 budget request for TSA includes funding to support research and development for in-line EDS machines that can operate at up to 900 bags per hour and employ new threat detection concepts. In its February 2006 strategic framework for checked baggage screening, TSA identified the development of high- throughput in-line EDS machines and lowering of EDS false alarm rates as key areas for improving investment management of next-generation technologies. TSA reported that these performance gains would be feasible and available in the near term. TSA also reported that given that the planning, design, and construction cycle for an in-line system can be 2 to 3 years, and these high-throughput and lower false alarm rate technologies are anticipated to be deployable by about 2008, the agency is recommending that all in-line planning and design efforts consider these new technologies. We reported in September 2004 that the Department of Homeland Security (DHS) and TSA have made some progress in managing their transportation security research and development programs according to applicable laws and R&D best practices. However, we found that their efforts were incomplete in several areas, including preparing strategic plans for R&D efforts that contain measurable objectives, preparing and using risk assessments to select and prioritize R&D projects, and coordinating with stakeholders—a condition that increases the risk that their R&D resources will not be effectively leveraged. We also found that TSA and DHS delayed several key R&D projects and lacked both estimated deployment dates for the vast majority of their R&D projects and adequate databases to effectively manage their R&D portfolios. We recommended that DHS and TSA (1) conduct some basic research in the transportation security area; (2) complete their strategic planning and risk assessment efforts; (3) develop a management information system that will provide accurate, complete, current, and readily accessible project information for monitoring and managing their R&D portfolios; and (4) develop a process with the Department of Transportation to coordinate transportation security R&D efforts and share this information with transportation stakeholders. In June 2006, DHS reported several actions that it had taken to address these recommendations, including coordinating with other federal agencies to leverage their basic research, issuing a Science and Technology Directorate Strategic Plan, implementing a program and project management system to monitor program and project funding and milestones, and establishing a memorandum of agreement that resulted in the formation of a Mass Transit Technology Working Group to coordinate efforts across agencies and to optimize resources. DHS also reported that basic research has been limited because the majority of R&D funds have been appropriated for countermeasures for specific threat areas. We will examine these efforts to implement our recommendations as part of our ongoing review of DHS’s and TSA’s airport checkpoint R&D program. TSA has made progress in installing EDS and ETD systems at the nation’s airports—mainly as part of interim lobby screening solutions—to provide the capability to screen all checked baggage for explosives as mandated by Congress. With the objective of initially fielding this equipment largely accomplished, TSA has shifted its focus from equipping airports with interim screening solutions to systematically planning for the more optimal deployment of checked baggage screening systems. TSA’s February 2006 strategic planning framework for the checked baggage screening program is a positive step forward in systematically planning for the more optimal deployment of checked baggage screening systems. The completion of a strategic plan for checked baggage screening by early fall 2006 should help TSA more fully determine whether expected reduced staffing costs, higher baggage throughput, and increased safety and security will in fact justify the significant up-front investment required to install in-line baggage screening systems. TSA’s retrospective analysis on nine airports installing in-line baggage screening systems with LOI funds, while limited, estimated that cost savings could be achieved through reduced staffing requirements for TSOs and increased baggage throughput. Specifically, the analysis identified that using in-line systems instead of stand-alone systems at these nine airports could save the federal government about $1.3 billion over 7 years and that TSA’s initial investment would be recovered in a little over 1 year. TSA also recently estimated that a saving of approximately $4.7 billion could be realized over a period of 20 years by installing optimal checked baggage screening systems at the 250 airports with the highest checked baggage volumes. However, TSA’s strategic planning framework identified that many of the initial in-line systems have produced a level of savings insufficient to offset up-front capital costs of acquiring and installing the systems. Nevertheless, TSA reported that recent improvements in the design of the systems and EDS screening technology now offer the opportunity for higher performance and lower-cost screening systems. In-line EDS baggage screening systems have efficiency, safety, and security benefits that have been reported on extensively by Congress, GAO, TSA, and aviation industry representatives. As part of its strategic planning efforts, TSA has identified the top 25 airports that should first receive federal funding for projects related to the installation of explosive detection systems and also identified the ideal mix of higher-performance and lower-cost alternative screening solutions for the 250 airports with the highest checked baggage volumes. With this initial planning now completed, a critical question that remains is how to fund and finance these screening systems and who should pay for them. TSA is currently working with airport and air carrier stakeholders to identify funding and financing options, an effort that is due to be completed by early fall 2006. As TSA works toward identifying funding and financing options, it will also be important for the agency to sustain its R&D efforts and further strengthen its R&D management and planning efforts. Researching and developing technologies, such as higher-throughput EDS machines with lower false alarm rates, should help TSA to improve the security and efficiency of checked baggage screening. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members of the subcommittee have. For further information on this testimony, please contact Cathleen A. Berrick at (202) 512-3404 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. In addition to the contact named above, Kevin Copping, Katherine Davis, Michele Fejfar, Thomas Lombardi, Allison Sands, and Maria Strudwick made key contributions to this testimony. Aviation Security: Enhancements Made in Passenger and Checked Baggage Screening, but Challenges Remain. GAO-06-371T. Washington, D.C.: April 4, 2006. Aviation Security: Progress Made to Set Up Program Using Private- Sector Airport Screeners, but More Work Remains. GAO-06-166. Washington, D.C.: March 31, 2006. Aviation Security: TSA Management of Checked Baggage Screening Procedures Could Be Improved. GAO-06-291SU. Washington, D.C.: February 28, 2006. Transportation Security Administration: More Clarity on the Authority of Federal Security Directors Is Needed. GAO-05-935. Washington, D.C.: September 23, 2005. Aviation Security: Better Planning Needed to Optimize Deployment of Checked Baggage Screening Systems. GAO-05-896T. Washington, D.C.: July 13, 2005. Aviation Security: Screener Training and Performance Measurement Strengthened, but More Work Remains. GAO-05-457. Washington, D.C.: May 2, 2005. Aviation Security: Systematic Planning Needed to Optimize the Deployment of Checked Baggage Screening Systems. GAO-05-365. Washington, D.C.: March 15, 2005. Transportation Security: Systematic Planning Needed to Optimize Resources. GAO-05-357T. Washington, D.C.: February 15, 2005. Aviation Security: Preliminary Observations on TSA’s Progress to Allow Airports to Use Private Passenger and Baggage Screening Services. GAO-05-126. Washington, D.C.: November 19, 2004. Aviation Security: Private Screening Contractors Have Little Flexibility to Implement Innovative Approaches. GAO-04-505T. Washington, D.C.: April 22, 2004. Aviation Security: Improvement Still Needed in Federal Aviation Security Efforts. GAO-04-592T. Washington, D.C.: March 30, 2004. Aviation Security: Challenges Exist in Stabilizing and Enhancing Passenger and Baggage Screening Operations. GAO-04-440T. Washington, D.C.: February 12, 2004. Aviation Security: Efforts to Measure Effectiveness and Strengthen Security Programs. GAO-04-285T. Washington, D.C.: November 20, 2003. Aviation Security: Efforts to Measure Effectiveness and Address Challenges. GAO-04-232T. Washington, D.C.: November 5, 2003. | The Transportation Security Administration (TSA) has deployed two types of baggage screening equipment: explosive detection systems (EDS), which use X-rays to scan bags for explosives, and explosive trace detection systems (ETD), in which bags are swabbed to test for chemical traces of explosives. TSA considers screening with EDS to be superior to screening with ETD because EDS machines process more bags per hour and automatically detect explosives without direct human involvement. In March 2005, GAO reported that while TSA had made progress in deploying EDS and ETD machines, it had not conducted a systematic, prospective analysis of the optimal deployment of these machines to achieve long-term savings and enhanced efficiencies and security. GAO's testimony today updates our previous report and discusses TSA's (1) deployment of EDS and ETD systems and the identified benefits of in-line systems, and (2) planning for the optimal deployment of checked baggage screening systems and efforts to identify funding and financing options. Since its inception in November 2001 through June 2006, TSA has procured and installed about 1,600 EDS machines and 7,200 ETD machines to screen checked baggage for explosives at over 400 airports. However, initial deployment of EDS machines in a stand-alone mode--usually in airport lobbies--and ETD machines resulted in operational inefficiencies and security risks as compared with using EDS machines integrated in-line with airport baggage conveyor systems. For example, TSA's use of stand-alone EDS and ETD machines required a greater number of screeners and resulted in screening fewer bags for explosives each hour. In March 2005, we reported that at nine airports where TSA has agreed to help fund the installation of in-line EDS systems, TSA estimated that screening with in-line EDS machines could save the federal government about $1.3 billion over 7 years. In February 2006, TSA reported that many of the initial in-line EDS systems did not achieve the anticipated savings. However, recent improvements in the design of the in-line EDS systems and EDS screening technology now offer the opportunity for higher-performance and lower-cost screening systems. Finally, screening with in-line EDS systems may result in security benefits by reducing the need for TSA to use alternative screening procedures, such as screening with explosives detection canines and physical bag searches, which involve trade-offs in security effectiveness. TSA has begun to systematically plan for the optimal deployment of checked baggage screening systems, but resources have not been made available to fund the installation of in-line EDS systems on a large-scale basis. In February 2006, TSA released its strategic planning framework for checked baggage screening aimed at increasing security through deploying more EDS machines, lowering program life-cycle costs, minimizing impacts to TSA and airport and airline operations, and providing a flexible security infrastructure. As part of this effort, TSA identified the 25 airports that should first receive federal funding for the installation of in-line EDS systems, and the optimal checked baggage screening solutions for the 250 airports with the highest checked baggage volumes. In February 2006, TSA estimated that installing and operating the optimal checked baggage screening systems will cost about $22.4 billion over 20 years and reported that under current investment levels, installation of optimal baggage screening systems would not be completed until approximately 2024. TSA is collaborating with airport operators, airlines, and other key stakeholders to identify funding and cost sharing strategies and is focusing its research and development efforts on the next generation of EDS technology. |
Americans generated about 13 billion tons of nonhazardous solid waste—including 200 million tons of municipal waste—in 1992, the latest year for which data are available. All of this waste requires processing by either recycling, incineration, or disposal. State and local authorities are responsible for planning for the safe management of solid waste; granting permits for landfills; and, in some cases, arranging for waste collection and other waste management services. The Environmental Protection Agency (EPA) has developed a hierarchy of preferred methods for managing solid waste that emphasizes first, reducing the amount of waste generated (source reduction); second, recycling and reuse; and finally, incineration and the use of landfills. According to EPA, total expenditures for managing nonhazardous solid waste in 1972 were $8.4 billion, and these costs could reach $75 billion by 2000. Of the 13 billion tons of nonhazardous waste generated in 1992, 7.6 billion tons was nonhazardous industrial waste, 5.2 billion tons was special wastes (wastes from mining, oil and gas production, electric utilities, and cement kilns), and about 200 million tons was municipal waste (both commercial and residential wastes). Figure 1.1 shows the percentage, by type, of all the waste generated in 1992. The amount of nonhazardous solid waste generated was almost 50 times greater than the amount of hazardous waste. In 1990, we reported that more than 95 percent of industrial waste goes to surface impoundments (such as ponds and lagoons), where it is stored, treated, and released into surface water. The rest is disposed of in landfills or waste piles, or applied to the land. The waste management method used for special wastes varies according to the type of waste. For example, EPA estimates that in the early 1980s, about 56 percent of waste rock was disposed of in on-site waste piles and 61 percent of tailings were disposed of in on-site surface impoundments. Municipal waste is managed quite differently than industrial or special wastes. In 1993, the states reported that about 17 percent of municipal solid waste was recycled, 11 percent was incinerated, and 72 percent was sent to landfills. (App. I provides state-by-state data on the percentage of municipal waste recycled, incinerated, and sent to landfills.) The Resource Conservation and Recovery Act of 1976 (RCRA), as amended, establishes a cooperative framework for federal, state, and local authorities to manage solid waste in an environmentally sound manner and to maximize the use of limited resources. The act requires EPA to establish minimum criteria for facilities that may receive hazardous waste from households or from generators of small quantities, in order to ensure that there is no reasonable probability that human health or the environment will be adversely affected. It also requires states to adopt a permit program or other means of prior approval to ensure that landfills meet EPA’s minimum criteria. Furthermore, EPA must establish guidelines and may provide technical and financial assistance to state and local authorities for the development and implementation of state plans for managing waste. Between fiscal year 1978 and fiscal year 1981, EPA provided funds to states to develop and implement waste management plans. Beginning in 1982, EPA eliminated financial assistance for state and local planning. Both RCRA and the Pollution Prevention Act of 1990 (P.L. 101-508) address alternatives to land disposal of waste. RCRA advocates the use of resource recovery, either through facilities that convert waste to energy or through recycling. To promote recycling, RCRA requires federal agencies that procure goods to purchase products, such as paper, that contain recovered material. The act requires EPA to develop guidelines that identify products that are or can be produced with recovered materials and to recommend practices for agencies to follow when purchasing the products. RCRA also requires the Department of Commerce to encourage more commercialization of resource recovery technologies through (1) promoting proven technologies, (2) providing a forum for the exchange of technical and economic data on resource recovery facilities, (3) providing accurate specifications for recovered materials, and (4) stimulating the development of markets for recovered material. The Pollution Prevention Act also promotes reducing the amount of material generated and thus reducing the amount of waste requiring recycling, treatment, or disposal. The act requires EPA to develop and implement a strategy to promote source reduction. As part of that strategy, EPA is directed to, among other things, (1) establish standard methods for measuring source reduction; (2) coordinate source reduction activities in each office within EPA; (3) facilitate the adoption of source reduction techniques by businesses; and (4) identify, where appropriate, measurable goals, tasks necessary to achieve the goals, dates for achieving these goals, and organizational responsibilities. In 1979, EPA issued minimum criteria for solid waste landfills. Under these criteria, waste had to be covered and protected against floodwater, and open burning of waste was prohibited. In 1988, EPA proposed new criteria for municipal waste landfills that accept hazardous waste from households or from small-quantity generators because the Congress determined that the 1979 criteria may not adequately protect human health and the environment. Beginning in October 1993, the new criteria for new or expanding municipal landfills require (1) liners to prevent liquids from leaking into the groundwater, (2) collection systems to remove liquids that accumulate in the waste, (3) monitoring of groundwater for hazardous substances, and (4) plans for closing and then monitoring the waste sites. EPA projected that these regulations would reduce the number of municipal landfills in operation. EPA has not revised its 1979 criteria for solid waste landfills other than those that accept municipal waste. As a result of a January 1994 settlement agreement between EPA and the Sierra Club, EPA is required, by May 1995, to propose rules revising criteria applicable to all nonmunicipal solid waste facilities that may receive hazardous waste from households or from small-quantity generators. The settlement agreement further requires that the rules be made final by July 1, 1996. EPA’s Agenda for Action, issued in 1989 in response to concerns over the lack of a national strategy for managing solid waste, calls for an integrated waste management system consisting of a hierarchy of waste management options: first, source reduction; then recycling and reuse; and finally, incineration and the use of landfills. EPA’s strategy included a national goal of reducing solid waste through source reduction or recycling by 25 percent by 1992. No specific goal for source reduction or recycling was set beyond 1992. In addition, the Agenda for Action identifies several objectives for municipal waste management. These objectives included increasing (1) the amount of information on waste planning and management available to states, local communities, waste handlers, citizens, and industry; (2) effective planning for municipal waste; (3) source reduction activities by the manufacturers, the government, and citizens; and (4) recycling by government, individuals, and corporations. The agenda envisions that EPA, state and local governments, industries, waste managers, and citizens will share the responsibility of educating themselves and adopting integrated waste management strategies. While state and local authorities are responsible for planning for solid waste management, the waste management entities or authorities that provide waste management services and the services provided vary considerably from community to community. A solid waste manager is responsible for selecting and arranging for waste management services, such as waste collection, land disposal or incineration, or recycling and composting. The services selected are those that appropriately address each component of solid waste in the most cost-effective and environmentally beneficial way. For example, recycling and reuse are appropriate for things whose physical properties make it technically and economically feasible to use them further; composting is used for organic substances; and incineration and land disposal are used for waste with little or no commercial value or for which recycling and reuse markets are poorly developed. Once the types of services needed to manage solid waste are selected, a solid waste manager must determine who will provide that service. Depending on location, the services could be provided by municipalities, private companies, large commercial firms, or the company or business needing the waste management services. For example, collection and disposal services may be owned and provided by the government, or the government may contract with commercial firms to provide these services. In some municipalities, households, businesses, and manufacturers may make their own arrangements with commercial haulers for waste collection. These haulers, in turn, may either own recycling and disposal facilities or contract to use services owned by commercial waste management companies. Other options include (1) public ownership of the infrastructure, with municipal waste collection services contracted to commercial operators, and (2) public collection, with waste taken to privately or commercially owned and operated facilities. For example, Los Angeles and New York City both own and operate collection vehicles that dispose of residential waste at publicly owned and operated landfills. The city of Las Vegas and the surrounding county partially contract out collection and disposal services to a commercial firm. In areas of Colorado and New Jersey, homeowners must contract with commercial firms for collection because the municipalities do not provide or arrange for this service. Ownership options for solid waste management services may also vary by the type of solid waste being managed. Local governments may provide services to households and small commercial establishments but exclude large commercial establishments and industrial firms from using those same services. Commercial waste collection and disposal companies may provide collection and disposal services to commercial establishments and industrial firms that generate nonhazardous industrial waste or construction and demolition debris. Large industrial firms may also treat, recycle, incinerate, or dispose of their own waste on-site. According to 1991 estimates by the National Solid Wastes Management Association, commercial firms served around 60 percent of all households and removed more than 90 percent of the nation’s commercial refuse. According to other estimates, commercial land disposal facilities handled about 50 percent of the volume of municipal solid waste, although they represented only 15 to 30 percent of the landfills operating in 1992. Solid waste managers must also decide whether waste can be shipped to a local private, public, or commercial landfill, incinerator, or processing facility—such as a recycling facility—or to facilities located elsewhere in the same state, in other states, or in other countries. In 1992, there were only about 170 incinerators and fewer than 5,400 landfills within the United States. However, given that there are about 40,000 county, municipal and township governments, some waste must be shipped to other locations. The domestic transport of solid waste is governed by state laws and regulations, which are limited by the Commerce Clause of the U.S. Constitution. The U.S. Supreme Court has ruled that state and local governments cannot ban, impose restrictions on, or place surcharges on solid waste solely on the basis of its origin. Publicly owned facilities, however, generally may restrict the solid waste they accept to waste generated within the state. The Court’s reasoning was that these facilities are operating as market participants, not as regulators, and may benefit the residents who, through taxes, paid for the facilities. Some waste is also shipped between countries. International shipments of waste between the United States and Canada and Mexico are governed by international agreements. The agreement between Canada and the United States was amended in 1992 to require that the receiving country be notified before municipal solid waste is shipped for final disposal or for incineration with energy recovery. Previously, this notice was required only for hazardous waste shipments. The agreement between the United States and Mexico governs hazardous waste shipments; however, many wastes classified as industrial nonhazardous waste in the United States are classified as hazardous in Mexico. Concerned about whether the nation has sufficient capacity for the safe disposal of solid waste, the Ranking Minority Member, Senate Committee on Governmental Affairs, asked us to examine (1) how the states are addressing solid waste issues, including what efforts state and local governments are making to pay for higher waste management costs and to develop additional solid waste management capacity amid growing opposition to placing waste facilities in local communities, and (2) where the states see the need for a federal role in addressing these issues. To address the first objective, we interviewed managers of solid waste programs, environmental specialists, or solid waste planners in each of the 50 states and obtained information about the states’ plans for solid waste management. We also obtained data from a state planning survey by the Texas Natural Resources and Conservation Commission and a survey on funding of solid waste management plans by the New York Department of Environmental Conservation. We also surveyed EPA’s regional solid waste officials to determine their views on problems that the states have with solid waste management and on the level of assistance provided by EPA’s regional offices. We reviewed studies and surveys of states’ solid waste management conducted by national solid waste organizations and editors of trade publications, such as Biocycle and the Solid Waste Report, to obtain an overview of the states’ rates of generating solid waste, disposal methods, recycling programs, goals and laws, and trends and potential problems with solid waste management. In addition, we visited nine states and two major metropolitan areas and interviewed these states’ directors of solid waste programs, environmental specialists, recycling coordinators, solid waste planners, county directors of public works, city commissioners, sanitary engineers, and city directors and supervisors of solid waste. Through these interviews, we identified state and local concerns about solid waste management and determined how state and local governments planned, carried out, and regulated solid waste management. The states we selected were Colorado, Michigan, New Jersey, New Mexico, Ohio, Oregon, Pennsylvania, Texas, and Washington; the metropolitan areas were Los Angeles and New York City. We selected these states and cities on the basis of where they were located, how much waste they generated, whether they had state plans for managing waste, how much they used alternative waste management methods, whether they were net exporters or net importers of waste, and how dense their populations were. We interviewed state and local officials in the selected states and cities to identify potential problems they had in carrying out their plans for managing solid waste and innovative approaches they used to address these problems. We asked how they had implemented EPA’s hierarchy of source reduction, recycling and reuse, and incineration or the use of landfills and what obstacles they had encountered when choosing these options. We also contacted U.S. Customs officials in Washington, D.C., and the Buffalo, New York, Port of Entry; Environment Canada; the Ontario Ministry of Environment and Energy; EPA’s solid waste officials at headquarters and in the regions; and state and local officials responsible for solid waste management to obtain data on the volumes of solid waste involved in intrastate, interstate, and international shipments. We also asked about the rationale for and against restricting solid waste shipments and the potential impact of these restrictions. We reviewed interstate agreements and international bilateral agreements between the United States and Canada and the United States and Mexico. We reviewed trade literature, court cases, state regulations, and surveys on state and local efforts to control interstate and intrastate solid waste shipments. To address our second objective, we discussed the problems of managing solid waste with state and local government officials and consulted industry experts representing solid waste associations, nonprofit environmental groups, academia, the Congressional Research Service, a solid waste management consulting firm, and a major private solid waste company. (See app. II for a complete list of these experts.) The organizations and groups were selected because they represent both solid waste practitioners and professionals, have academic backgrounds in environmental and solid waste issues, and/or represent national environmental groups active in waste management. We asked these experts to comment on the need for a federal role in addressing solid waste issues and major issues affecting the management of solid waste. We also obtained their opinions on the elements that should be included in a federal role—for example, source reduction, recycling, interstate and intrastate shipments of solid wastes, and other issues facing state and local governments in managing solid waste. Additionally, we contacted representatives from the Canadian Council of Ministers of the Environment, Washington Retailers Association, Coalition of Northeastern Governors, Recycling Advisory Council, Northeast Recycling Coalition, and International City/County Management Association. From these organizations, we obtained and reviewed model legislation on toxic substances and on packaging, packaging guidelines, labeling standards, position papers on market development, and descriptions of peer exchange programs. We also reviewed EPA’s publications on source reduction and recycling. We conducted our review between October 1992 and January 1995 in accordance with generally accepted government auditing standards. As requested we did not obtain written comments on this report from EPA. However we discussed its contents with officials in EPA’s Office of Solid Waste and Emergency Response, and they generally agreed that the information was accurate. The Chief of the office’s Recycling and Implementation Branch, Municipal and Industrial Solid Waste Division, stated that the report accurately portrayed the current status of solid waste management in the United States and EPA’s role in assisting the states in their efforts. These officials’ comments have been incorporated where appropriate. In response to concerns about solid waste, states have increased their efforts to address solid waste issues within the past decade by developing solid waste management plans. State plans include regulatory and technical guidance; assessments of facilities and waste inventories; descriptions of options for managing the waste; and goals, policies and strategies for carrying out those options. Several states’ plans address financing the rising costs of waste management and include funding mechanisms for paying those costs. Some states’ plans also address where or how to locate new waste management facilities. As of December 1994, a total of 46 states had either developed plans or were in the process of developing plans for managing solid waste. While some state plans deal narrowly with municipal waste, others deal more broadly with all solid waste, including municipal and nonhazardous industrial wastes. States are primarily developing these plans to address their concerns about protecting human health and the environment, the rising costs of disposal, and diminishing disposal capacity. Four states—Arizona, Colorado, Wyoming, and Wisconsin—do not have plans because, according to officials in these states, (1) the responsible state agencies have not initiated planning, (2) the state does not perceive that it has pressing problems in managing solid waste, or (3) the state believes that its regulations adequately address solid waste management without any formal planning document. Despite the lack of state planning requirements, at least two of these states have voluntary planning efforts at the regional and municipal level. For example, some counties in Arizona and Colorado have initiated their own solid waste management plans. Of the nine states we visited, eight had solid waste management plans. Seven of these plans refer to, require, or recommend technical standards or instructions for siting solid waste facilities and issuing permits for these facilities in order to protect human health and the environment. For example, New Mexico’s plan provides criteria, such as transportation routes, geology, topography, and proximity to population, that local governments must consider selecting a site for a facility. Pennsylvania requires local governments to describe their siting process in their municipal waste management plans. Ohio’s plan recommends that state permits restrict certain toxic items, such as lead-acid batteries and used oil, from municipal landfills. To determine future capacity needs, five of the eight plans contain an inventory of the state’s waste stream and capacity to manage that waste stream. For example, New Jersey’s plan describes the state’s total municipal and nonhazardous industrial waste stream. It includes county-by-county breakdowns of the rates of waste generated, recycled, and disposed of. The plan estimates how much waste will be generated through 2010 and describes how the state will reduce its reliance on exporting waste out of state for disposal and reach self-sufficiency by 1999. New Mexico’s plan includes a breakdown of residential, commercial, yard, construction, and agricultural waste, and further distinguishes the composition of urban and rural residential waste. All eight state plans we reviewed recognize options other than land disposal and incorporate either EPA’s waste management hierarchy or a variation. Texas and several other states are required, by state law, to develop plans that follow the hierarchy in managing waste. Texas’s goal, by the year 2000, is to reduce, reuse, and recycle 60 percent of municipal waste and to reduce industrial and hazardous waste by 50 percent or more. Washington State’s plan sets forth goals and recommends courses of action to reach these goals. The state’s chief goal, established by state law, is to reduce waste by 50 percent through source reduction and recycling by 1995. The law, as well as the state plan, incorporates the waste management hierarchy outlined in EPA’s 1989 Agenda for Action. Michigan’s overall policy is to promote waste reduction, reuse, composting, recycling, and incineration with energy recovery, while limiting the use of landfills. Its long-range goals, to be achieved by the year 2005, include reducing the solid waste stream by 8 to 12 percent; increasing composting from 8 to 12 percent of the waste, recycling from 20 to 30 percent, and incinerating from 35 to 45 percent; and sending from 10 to 20 percent of the waste to landfills. Nationwide, 42 states have adopted all, or some variation, of EPA’s waste management hierarchy in order to reserve disposal capacity. New Jersey ranked recycling higher than source reduction since recycling is a key waste management option. Other states, like Nebraska, rank the use of landfills over incineration because of concerns about air pollution. A majority of states have also adopted goals and/or strategies for waste management. Approximately 41 states have reduction and/or recycling goals; these goals range from 15 to 70 percent by the year 2000. In about 35 states, the recycling goals are legislated. Localities pay over 95 percent of the more than $18 billion that EPA estimated was spent on managing municipal solid waste in 1991. Given the high and rising costs of solid waste management, alternatives to using general tax revenues are becoming increasingly important. Unless other sources of funding are available to augment limited general tax revenues, the plans that states have developed may not be carried out. Several states have addressed the need for additional funding, and their plans include options for funding mechanisms. Nationwide, a majority of states continue to rely on general revenue funds to finance the majority of their solid waste management planning and programs. As shown in figure 2.1, six states were using only general tax revenues to fund their programs while eight states used no general tax revenues, as of November 1992. The remaining states used various percentages of general tax revenues. States not using general tax revenues to finance all or a portion of their programs used other sources of revenue, such as special fees levied on waste and permits. We reported on the need for additional sources of funding for solid waste management as early as July 1981. At that time, we stated that no long-term funding was available for waste programs at the federal, state, or local levels. More recently, EPA noted the need for more state funding for environmental protection in its 1993 report on state capacity. For example, EPA estimates that local governments will have to spend 65 percent more for environmental protection by the year 2000 than they did in 1988 just to maintain their current level of effort. In addition, EPA estimates that local governments will need to raise 32 percent more money just to cover operating and debt service costs. The report identified over 80 financing mechanisms, in 11 major categories, that state and local governments could use, including fees, grants, bonds, loans, credit enhancements, public-private partnerships, economic incentives, special districts, environmental finance centers, and taxes. Other financing mechanisms can be used to finance a wide variety of capital and operating costs. For example, bond financing is well suited to financing recycling centers or landfills, and fees are suitable to pay ongoing program costs, such as the costs of curbside trash removal services. Even though 41 states are still relying, to some extent, on general revenue funds to finance their programs, a 1992 survey of state solid waste funding showed that special sources of revenue are becoming a larger and more significant source of funding than general revenues. Of the 32 states responding to the survey that had knowledge of special revenue funding, special revenues accounted for 74 percent of total funding for solid waste. This was a significant increase since 1991 in the proportion of funding supplied by special revenue sources. In the 1991 survey, 45 states responded that special revenues accounted for 57 percent of total funding for solid waste. The 1992 survey also found that special revenue funding varied widely by state: Some states used no special revenues to fund their programs, while other states funded 100 percent of their programs with special revenues. Of the nine states we reviewed, six use alternatives to general revenue funds to finance a portion or all of their costs because general revenue funds are increasingly insufficient to finance the growing costs of waste management. For example, New Jersey funds its program through solid waste fees, recycling taxes, bond funds, and economic assessments. In addition, New Jersey assists local governments through a number of grant and loan programs financed by a per-ton levy on waste disposed of in-state, general revenue appropriations, and taxes on solid waste generation and disposal. Ohio uses fees rather than the state’s general revenue fund to pay its waste management costs. Even so, Ohio officials are still concerned that the fees, as currently structured, are not sufficient to cover the costs of managing their program. Pennsylvania requires its counties to establish trust funds to finance the costs of closing landfills and implementing any measures that must be taken after closure. The amount paid into the fund is a tonnage surcharge based upon the estimated cost of closing the landfill and the weight of waste to be disposed of at the landfill before it is closed. Texas levies a $1.50 surcharge on each ton of municipal solid waste disposed of in the state. A portion of the funds collected is used to finance the state’s solid waste planning and management efforts. The state also allocates half of the funds for grants that local governments and eligible organizations can use for programs that save or recover resources, minimize the amount of waste generated, or improve the operating efficiency of waste facilities. Washington authorizes local governments to collect taxes and fees, such as a fixed collection fee, a $1 purchase fee on tires, and a $5 fee on the purchase of car batteries. In addition, the state provides grants and loans for, among other things, planning by local governments and the development of recycling facilities. Public opposition to new and expanding landfills has intensified in recent years and is causing difficulties in ensuring sufficient capacity for managing waste in some locations. Local officials continually face the not-in-my-backyard (NIMBY) syndrome, in which residents oppose locating a waste disposal facility in their communities. At best, it can take years to select a site for a facility. At worst, a site may never be selected, and the locality may be faced with the alternative of shipping waste long distances. A study by the International City/County Management Association found that local opposition can add years to the time it takes to obtain a site and construct a solid waste facility. In Claremont, New Hampshire, it took nearly 10 years to obtain a site for a waste-to-energy facility. According to the project manager, the delay resulted in expenditures of $1.2 million in legal fees and contract negotiations, disenchantment on the part of the citizens, and the loss of political goodwill. The association reported on seven cases in which local governments sited facilities; these cases are summarized in table 2.1. In contrast, Los Angeles County, when it identified unoccupied canyons as potential landfill sites, was thwarted in its efforts when environmental groups purchased land on the canyon floors. The county is now considering whether it must ship waste, via interstate rail, to a landfill located 200 miles away in Utah. New York City has attempted to build a waste-to-energy incinerator in the vacant Brooklyn Naval Yard, but local opposition has delayed the project since 1978. According to an official in the New York City Department of Sanitation, as a result of this opposition, the cost for this project has escalated into the millions of dollars, and construction has not yet begun. Not all local governments are having difficulty siting facilities and thus ensuring sufficient capacity for their waste. Of the nine states we reviewed, one state is trying innovative techniques to address citizens’ opposition. We also identified other innovative techniques being tried in states not included in our detailed review. In Michigan, counties must establish siting criteria in their solid waste management plans before receiving a state permit to construct new capacity. Citizens, elected officials, and environmental groups are invited to participate in developing the plan. After a county’s plan is approved, the county must grant a permit to a facility if it meets the conditions outlined in the plan. Wisconsin takes a different approach. Local governments form a committee to negotiate with the waste facility’s developer over the economic and operating terms of a proposed landfill. If the parties are unable to reach an agreement, a 1981 Wisconsin law mandates binding arbitration by the state’s Waste Facility Siting Board. Only two cases have gone through arbitration since the law was enacted, indicating that developers and local governments are able to establish new facilities in Wisconsin. In another successful technique, owner/operators offer financial incentives to the local government in exchange for permission to locate the facility within the community’s jurisdiction. For example, Gilliam County in eastern Oregon is the site of a privately owned landfill. The landfill owner pays the county government $1.25 per ton of waste disposed of in the landfill, or about $875,000 annually. Given that the county’s population is only about 2,000, this source of revenue is substantial. Other benefits that landfill owner/operators can offer to host communities include (1) environmental guarantees ensuring water quality; (2) contingency funds in case of contamination; (3) protection of property values; and (4) the provision of recreational, health, or other facilities. Because the states’ progress has been slow towards meeting goals and objectives for source reduction and recycling and towards ensuring that waste disposal capacity is sufficient, state and industry officials believe the federal government has a role in (1) developing current national goals for source reduction, (2) setting standards for packaging, (3) setting standards for products containing material recovered from recycled goods, and (4) promoting the development of markets for recyclable materials. States also see the need for a federal role in determining whether they can control the intrastate and interstate flow of waste and hence better plan for capacity. State laws aimed at limiting interstate movements of waste by imposing bans or higher disposal fees have been found to violate the Constitution’s Commerce Clause, but a number of legislative proposals that address the states’ desires to limit or control waste imports from other states have been introduced in the Congress. As discussed in chapter 2, 42 states incorporate EPA’s waste management hierarchy—in which source reduction and recycling are preferred to waste disposal—in their solid waste management plans. Source reduction is aimed at reducing the amount of waste generated, including the amount and toxicity of packaging, while recycling is aimed at using waste as a resource. To achieve their goals and objectives for source reduction, some regions and states are trying to develop packaging standards, educate consumers, and limit the toxicity of packaging. To achieve their goals and objectives for recycling, they are developing markets for recyclable materials (secondary markets), identifying uses for material recovered from recycled goods or recovered material, and developing standards for products containing recovered material. While some efforts are aimed solely at municipal waste, other efforts are also aimed at industrial nonhazardous waste. State officials identified source reduction as a key element in reducing their future needs for capacity and as a central tenet in their solid waste management plans. Some regions and states are taking actions to carry out their plans. For example, the Coalition of Northeastern Governors’ Source Reduction Council, which has representatives from state governments, public interest organizations, and industry, developed voluntary guidelines in 1989 to reduce packaging waste. The guidelines call for industry to (1) eliminate packaging whenever possible; (2) minimize the amount of material used in packaging; (3) design packages that are returnable, refillable or reusable; and (4) produce packages that can be recycled and use recovered material in packages. Although these guidelines are voluntary, as of August 1993, 8 of the top 40 retailers in the country have endorsed them. For example, Sears, Roebuck and Company adopted these guidelines and is working with its private-label manufacturers to reduce the packaging used for appliances and clothing. The company had eliminated 1.5 million tons of packaging by September 1994. The coalition also developed model legislation that establishes standards for packaging sold or distributed in the Northeast. The legislation was developed to make the individual states’ legislative initiatives to achieve source reduction more effective and, at the same time, to minimize economic disruptions by having a regional (if not a national) approach. The model legislation would (1) formalize and codify the coalition’s 1989 guidelines on preferred packaging; (2) provide industry options for achieving, by January 1996, a 15-percent reduction in the amount of packaging used; and (3) encourage industry to take additional actions to reduce packaging. In addition, the legislation sets a goal of reducing solid waste by 50 percent by the year 2000 and calls for an evaluation to determine if more stringent packaging standards should be adopted to achieve that goal. Some states have also initiated source reduction efforts aimed at consumers and industries. In Washington, the Department of Ecology developed a program to help consumers practice “smart shopping” to reduce waste. For example, one brochure urges consumers to avoid buying disposable products, use durable shopping bags, and purchase recyclable products. Similarly, in Colorado, EPA Region VIII and the Colorado Office of Energy Conservation produced a public service video urging citizens to reduce, reuse, and recycle waste. The Pennsylvania Department of Environmental Resources offers an award for innovative projects to minimize waste, giving preference to industries and municipalities that prevent waste from being generated. The state also requires those who generate 2,200 pounds or more of nonhazardous industrial waste annually to file a document identifying ways to reduce the weight or toxicity of their waste. The states and others are also developing their own approaches to reduce the toxicity in packaging as well as the use of toxins in manufacturing. In addition, the Coalition of Northeastern Governors developed model legislation for reducing toxicity in packaging, which has already been adopted in 14 states. Furthermore, as of 1991, more than a dozen states had enacted laws that promote reducing the use of toxic substances in manufacturing. For example, the law in Massachusetts has a target of reducing the use of certain chemicals by 50 percent by the year 1997. One key to successful recycling is to ensure ready markets for products that can be recycled as well as markets for products containing recovered material. According to the National Conference of State Legislatures, as of 1990, 31 states had undertaken studies on developing markets for products that are recyclable. For example, the Council of Great Lakes Governorslaunched a multistate effort to purchase recycled copy paper and rerefined oil. In Washington, the state legislature established and funded the Clean Washington Center in 1991 to develop and expand markets for materials and products containing recovered material, develop the necessary infrastructure, and eliminate barriers to using recovered materials. Under the program, the center has distributed a directory of products as a guide for individuals and/or companies seeking to purchase products made from recovered materials. It also identified additional uses for recycled glass and spent $1.5 million to help retrofit pulp and paper mills to include old newsprint in their production processes. Officials in some of the states included in our review said that they are having difficulty meeting their source reduction goals or objectives because of the lack of national (1) goals for reducing the volume and toxicity of packaging and (2) packaging standards. They also said they are having difficulty meeting recycling goals or objectives because there are few national standards for products containing recovered material and because of the lack of markets. Industry experts also support these views. EPA does not believe that it should take the lead in promoting source reduction or recycling because it views solid waste management, for both municipal and industrial nonhazardous wastes, as primarily a state responsibility. State officials said that source reduction is difficult to address on a state-by-state basis because manufacturers might encounter numerous different goals and standards across the nation, and the potential impact on production costs could be significant if manufacturers have to produce different products for different markets. State and local officials told us that the interstate commerce in consumer products discourages them from legislating goals for reducing the toxicity and volume of packaging or packaging standards. A state official also said that states cannot individually influence industry’s predisposition for built-in product obsolescence. Other officials noted the lack of a coordinated national policy that clarifies the roles of governments, industry, and consumers in reducing waste. Changes in packaging offer significant opportunities for reducing the amount of waste generated. Figure 3.1 shows the amount, by weight, of containers and packaging in the municipal waste stream. The total weight of 34 percent is the percentage before any recycling occurs. After recycling, containers and packaging still make up 32 percent of all discarded waste. Containers and Packaging (70.6 Million Tons) Yard Trimmings (32.8 Million Tons) Some of the states included in our review also have difficulty recycling because of the lack of national standards for products containing recovered material. According to state and local officials and industry experts, national standards requiring products to contain specific amounts of recovered material are needed to encourage markets. In their view, such standards are needed because manufacturers cannot be expected to conform to many different standards across the states. State officials also said that the lack of nearby markets for recovered material affects the states’ recycling efforts. For example, while citizens in New Mexico are interested in recycling, the nearest markets for glass, plastics, and paper are in bordering states and Mexico. Because of the high cost of shipping materials, recycling programs are cost-effective only in communities with a high population density. According to state and local officials and industry experts, recycling efforts need to be coordinated and initiated at the national level if significant increases in recycling rates are to be achieved. A 1991 study by the Congressional Budget Office found that states’ attempts to develop markets have only a slight effect on demand for recovered material because such material is exchanged in markets extending beyond individual state boundaries. Similarly, minimum content standards, if established on a state-by-state basis, would have only a slight effect because markets extend across state lines. Nationally, efforts to recycle other types of solid waste need to be initiated if recycling rates are to increase. About 7 percent of all municipal solid waste was recovered for recycling and composting in 1960. This proportion increased to 22 percent in 1993. EPA projected in 1994 that recycling rates of between 25 and 35 percent may be achievable in 2000. To achieve the recycling rates that EPA projects, however, 50 percent or more of some wastes may have to be recovered. Some types of waste are easier to recycle than others. For example, composting of yard trimmings could be substantially increased. While food, yard, and miscellaneous inorganic wastes accounted for nearly 24 percent of the total municipal solid waste generated in 1993, as table 3.1 shows, only 13.1 percent of these wastes were recovered for recycling or composting. To achieve higher recycling rates, industry would need to continue to invest in plant and equipment to use recovered materials, most citizens would need access to recycling programs, and markets for recycled materials would have to grow. EPA has no specific congressional mandate to take the lead in developing a program to reduce the volume of solid waste generated, and it has not achieved significant advances in source reduction for solid waste. EPA has largely focused on encouraging states and industry to act; it has not set current goals for reducing the volume and toxicity of packaging or packaging standards. According to the Chief of EPA’s Waste Reduction and Management Branch, Source Reduction Section, because the agency has no specific legislative authority to take a more proactive approach, it relies on voluntary participation from business, federal agencies, state and local governments, and the public at large. To foster source reduction among business, EPA launched a Waste Wise Program that promotes waste prevention and recycling in industry. About 300 companies have agreed to participate in the program. Under the program, EPA suggests approaches, such as reusing products and supplies, reducing the amount of packaging, and using and maintaining durable equipment and supplies. EPA has also published two documents to help businesses design and implement waste reduction programs in their facilities. To foster source reduction in state and local governments, EPA is participating in a conference sponsored by the National Recycling Coalition promoting procurement practices among state and local agencies that emphasize purchasing durable products; EPA is supplying a guide for setting up a program for exchanging solid waste materials at the state and/or local level. In addition, EPA sponsors regional meetings that promote meetings among solid waste professionals and unit pricing for residential trash collection whereby, for example, households are charged according to the number of bags of trash collected. It has also awarded a grant to develop educational materials on composting for local governments. To foster source reduction among the public, EPA has awarded grants to (1) the Smithsonian Institution to create a traveling exhibit on source reduction, (2) the League of Women Voters to train community volunteers to conduct workshops on source reduction, and (3) the National Audubon Society to develop a public service announcement on source reduction. While the Pollution Prevention Act requires EPA to develop and implement a strategy to promote pollution prevention through such means as source reduction and recycling, EPA has not yet developed this strategy. A strategy for municipal solid waste had already been issued in EPA’s 1989 Agenda for Action, before the act’s passage. Furthermore, while the act also directs that strategies are to identify, where appropriate, measurable goals and the tasks necessary to achieve the goals, EPA’s agenda does not. Rather, the agenda sets a national goal of 25 percent for source reduction and recycling by 1992. However, the agenda includes no goals beyond 1992 and no specific tasks to meet its goals. The Chief of EPA’s Source Reduction Branch said that data are not available on the amount of solid waste that has been reduced through source reduction, largely because source reduction is very difficult to measure and is not highly visible. However, EPA has contracted with a private firm to develop a process to measure the nation’s progress in reducing the amount of solid waste generated. We concur that source reduction is difficult to measure and that EPA will need measurable goals before it develops a source reduction strategy as called for in the Pollution Prevention Act. EPA also does not believe it is responsible for taking the lead in establishing recycling goals, encouraging recycling, or developing markets for recycled materials. However, RCRA did assign limited responsibilities to EPA for encouraging the use of recycled materials through federal purchasing power by having EPA (1) designate which products containing recovered material should be purchased by federal agencies and (2) develop guidelines for such purchases. Lacking a federal mandate, EPA views recycling as primarily a state responsibility and supports the states’ recycling efforts through grants and other assistance. Furthermore, RCRA assigns the Department of Commerce, not EPA, several responsibilities to encourage the development of such markets. EPA has published guidelines for federal purchases of products containing recovered material. The agency has established minimum standards for the amount of recycled material in five classes of products: paper and paper products, lubricating oils, retread tires, building insulation products, and cement and concrete containing incinerator fly ash. However, in our May 1993 report on EPA’s progress in implementing the program, we reported that EPA took 17 years to develop these standards because of the lengthy process it uses to develop standards and the low priority accorded the program. We recommended that EPA complete a strategy for developing procurement guidelines that includes a streamlined process for developing guidelines. In April 1994, EPA proposed standards for another 21 items. EPA also provides financial or technical assistance for recycling efforts. For example, the Recycling Advisory Council, composed of representatives of environmental and public interest groups, the recycling industry, business, and the public sector, is partially funded by an EPA grant. The council was established to build consensus on public policies and private initiatives to increase recycling and to make recommendations on the basis of its findings. EPA also provided (1) technical assistance to the Federal Trade Commission to develop labeling guidelines in 1992 and (2) financial and technical assistance to the Environmental Defense Fund to support a recycling campaign. The Department of Commerce, which is responsible under RCRA for stimulating the development of markets for recycled material, has done little since 1982. RCRA requires Commerce to, among other things, (1) provide accurate specifications for recovered materials, (2) stimulate the development of markets for these materials, (3) promote proven methods for recovering resources, and (4) provide a forum for exchanging technical and economic data on resource recovery facilities. As we reported in May 1993, because of competing priorities Commerce has done little to stimulate market development. In 1982, Commerce terminated the limited work it had conducted because it believed that it had carried out its responsibilities under RCRA. However, since 1982, the lack of markets for recycled material has created an oversupply of recyclable material. In our report, we recommended that Commerce establish a program to support the recycling industry and stimulate the demand for recycled materials. While Commerce did not implement our recommendation, it did designate a senior official to help industries develop expertise in domestic environmental technologies for preventing pollution, minimizing waste, and recycling and improve their ability to compete internationally in these areas. H.R. 1821, which was introduced but not passed in the 103rd Congress, would have required Commerce to study markets for recovered materials from discarded consumer waste and establish an office of recycling research and information. The office would make grants for studies and scientific research on recycling materials from discarded consumer waste and conduct a public outreach program. To assist in the development of markets for recycled materials, the Recycling Advisory Council, partially funded with an EPA grant, is addressing such topics as market development initiatives and economic incentives to promote recycling. According to the Recycling Advisory Council’s Program Coordinator, the group has studied policy options for increasing the demand for recovered materials, and the council’s 5-year strategic plan incorporates several recommendations and policy options for the council to carry out its vision for recycling in the year 2000. Currently, 47 states ship waste to and receive waste from other states and countries, and these shipments are increasing. Some states are concerned that waste shipped in from other states could use up their disposal capacity if such shipments are not controlled. According to the National Solid Wastes Management Association, interstate movement of solid waste increased by 54 percent between 1990 and 1992. Solid waste is routinely shipped between 47 states; shipments between neighboring states account for 66 percent of the total interstate movement of waste. According to the report, these figures may be underestimated because 10 states—Colorado, Georgia, Maryland, Mississippi, Nebraska, North Dakota, South Carolina, South Dakota, West Virginia, and Wyoming—reported that although they believe waste is being exchanged between neighboring states, they lack quantifiable data. According to the National Solid Wastes Management Association, about 19 million tons of municipal waste, or about 9 percent of the total 200.6 million tons generated, was moved in interstate commerce during 1992. Data are not available on what percentage of the remaining 13 billion tons of nonhazardous solid waste is shipped. These movements represent partnerships between and among states, municipalities, and commercial waste managers. Waste can be transported out of state for processing or disposal if (1) the nearest processing center or landfill is in another state, (2) the in-state capacity is insufficient, (3) the costs of managing and disposing of waste within the state exceed the costs of disposing of waste in another state, or (4) it is not feasible to ensure local capacity because of either political or environmental opposition. Some localities use interstate shipments as a solution to their local problems with waste disposal. For example, commercial haulers of business waste in New York City export about 3 million tons annually for disposal because the publicly owned landfill raised its rates for commercial waste to the point that it was less expensive to transport and dispose of waste out of state. New York City officials raised the commercial rates in an effort to conserve the disposal space for residential waste in their only remaining landfill. Interstate shipments have also been attributed to new and stricter federal criteria for landfills; increasing state regulation; economic and environmental factors, such as the increasing privatization of municipal solid waste management; and trends towards building larger and better but fewer landfills for municipal solid waste. Also, as a result of stricter federal and state regulations, the cost of constructing small locally owned and operated solid waste management facilities has exceeded the resources of many governmental bodies. Thus, intrastate and interstate transport of waste becomes a viable option for containing costs because wastes can be combined at a single location to achieve economies of scale. According to the report by the National Solid Wastes Management Association, in 1992 only three states—Hawaii, Montana and South Carolina—reported that they did not ship waste to other states, while five states—Alaska, California, Colorado, Idaho, and New Jersey—reported that they did not receive waste from other states. All other states both export and import waste. While some state officials told us that their state is becoming a dumping ground for other states, these states also export waste. For example, Texas imports from Arkansas, Louisiana, and New Mexico and exports to these same three states plus Oklahoma. Pennsylvania imports from 8 states and the District of Columbia, while exporting to 10 states. Ohio imports from 20 states and exports to 6 states. While some states ship relatively small amounts of waste, others are major exporters. For example, Illinois, Pennsylvania, New York, and New Jersey exported more than 1 million tons of municipal solid waste in 1992. In contrast, Ohio, Michigan, New Mexico, and Washington State exported between 0.1 and 1 million tons in 1992. According to data from the U.S. Bureau of the Census, Canada, Mexico, Japan, Italy, Germany, Finland, Sweden, and Austria shipped waste into the United States in 1992. However, these data do not specify whether these exports are destined for disposal or recycling. This waste includes unsorted paper or paperboard, glass, waste plastic, and rubber. In total, about 322,000 tons are received. (App. III provides detailed information on the volume of waste the United States receives.) The majority of waste shipped to the United States comes from bordering countries, particularly Canada. Tipping fees in Canada average about $3,000 per truckload at a landfill, while such fees in the United States average about $600. Between 1984 and 1992, tipping fees for commercial waste in metropolitan Toronto increased from $18 to $150 per ton to finance local recycling efforts. As a result, landfills in Pennsylvania, New York, Ohio, and Michigan attracted Canadian solid waste because their fees, plus transportation costs, ranged between $56 to $140 per ton. (App. IV compares the costs of disposing of waste in Ontario landfills with the cost of transporting and disposing of waste in the United States.) Table 3.2 shows the amount of waste that five states received from Canada in 1993 through Buffalo, New York. Waste imported through Buffalo from Canada was not being shipped for recycling and reuse but was destined for disposal facilities. Along the U.S.-Mexican border, American companies operating in Mexico are required, under a bilateral agreement between the two countries, to return any waste the Mexican government defines as hazardous, which includes more wastes than EPA defines as hazardous. For example, Mexico considers used lubricants as hazardous, while EPA does not. About 6,000 tons of waste that Mexico considered hazardous were received from Mexico in 1993. According to an EPA Region VI official, this waste includes waste that EPA defines as nonhazardous solid waste. About 12 percent of this waste is recycled in the United States. Data maintained by EPA to track imported waste shows that Texas and California are the final destinations for the vast majority of this waste. Other states that receive waste from Mexico include Arizona, Arkansas, Louisiana, Nevada, New Mexico, and Oklahoma. The United States also exports solid waste to other countries, including materials to be recycled. For example, North Dakota exports white goods (such as household appliances), crushed autos, and scrap metals to Canada; Massachusetts exports wood waste to Canada. However, national data are lacking on solid waste exported from the United States. Some state authorities do not want to continue receiving waste from other states and/or countries because of concerns about the impact on local disposal capacity, among other things. Some state officials said that imported waste affects a state’s ability to plan for sufficient disposal capacity for in-state waste and discourages citizens from recycling because their efforts only serve to make room for waste from other states. Oregon officials said that although the state’s disposal capacity is expected to be sufficient for 100 years, the state should be compensated through surcharges placed on imported waste. This surcharge should be based on the costs incurred for (1) managing solid waste, (2) issuing new and renewal permits for solid waste disposal sites, and (3) funding environmental monitoring, groundwater monitoring, and waste facility closure and post-closure activities. Some state officials were concerned that imported waste might present additional risks. For example, officials in Ohio were concerned that imported waste destined for nonhazardous landfills would contain hazardous materials and that this waste could go undetected if the shipments are baled or shredded. Some states, because of concerns that out-of-state waste threatens their disposal capacity, have passed laws aimed at controlling such shipments. However, the Supreme Court has held that these statutes violate the Commerce Clause of the Constitution. Federal courts have also struck down state laws aimed at ensuring sufficient revenues for their publicly financed waste facilities. As a result, some state and local governments believe that the federal government should authorize them to act to protect their disposal capacity. Several legislative proposals to provide the states with more control over waste have been introduced in the Congress. At least 41 states have enacted legislation or issued executive orders to control interstate shipments of solid waste, either by banning, setting limits on, or imposing higher fees on waste imports. The purpose of these laws is to conserve capacity at in-state private or commercial landfills. However, since the Congress has not authorized states to enact such measures, the U.S. Supreme Court has struck down several of these statutes, holding that they violate the Commerce Clause. Because the Congress has not provided the states with authority to limit interstate shipments of waste, some state and industry officials state that federal action is needed to provide them with this authority. In one instance, in City of Philadelphia v. New Jersey, the state enacted legislation that banned importing most solid waste that originated outside the state. New Jersey argued that the ban was intended to preserve existing landfill space in order to protect the health, safety, and welfare of the state’s citizens. The Court held that a state may not discriminate against waste coming from outside the state based solely on its origin. The Court stated that the law was discriminatory because it “imposes on out-of-state commercial interests the full burden of conserving the state’s remaining landfill space.” The Court held that the New Jersey statute was unconstitutional. States’ attempts to impose a differential fee structure on out-of-state waste also have been struck down. On April 4, 1994, in Oregon Waste Systems v. Department of Environmental Quality, the U.S. Supreme Court struck down an Oregon statute that imposed a surcharge on the disposal of solid waste from outside the state, ruling that the charge violated the Commerce Clause. The Court stated that “it is well established . . . that a law is discriminatory if it taxes a transaction or incident more heavily when it crosses state lines than when it occurs entirely within the state.” States also may not curtail the movement of solid waste through the subdivisions of a state. A Michigan statute generally prohibited private landfill operators within a county from accepting solid waste originating outside the county where the facility is located. Michigan had enacted the statute to help counties plan for the disposal of solid waste. In Fort Gratiot Sanitary Landfill, Inc. v. Michigan Department of Natural Resources,Michigan claimed that the statute was constitutional because it treated waste from other Michigan counties the same as waste from other states. The Supreme Court disagreed and held the statute unconstitutional. The Court stated that Michigan could attain its planning objective without discriminating by limiting the amount of waste a landfill may accept each year regardless of the source of the waste. State and local authorities can generally ban, restrict, or impose surcharges on out-of-state waste received at publicly owned facilities without being in conflict with the Commerce Clause. In these cases, state and local authorities are acting as market participants rather than as regulators. Publicly owned facilities currently account for about 86 percent of the land disposal facilities operating. However, the commercial industry owns about 50 percent of the available landfill capacity. Data are not available on the types of waste being shipped between states and whether these shipments are destined for private, commercial, or publicly owned facilities. Local governments are enacting laws to ensure a sufficient amount of waste, and thus sufficient revenues, to pay the costs associated with financing and/or operating publicly arranged services. These laws (1) direct that all municipal waste be disposed of at specific sites for specific disposal fees, thus prohibiting the shipment of waste to another facility, or (2) establish a private party as the exclusive provider of waste management services. Thus far, the courts have struck down several of these laws on the grounds that they also violate the Commerce Clause. It is estimated that ordinances to control the flow of waste to specific companies or facilities, commonly referred to as flow control laws, exist in about 41 states. However, data are not available on the amount of waste subject to flow control laws or the number of publicly financed facilities or services that rely on flow control to repay public debt or finance the service. According to state and industry officials, flow control provides the financial assurance that investor communities and bond rating agencies require by guaranteeing, over the life of a waste management facility, contracts for a specified amount of solid waste and/or recyclable materials, for which the facility will receive a specific revenue. Most local governments have “put or pay” contracts with solid waste management facilities: If a specified amount of solid waste and/or recyclable material is not delivered, the local government must pay the shortfall. Because some state and local flow control ordinances have been held by federal courts to violate the Commerce Clause, several state and industry officials believe that federal action is needed to provide states and localities with the authority to control the flow of waste. Furthermore, the U.S. Supreme Court has more recently ruled against a local flow control ordinance. In Minnesota, counties that had built a new composting facility required all compostable solid waste generated in those counties to be delivered to the new facility. The county ordinances were intended to ensure an adequate supply of waste to the facility and thus finance the debt incurred in building the new facility. Previously, waste had been disposed in an Iowa landfill. In Waste Systems Corp. v. County of Martin,the U.S. Court of Appeals for the Eighth Circuit held that the county ordinances violated the Commerce Clause by discriminating against companies that dispose of waste outside of Minnesota. More recently, the Supreme Court struck down, on the grounds that it violated the Commerce Clause, a local flow control ordinance. An ordinance in Clarkstown, New York, required all nonrecyclable solid waste generated within the town be processed at a designated facility before being shipped elsewhere for disposal. The town had argued that the ordinance did not affect interstate commerce because, after treatment, the waste still had to be shipped out of town because there is no local landfill. In response to the states’ desires to see federal action that would provide them with authority to control interstate shipments and the flow of intrastate waste, several bills that would allow states to limit or restrict waste received from out of state and to impose controls over intrastate shipments have been considered, but not passed, by the Congress. The Congress has also directed EPA to conduct a study on flow control. From 1991 through 1994, more than 30 bills were introduced in either the U.S. Senate or the House of Representatives that would authorize the states to impose restrictions on out-of-state waste; however, none of these bills were enacted. The bills varied considerably in (1) who was authorized to restrict waste and under what conditions, (2) whether higher fees could be imposed on out-of-state waste, (3) what types of waste could be restricted, and (4) whether exemptions from restrictions could be obtained. Some of these bills allowed the states to place a surcharge, or a differential fee, on such waste. Several of the bills specified that restrictions can only be placed on municipal waste; others imposed restrictions more generically on all solid waste. Three bills also allowed exemptions from the restrictions; for example, landfills that accepted out-of-state waste in 1991 and that complied with state design and operation laws would not be subject to restrictions. Several bills have also been introduced that would provide state or local governments with control over shipments of waste within the state or locality. One bill specifically exempts flow control contracts entered into before January 1994, but requires state and local governments to have recycling programs in place before entering into new contracts after that date. Another bill allows communities to continue to adopt flow control arrangements; however, facilities would have to compete against each other to qualify for entering into a flow control arrangement. While state officials and industry experts told us that congressional intervention is needed to resolve the issue of interstate and intrastate waste shipments, there is insufficient information to determine the benefits or potential negative impacts of such action on the economics of waste management and waste management options, such as ownership. While a congressional conference committee report directed that EPA study issues associated with flow control, the Congress has not directed a study on issues associated with controls over interstate waste shipments. Allowing state and local governments to restrict the waste received at private and commercial facilities could have some benefits, including (1) an improved ability to plan and project capacity needs and (2) an extended life for existing landfills, thereby delaying the need to build new capacity in specific locations. According to state officials and industry experts, bans or limits would also allow the state to address citizens’ concerns that the state is being used as a dumping ground for other states less willing to make decisions about solid waste management, the imported waste may contain hidden environmental and health hazards, the imported waste adversely affects local recycling efforts by discouraging some citizens from recycling because they believe their local capacity will be used for out-of-state waste, and increased traffic will result in additional costs for maintaining publicly financed roads. Likewise, allowing state and local governments to control the flow of waste to certain facilities could benefit those communities that have made major financial commitments in waste management operations, either through “put or pay” contracts or through construction funded by public debt, by providing those communities with more certain financing for these efforts. However, allowing state and local authorities to limit or restrict waste received at private or commercial facilities, or to control where waste must be taken, also has potential negative consequences. First, competition could be impeded, opening the way for potential inefficiencies that drive up the costs to the public. Second, the number of options that state and local authorities, households, commercial firms, and manufacturers have for managing their solid waste could decrease if the waste cannot be shipped across state lines, thus possibly raising the cost to those who pay for the services. Third, communities with insufficient capacity could be required to make significant outlays as they attempt to finance and construct local waste management capacity because they would no longer be able to use out-of-state facilities. Fourth, land disposal facilities that may not comply with EPA’s revised criteria on landfills could continue to be used because options to ship waste out of their jurisdictions would have been precluded. Finally, communities that could be precluded from shipping waste out of their jurisdictions might be required to construct new facilities locally, where land and water resources could more easily be compromised, thus posing a potential threat to human health and the environment. The conference committee report accompanying EPA’s fiscal year 1993 appropriating legislation directed EPA to provide the Congress with a review of flow control laws and an analysis of their effect on health and environmental protection, state and local management capacity, and source reduction, reuse, and recycling. EPA estimates that its study will be provided to the Congress by early 1995. According to EPA solid waste officials, the study will compare states that have flow control with those that do not to determine the impact that flow control has on planning, interstate shipments of solid waste, and recycling. However, according to one official, EPA does not have a position on flow control. It is not known if EPA’s study will provide sufficient information to determine whether legislative action to address flow control is necessary. Federal legislation that was proposed but not acted upon during the 103rd Congress on the interstate shipment of waste addressed a number of issues, but that Congress did not direct EPA to conduct a study, similar to the one currently being conducted on flow control, to review state laws affecting interstate waste shipments and the impact these laws have on waste management issues. While we attempted to obtain data useful to the Congress to address interstate shipments of solid waste, we were unable to identify sources for that data. This lack of data makes it difficult to determine the impact of legislative action that places restrictions on interstate waste shipments. | Pursuant to a congressional request, GAO reviewed state and federal efforts to manage municipal, commercial, and industrial solid waste, focusing on: (1) how states are addressing the rising costs of solid waste management and public opposition to solid waste facilities; and (2) the federal role in addressing solid waste management issues. GAO found that: (1) as of December 1994, 46 states had developed or were developing solid waste management plans to address diminishing disposal capacity, the rising costs of solid waste management, and public opposition to new disposal sites in local communities; (2) the eight state plans reviewed propose options for managing solid waste and alternative financing mechanisms to support local recycling programs and landfill closings; (3) states have used special fees and taxes to finance 74 percent of their solid waste programs; (4) although local opposition to solid waste management facilities has delayed site selection and construction, two of the eight plans contain procedures for selecting waste management sites; (5) some state officials and industry experts believe that the federal government should assist in developing national source reduction goals, setting packaging and recovered material standards, developing markets for recyclable materials, and ensuring sufficient disposal capacity; (6) although the Environmental Protection Agency (EPA) supports state source reduction and recycling efforts, it does not plan to enforce its 1992 municipal solid waste agenda or believe that it should lead recycling or source reduction activities; (7) although EPA projects that recycling rates of 25 to 35 percent may be achieved by the year 2000, additional advances may have to be made to achieve these rates; and (8) although legislation has been proposed authorizing states to restrict the interstate and intrastate shipment of solid waste, sufficient data do not exist to determine the impact of this authority on the solid waste management industry. |
IPTs are to bring together the different areas of expertise needed to acquire a new product, such as engineering, manufacturing, purchasing, and finance. The essence of the IPT approach is to concentrate this expertise in a single team together with the authority to design, develop, test, manufacture, and deliver a product. The hallmark of these teams is their ability to efficiently make decisions that cross lines of expertise. Over the last two decades, the federal government has taken steps to improve IT acquisitions through the use of IPTs. Building on success from private industry’s use of IPTs, Defense adopted them in an attempt to improve its weapon system acquisitions. In 1996, the department published a guide on integrated product and process development based on its survey of policies and practices for over 80 government and industry organizations. Defense’s intention was to use the teams in the same manner as commercial firms—to integrate different functional disciplines into a team responsible for all aspects of an acquisition. Recognizing IPTs’ potential to improve the federal government’s approach to managing IT investments, OMB has called for the development and use of IPTs for federal IT acquisitions. In 2010, OMB published a 25-point action plan that was intended to address many of the most pressing, persistent challenges to the federal government’s management of IT. One of the actions OMB cited was to require that IPTs were in place before OMB approves program budgets. Additional actions agencies are to take are to dedicate resources to the team throughout the program lifecycle and hold team members accountable for individual goals and overall program success. Subsequently, OMB has incorporated revisions to its Capital Programming Guide and related guidance, which require the use of IPTs prior to OMB’s approval of an investment’s business case. Specifically, OMB requires that each major IT investment establish an IPT that includes, at a minimum, a fully dedicated program manager, a contracting specialist (if applicable), an IT specialist, an IT security specialist, and a business process owner or subject matter expert. Effective IT workforce planning is key to an agency’s success in developing IPTs with the necessary knowledge, skills, and abilities to execute a range of management functions that support the agency’s mission and goals. Over the past 20 years, various laws were enacted and guidance issued that call for agencies to perform workforce planning activities that ensure the timely and effective acquisition of IT. These laws and guidance focus on the importance of (1) setting the strategic direction for workforce planning, (2) analyzing the workforce to identify skill gaps, (3) developing strategies to address skill gaps, and (4) monitoring and reporting on progress in addressing skill gaps. For example: The Clinger-Cohen Act of 1996 requires agency CIOs to annually (1) assess the requirements established for agency personnel regarding knowledge and skill in information resource management and the adequacy of such requirements for facilitating the achievement of performance goals; (2) assess the extent to which the positions and personnel at executive and management levels meet those requirements; (3) develop strategies and specific plans for hiring, training, and professional development to address any deficiencies; and (4) report to the head of the agency on the progress made in improving information resources management capability. The E-Government Act of 2002 requires the Director of OPM, in consultation with the Director of OMB, the Chief Information Officers Council, and the Administrator of General Services to (1) analyze, on an on-going basis, the personnel needs of the federal government related to IT and information resource management; and (2) identify where current IT and information resource management training does not satisfy personnel needs. In addition, the law requires the Director of OMB to ensure that agency heads collect and maintain standardized information on their IT and information resources management workforce. In 2010, OMB issued its 25-point plan for IT reform and outlined several action plans to build workforce capabilities, including acquisition and program management. For example, OMB stated that OPM will work with OMB to provide agencies with direct hiring authority for program managers and directed OPM to create a specialized career path. OMB also tasked agencies with identifying program management competency gaps and reporting on those gaps. Subsequent to the 25-point plan, in July 2011, OMB released guidance for agencies to develop specialized IT acquisition cadres. Among other things, this memorandum required agencies to analyze current acquisition staffing challenges; determine if developing or expanding the use of cadres would improve program results; and outline a plan to pilot or expand cadres for an especially high-risk area, if the agency determined that such an effort would improve performance. Further, in November 2011 OPM issued guidance for developing career paths for IT program managers. OPM’s career path guide was to build upon its IT Program Management Competency Model released in July 2011 by serving as a roadmap for individuals interested in pursuing a career in this area and providing employees and their supervisors with a single-source reference to determine appropriate training opportunities for career advancement. In December 2014, Congress enacted legislation commonly referred to as the Federal Information Technology Acquisition Reform Act (FITARA). Among other things, the law aims to ensure timely progress by federal agencies toward developing, strengthening, and deploying IT acquisition cadres consisting of personnel with highly specialized skills in IT acquisition, including program and project managers. Agencies (other than Defense) are required to update their acquisition human capital plans to address how they are meeting their human capital requirements to support timely and effective acquisitions. To assist agencies in implementing the provisions of FITARA and to reinforce provisions of the Clinger-Cohen Act of 1996, OMB issued guidance to agencies in June 2015. In doing so, OMB directed agencies (other than Defense) to, among other things, (1) develop a set of competency requirements for staff, including leadership positions; and (2) develop and maintain a current workforce planning process to ensure the agency can (a) anticipate and respond to changing mission requirements, (b) maintain workforce skills in a rapidly developing environment, and (c) recruit and retain the talent needed to accomplish the mission. Each agency is to conduct an annual self-assessment of its conformity with these requirements and develop an implementation plan describing the changes it will make. In October 2015, OMB required agencies to identify their top five cybersecurity talent gaps by December 2015 as a one-time effort. Specifically, agencies were to participate in an OPM cybersecurity staffing exercise to identify the universe of their cyber talent, understand challenges for retaining talent, and address gaps accordingly. The Federal Cybersecurity Workforce Assessment Act of 2015 required OPM, with support from the National Institute of Standards and Technology, to establish a coding structure to be used in identifying all federal civilian and non-civilian positions that require the performance of IT, cybersecurity, or other cyber-related functions. Agencies, in consultation with OPM, the National Institute of Standards and Technology, and the Department of Homeland Security, were then required to utilize this coding structure to annually assess, among other things, the IT, cybersecurity, and other cyber- related work roles of critical need in the agency’s workforce. We have additional planned work in this area. OMB released its Federal Cybersecurity Workforce Strategy in July 2016. Among other things, the strategy cited the need for agencies to examine specific IT, cybersecurity, and cyber-related work roles, and identify personnel skills gaps, rather than merely examining the number of vacancies by job series. The strategy identified several actions that agencies could take to identify workforce needs, expand the cybersecurity workforce through education and training, recruit and hire highly skilled talent, and retain and develop highly skilled talent. Finally, in July 2016 OMB issued updated policy for the planning, budgeting, governance, acquisition, and management of federal information, personnel, equipment, funds, IT resources and supporting infrastructure and services. Among other things, OMB’s updated circular requires the agency’s chief human capital officer, CIO, chief acquisition officer, and senior agency official for privacy to develop a set of competency requirements for staff and develop and maintain a current workforce planning process. While the laws and guidance focus on IT workforce, there are also other broader initiatives to improve federal human capital management. For example, we and OPM developed human capital management models that call for implementing workforce planning practices that can facilitate the analysis of gaps between current skills and future needs and the development of strategies for filling the gaps, as well as planning for succession. In addition, our Standards for Internal Control in the Federal Government stress that management should consider how best to retain valuable employees, plan for their eventual succession, and ensure continuity of needed skills and abilities. We have previously reported on commercial and Defense teaming practices and found that IPTs can develop and deliver superior products within predicted time frames and budgets—often cutting calendar time in half compared with earlier products developed without such teams. In addition, we identified two elements that are essential to an IPT: the knowledge and authority needed to recognize problems and make cross- cutting decisions expeditiously. We noted that knowledge is sufficient when the team has the right mix of expertise to master the different facets of product development and authority is present when the team is responsible for making both day-to-day decisions and delivering the product. We concluded that if a team lacks expertise, it will miss opportunities to recognize potential problems early; without authority, it can do little about them. Regarding broader human capital planning efforts, we first designated strategic human capital management across the government as a high- risk issue in 2001 because of the federal government’s long-standing lack of a consistent approach to human capital management. In February 2011, we narrowed the focus of this high-risk issue to the need for agencies to close mission-critical skill gaps. At that time, we noted that agencies faced challenges effectively and efficiently meeting their missions across a number of areas, including acquisition management. With regard to IT workforce and human capital planning, we reported that effectively addressing mission-critical skill gaps in IT requires a multi-faceted response from OPM and agencies. Specifically, our high risk update in February 2013 noted that OPM and agencies would need to use a strategic approach that (1) involves top management, employees, and other stakeholders; (2) identifies the critical skills and competencies that will be needed to achieve current and future programmatic results; (3) develops strategies that are tailored to address skill gaps; (4) builds the internal capability needed to address administrative, training, and other requirements important to support workforce planning strategies; and (5) includes plans to monitor and evaluate progress toward closing skill gaps and meeting other human capital goals using a variety of appropriate metrics. We subsequently reported in January 2015 that while the Chief Human Capital Officers Council identified skill gaps in six government-wide occupations— including IT/cybersecurity and contract specialist/acquisition—it would be important for lessons learned from these initial efforts to inform a new set of skill gaps; key features of OPM’s efforts to predict emerging skill gaps beyond those already identified were in the early planning stages; and OPM and selected agencies could improve efforts to address skill gaps by strengthening their use of quarterly data-driven reviews. Further, we have reported that agencies across the federal government have not always effectively planned for IT workforce challenges. For example, We recently determined that the Department of Veterans Affairs (VA) had performed key steps such as documenting an IT human capital strategic plan and regularly analyzing workforce data, but the department had not tracked and reviewed historical and projected leadership retirements and had not identified gaps in future skill areas. We recommended that the department track and review historical workforce data and projections related to leadership retirements and identify IT skills needed beyond the current fiscal year to assist in identifying future skills gaps and it concurred with our recommendations. We identified that while the Federal Emergency Management Agency had taken initial steps to assess the needs of its IT workforce, it had not yet completed workforce planning efforts and lacked an understanding of its regional IT workforce. For example, we noted that while it had conducted a workforce assessment to identify skill levels of employees in the agency’s Office of the CIO, it had not completed recommended actions called for by this assessment. In addition, its workforce planning efforts had not included an assessment of the many IT staff located in the agency’s regions and other offices. We concluded that the agency had less assurance that its IT workforce will have the skills needed to successfully manage its programs and recommended it establish time frames for completing workforce planning efforts. The Department of Homeland Security concurred with our recommendations. In November 2015, we testified that, among other things, the U.S. Census Bureau faced challenges in the area of workforce planning. Specifically, we noted that while it had taken steps to develop an enterprise-wide IT workforce planning process, as we recommended in 2012, it had yet to fill key positions. We have also identified human capital challenges at the Social Security Administration (SSA). Specifically, we concluded that SSA’s IT human capital program had identified skills and competencies to support certain workforce needs, but lacked adequate planning for the future. The agency had developed IT human capital planning documents, such as an Information Resources Management plan and skills inventory gap reports, which identified near-term needs, such as skill sets for the following 2 years. Nevertheless, SSA has not adequately planned for longer-term needs because its human capital planning and analysis were not aligned with long-term goals and objectives and the agency did not have a current succession plan for its IT efforts. Accordingly, we recommended that SSA identify long-term IT needs in its updated human capital operating plan and the agency agreed. Further, we determined that eight selected agencies had taken varied steps to implement workforce planning practices for cybersecurity personnel. For example, five of eight agencies, including the largest, Defense, had established cybersecurity workforce plans or other agency-wide activities addressing cybersecurity workforce planning. However, all of the agencies faced challenges determining the size of their cybersecurity workforce because of variations in how work was defined and the lack of an occupational series specific to cybersecurity. With respect to other workforce planning practices, all agencies had defined roles and responsibilities for their cybersecurity workforce, but these roles did not always align with guidelines issued by the federal Chief Information Officers Council and National Institute of Standards and Technology. We also noted that the robustness and availability of cybersecurity training and development programs varied significantly among the agencies. We made recommendations aimed at enhancing individual agency cybersecurity workforce planning activities and to address government-wide cybersecurity workforce challenges through better planning, coordination, and evaluation of government-wide activities. The agencies agreed with the majority of our recommendations. Our review of the Food and Drug Administration concluded that, among other things, the agency was not strategically managing IT human capital—it had not determined its IT skill needs or analyzed gaps between skills on hand and future needs. We recommended that the agency complete key elements of IT human capital planning; the Food and Drug Administration concurred with our recommendation. Three key characteristics contribute to the creation and operation of comprehensive IT acquisition IPTs: (1) effective executive leadership through team support, empowerment, and oversight; (2) effective team composition; and (3) effective processes for team operations. The 18 key practices associated with these characteristics provide additional detail regarding recommended practices for the successful implementation of the characteristics. The first characteristic of a strong IPT is that executive leadership, external to the team, provides the team with support, empowerment, and oversight. The seven key practices provide details of how executive leadership can assist the IPT, as shown in figure 2. There should be a common understanding between executive leadership, the IPT program manager, and team members regarding the mission of the IPT, its responsibilities, and the desired outcome of the program. Individual team members should have a shared definition of success, and should be encouraged to prioritize team-wide goals over personal goals. Agency officials highlighted the need to establish and maintain a shared vision and goals. Specifically: General Services Administration (GSA) officials told us that IPTs do not set their own goals. The project is sponsored by management, and the vision and goals should be communicated by leadership. The IPT’s job is to develop a strategy to achieve the vision and goals. GSA officials added that these teams should communicate the vision and goals of the program during the solicitation phase. During the performance phase, vision and goals should be aligned with service level agreements. Officials from the National Oceanic and Atmospheric Administration’s (NOAA) Office of the CIO noted that the IPT should communicate its vision and goals with its stakeholders for their review and approval prior to the project commencement. Officials with the Department of Commerce’s (Commerce) Office of the CIO stated it is important to ensure the team is aware of the shared vision and goals and that the team works with the sponsor, stakeholders, and other management to ensure the vision is shared and understood by all involved. Representatives of NOAA’s Geostationary Operational Environmental Satellite - R series program reported that team members need to be able to perform tasks that are best for the IPT and the project, regardless of whether those tasks were not originally assigned to them. For example, members need to break out of the mentality of being an “IT person” who does not need to assist with non-IT related tasks. Regardless of what expertise the member holds, he or she needs to work towards the mission of the project. Representatives from the VA Veterans Benefits Management System added that they work with partnering and parent organizations to ensure decisions related to the functionality are aligned with agency priorities. Representatives from the VA Technology Acquisition Center and the Office of Information and Technology explained that an IPT should be committed to a common purpose. Work products such as the project charter and program management plan can be used to communicate the IPT’s vision and goals. Executive leadership should serve as an active promoter for the IPT and its success. This focus can be demonstrated by leadership effectively and enthusiastically communicating the vision and goals to outsiders, collaborating with other programs upon which the team is dependent, and managing the impact of challenges and opportunities from the external environment. For example, representatives from the VA Veterans Benefits Management System stated that a major underlying contributor to the progress of the program has been unwavering support from executive leadership since the project’s inception. The IPT staff explained that consistent oversight and executive involvement has had a positive and direct impact on the project’s overall probability of success by removing roadblocks, mitigating risks, and prioritizing funding. Executive leadership should create an environment for the IPT that facilitates success. This can include things such as team building experiences, opportunities for career growth through challenges, feedback and support, and recognition and rewards for good performance. For example, key guidance from MITRE Corporation recommends that periodic opportunities be provided for team members to brief their respective executives on aspects of their work. This may provide individual members with valuable recognition from high levels within their own areas as well as feedback to the IPT from senior management. The guidance also discusses the importance of incentivizing individual team members by tying their performance appraisals and rewards to team performance. Officials with two of the agencies in our review also mentioned the value of motiving team members: Officials with Commerce’s Office of the CIO stated that a desirable IPT characteristic includes teaming. Teaming requires a true peer environment where team members are mutually accountable for outcomes and consensus building is essential. Representatives from GSA’s Assisted Acquisition Services, Federal Systems Integration and Management Center noted that successful IPTs have some level of social interaction outside of professional duties to smooth out communication barriers and build rapport. The people assigned to an IPT should have the appropriate authority to perform their assigned responsibilities. The boundaries of responsibility and authority between the team and executive leadership should be established early and documented. Executive leadership may honor these agreements by allowing the IPT to select its members, coordinate and implement decisions, take prudent risks, and exercise full day-to-day responsibilities for delivering the product. An IPT should have the authority to make decisions and not just serve as a mechanism for communicating with stakeholders. Several agency officials also discussed the benefits of empowering teams. Specifically: Officials from the NOAA Office of the CIO stated that the extent of the IPT’s authority should be set by the executive sponsors based on the importance of the program. A risk-based approach should be used to identify the threshold of decision authority. According to officials with Commerce’s Office of the CIO, the IPT should be able to make most decisions as long as it does not over-run the budget, schedule, or scope. Empowerment is critical to making and keeping the agreements essential to effective teams. Representatives of NOAA’s Geostationary Operational Environmental Satellite - R series program noted that executive leadership should only help an IPT when appropriate, otherwise too strong of a hand from leadership can result in micromanagement. These representatives added that IPTs should have enough decision authority to push forward the project. Further, they should not have to constantly go up the management chain to make decisions, as this would be a clear indicator that the team’s authority is non-existent. Representatives from GSA’s Assisted Acquisition Services, Federal Systems Integration and Management Center explained that the level of decision making authority granted to an IPT depends on the level of resources, experience, human capital, and organization. It is important to hire quality resources, empower them to use critical thinking and judgment, and support their efforts. Controls should be implemented when these conditions are not present. Officials with the VA Technology Acquisition Center and the Office of Information and Technology told us that, in providing the best value to the VA customer, the IPT should have the authority to decide on requirements and the corresponding acquisition milestones and process to accomplish effective lifecycle acquisition, contract, and performance management. According to officials from Defense’s Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics and the Office of the CIO, a desirable characteristic of an IPT is to have empowered team members. Executive leaders outside of the IPT can help to ensure its success by providing the resources necessary to do the assigned work. Resources include funding to ensure the team has adequate staffing; physical facilities; security; and IT tools such as environments, software, hardware, and networks. In that regard, it is vital to have leadership support for the IPT lead and team members’ roles and time commitments. Having this support will help enable the people assigned to the IPT be able to devote the necessary time and effort to make the program successful. Agency officials highlighted the importance of providing the necessary resources. Specifically: Officials from NOAA’s Office of the CIO stated that each team member should have the time to devote to the IPT without distraction. Representatives of NOAA’s Geostationary Operational Environmental Satellite - R series program explained that leadership should have the appropriate understanding and awareness of what resources are needed, such as a sufficient budget and skilled staff members. If problems arise, senior executives need the ability to bring in additional resources that help the program. IPTs should have access to a resource pool of needed expertise or talent. According to officials from the VA Office of Information and Technology, it is critical that team members are committed and provide the necessary time for the effort so that project plans are fulfilled, consistent with legitimate constraints. Officials with the VA Technology Acquisition Center noted that members need to be committed and provide the necessary time to the IPT. Representatives from GSA’s Assisted Acquisition Services, Federal Systems Integration and Management Center told us that it is critical to have access to resources, such as budget and technology, to track the program’s schedule and deliverables. In addition, leadership support and flexibility are needed when staffing a team. Executive leadership outside of the IPT should periodically evaluate its structure, operations, and results. Another important role of leadership oversight is to ensure that the shared vision and goals are consistently pursued throughout the program lifecycle. Conducting such evaluations can result in the clarification of roles and responsibilities and constructive feedback to team members, the discovery of unrecognized or unresolved issues, and the establishment or modification of program goals for the future. Members should be held accountable by leadership for their individual performance as well as overall program success. Agency officials highlighted the need to provide the IPT with meaningful oversight. Specifically: Officials with NOAA’s Office of the CIO stated that executive managers from three offices (acquisitions, IT, and the customer organization) work together to approve the IPT and provide oversight to hold it accountable. According to VA Veterans Benefits Management System officials, IPTs at the VA were held accountable through the department’s Project Management Accountability System, which required that IT projects deliver customer-facing functionality every 6 months. Through the project management process, milestones are to be monitored regularly and communicated to appropriate stakeholders. Representatives from the VA Technology Acquisition Center and the Office of Information and Technology stated that IPTs within the department are subject to regular reviews with senior leadership where metrics are used to monitor progress and make adjustments as appropriate to ensure success. Representatives from the VA’s Office of the CIO added that projects that miss their delivery date are to be reviewed by a senior leader panel to identify root causes and lessons learned. Representatives from GSA’s Assisted Acquisition Services, Federal Systems Integration and Management Center indicated that the IPT is coordinated by a sector director, group manager, and acquisition group manager based on client needs and resource availability. These three leadership stakeholders are involved in the gate review process and provide oversight. Projects are tracked using activity based costing. The budget is set by the group manager, and each employee tracks their time and cost against the budget. This activity drives efficiency on the government side. Similarly, every project employs a variation of project tracking using service level agreements, deliverables, and quality assurance surveillance. IPT leadership, with sufficient autonomy, should be able to handle many issues and conflicts on their own. However, when an issue arises that threatens to derail the project and it cannot be handled within the IPT, executive leadership must be available and involved enough to quickly and effectively resolve the issue. For example, officials from NOAA’s Geostationary Operational Environmental Satellite - R series program explained that when an issue cannot be resolved within the IPT, the program manager should raise the issue as quickly as possible to a decision-making level where resolution can be achieved. In addition, executive sponsors help projects by negotiating and addressing concerns of stakeholders not directly assigned to the team. The second key characteristic of a comprehensive IPT for major IT acquisitions is to establish a highly effective team. The five key practices contribute to the overall success of this characteristic, as shown in figure 3. Based on the program’s requirements, agencies need to develop a human resource management plan that identifies the skills needed to complete the work. Agencies then need to determine the optimal size of the core IPT team and availability of other supplementary staff. In some situations, subject matter experts may be assigned to work full time on the team, or they may rotate in and out based on the need for their expertise in a given phase. Agency officials with whom we spoke mentioned the importance of determining the required skills, optimal size, and availability. Specifically: According to officials with Commerce’s Office of the CIO, the assignment of core and supplementary staff and subject matter experts depends on the work needed to be completed. Officials from NOAA’s Office of the CIO also explained that the number and composition of team members should be commensurate with the complexity and the scope of the task. Representatives from NOAA’s Geostationary Operational Environmental Satellite - R series program told us that for larger projects, staff should be changed at specific phases of the program, such as when the program transitions from development to operations. Officials from Defense’s Office of the Under Secretary of Acquisition, Technology, and Logistics and the Office of the CIO explained that the program manager, stakeholders, and customers should be able to assign any staff member who would be of value and assistance. Once the effort is complete, the assigned staff member can be released from the IPT based on the program manager’s assessment that the resource is no longer needed. These officials added that in addition to the program’s tasks, functional capabilities, and lifecycle phase, the size of the IPT will vary based on the acquisition category of the program. Representatives from VA’s Veterans Benefits Management System noted that supplementary staff, such as end users and subject matter experts, can become a part of the core IPT during times that necessitate a specific level of expertise. These individuals can return to their regular duties once they have fulfilled their roles. Representatives from the VA Technology Acquisition Center and the Office of Information and Technology stated that it is important to ensure adequate representation from all major stakeholder organizations, but also to safeguard that the IPT does not have too many members. According to representatives from the VA Technology Acquisition Center and the Office of Information and Technology, different members have different levels of engagement depending on the scope of the IPT and the lifecycle phase of the program. Staff may be added later or required to participate more frequently depending on the needs of the program. Each program must determine the appropriate composition of its IPT. Some roles and responsibilities are considered “core,” meaning that each team must have these staff. For example, in order for OMB to approve the IT investment, an IPT must at a minimum include: (1) a fully dedicated IT program manager; (2) a contracting specialist (if applicable); (3) an IT specialist; (4) an IT security specialist; and (5) a business process owner or a subject matter expert. Other roles and responsibilities are considered “supplementary,” meaning that they can be added as necessary during certain phases of the lifecycle. Our review of key guidance documentation and interviews with agency officials indicates that an IPT for a major IT acquisition should include a number of core disciplines. Although the descriptions of the disciplines are more detailed than those required by OMB, they are still compatible with OMB’s five categories. For example, the contracting, procurement, and acquisition professionals could fit into OMB’s category of contracting specialist. Similarly, the disciplines of software developers, test and quality assurance managers, engineers, and architects could fit into OMB’s category of IT specialist. Officials from the eight organizations that we identified for our sample were largely in agreement with these roles and responsibilities. For example, they all told us that contracting, procurement, and acquisition professionals were critical for an IPT. In addition, six organizations told us that that security and privacy specialists and requirements managers should be team members. At least four of the organizations also mentioned customers and users, budget and finance managers, software developers, test and quality assurance managers, engineers, risk managers, and sponsors. The core disciplines are shown in figure 4 by descending order in which they were cited in literature and by selected organizations, and discussed in more detail following the figure. Contracting, procurement, and acquisition professionals Contracting officers, who, according to OMB, evaluate technical competency of contractors and establish acquisition strategies to achieve the best value for taxpayer dollars. They and their support staff analyze proposals, provide independent cost estimates, and develop negotiation positions. They legally obligate the government when they enter into contracts. Contracting officer’s representatives, who manage ongoing contractor performance to ensure the government’s interests are protected. They are designated and authorized in writing by the contracting officer to perform specific technical or administrative functions on contracts or orders. Purchasing agents and procurement specialists, who assist contracting professionals with a wide range of duties, such as market research and file preparation, tracking procurements, and preparing awards for simple acquisitions. Contract specialists, who, according to OMB, support the contracting officers in accomplishing their many duties during the pre- and post- award acquisition phases. Contract specialists may also perform the role of contracting officers for small dollar value procurements. At the hub of an effective IPT is a strong program manager who stewards the process from beginning to end while achieving the program’s cost, schedule, and performance goals. The program manager could come from either the technology or mission organization, so long as the person possesses skills in both areas and operates under a strong governance process. Further, he or she should ideally be highly proficient at technical, business (both government and commercial business processes), organizational, programmatic, and interpersonal levels. Members of the organization who will approve, accept, and ultimately use the deliverables or products of the project on a day-to-day basis should be assigned to the IPT to ensure proper coordination; advise on requirements including business policies, rules, and processes; and validate the acceptability of the project’s results. Personnel from budget and finance are necessary to secure the required funding for the program. Their involvement during the acquisition process can help in the development of the acquisition strategy and limit potential problems related to financial and budgetary issues. An IPT should include government employees who are experts in system security. In addition, the sustained engagement of privacy specialists helps ensure that personal data is properly managed. Members of the team should have experience with traditional and modern development techniques such as Agile software development concepts and modular approaches. The team should have a requirements manager who understands the lifecycle of managing requirements starting with elicitation through the requirements change management process to test and evaluation. Test and quality assurance managers The test manager brings a solid end-to-end view of the testing process, including test management and the use of automated testing frameworks. Quality assurance personnel ensure consistency and quality documentation. Engineers translate operational needs and requirements into a set of system product and process solutions that satisfy customer needs. Teams benefit from having IT architects who can develop a solution that will interoperate with the agency’s internal and external systems. IPTs should include risk managers who are knowledgeable in the processes of risk management. This includes risk identification, analysis, and response planning that may decrease the likelihood and impact of negative events in the program. Each IPT should include the sponsor, who is the executive-level person or group who provides resources and support for the program and who is ultimately responsible and accountable for enabling its success. In addition to the core disciplines, other supplementary staff members could be added to the IPT on an as-needed basis. These include positions such as: Administrative personnel. These personnel are responsible for activities such as document management, communications, outreach, and meeting facilitation and recording. Organizational change managers. These managers execute strategies and techniques required for effectively planning, implementing, and evaluating change in the organization. Configuration managers. These managers apply principles and methods for planning and managing the implementation, update, and integration of information systems components. Earned value management specialists. These specialists can combine scope, schedule, and resource measurements to help the program team assess and measure project performance and progress. Human resources representatives. Human resources representatives are involved in (1) identifying and documenting project roles, responsibilities, required skills, and reporting relationships; (2) confirming human resource availability; (3) improving competencies, team member interaction, and team environments; and (4) tracking team member performance, providing feedback, and resolving issues. Governance managers. Governance managers are IT officials involved with strategic capital planning and investment control processes. Schedulers. Schedulers plan, develop, manage, execute, and control the program schedule in order to ensure the timely completion of the project. Designers. Designers have core knowledge of sustainable design. Legal counsel. Counsel should have the expertise to assist with acquisition-related and legal issues such as the award of contracts, intellectual property rights, licenses, and other matters. Operational support personnel. These personnel are responsible for activities such as system operations, implementation/deployment management, software maintenance, training, customer service, and system performance. They can be from external organizations that have a relationship with the program to provide specialized expertise or fill a specified role, such as IT system installation, customization, or training. Ideally, the team will not only consist of members from a wide selection of subject matter disciplines, but individual members will also have a variety of technical skills and expertise. In addition, important soft skill sets may also be considered. These include skills such as problem solving and decision-making, interpersonal skills, ability to communicate and work with customers, team building, and conflict resolution. One of the more important soft skills is the ability to deal with adversity and ever changing circumstances. Specifically for the program manager, important selection criteria include: (1) lack of bias, (2) technical expertise, (3) project management skills, (4) ability to manage external environment, (5) team engagement skills, (6) decisiveness, (7) time management skills, (8) ability to effectively elevate and delegate decisions, and (9) commitment to the IPT’s work. Several agency officials discussed the value of both technical and non-technical attributes. Specifically: Officials with Commerce’s Office of the CIO explained that a desirable characteristic of an IPT is integration, which is embodied by bringing together different organizations that have a stake in the program, each providing differing perspectives and skills which are vital to the successful outcome. Each team should possess the knowledge to collaboratively identify problems and propose solutions, minimizing the amount of rework that has to be done. According to officials from NOAA’s Office of the CIO, members should be capable of providing input regarding multiple disciplines, not just their area of primary responsibility. They added that on a multidisciplinary team often the best team members are individuals who have multiple types of expertise. Representatives from NOAA’s Geostationary Operational Environmental Satellite - R series program stated that IPTs should have personnel with specialized skill sets to bridge any gaps in the program. They should also have cross-functional skill sets that enable effective communication with managers inside and outside of their primary knowledge domain. GSA Assisted Acquisition Services, Federal Systems Integration and Management Center officials explained that they have created a structure that integrates the acquisition workforce with the technical resources under the same management. In addition, they have developed a role called the acquisition project manager, which is a hybrid position of technical expertise and acquisition knowledge that is present for pre-award activities such as technical evaluations. The representatives added that the integration of acquisition and technical resources, sharing the same management, leads to more efficiency and alignment with the mission. Representatives from the VA Technology Acquisition Center and the Office of Information and Technology told us that it is desirable for IPT members to have the necessary acquisition, business, technical and programmatic knowledge, as well as the expertise to facilitate and leverage the process to help define user needs, facilitate discussions, make recommendations, resolve issues, and make decisions. VA Veterans Benefits Management System officials explained that the most critical characteristic of a comprehensive IPT is a joint team consisting of IT resources and business resources, where the IT staff understands the business needs of the users and the users have the technical experience to assess alternative IT solutions and weigh the tradeoffs of each. Officials told us that they attempted to ensure frequent collaboration between business and IT team members during key phases of projects—from planning to deployment. They stated that this practice was essential to the delivery of functionality to end- users. Representatives from the VA Technology Acquisition Center and the Office of Information and Technology stated that desirable non- technical skills of IPT members include problem solving and decision- making, team building, interpersonal skills, and conflict resolution. Officials with Commerce’s Office of the CIO noted that adaptability is a desirable characteristic of an IPT member. Representatives from NOAA’s Geostationary Operational Environmental Satellite - R series program said that IPT members need to be flexible and open to change when needed to address team-wide priorities. The IPT needs to ensure that its members have received two types of training: (1) training related to their specific roles and (2) training related to their involvement in an IPT in general. The first type of training involves measuring the skills and knowledge of the staff in relation to their roles. Based on this assessment, the team should provide role-specific training as necessary to support the execution of the program. Providing cross-training to team members can reduce problems which arise during member absences. For the second type of training, the team should provide its members with IPT-specific training to create the knowledge and culture necessary to ensure its success. This can include training on items such as (1) the purpose of an IPT, (2) why an IPT is being used in this case, (3) how an IPT needs to function, and (4) behavior and skills required of IPT leaders and members. This training will require the use of additional resources upfront, but it can result in greater team effectiveness and efficiencies later. Officials from Commerce mentioned the value in ensuring appropriate training. Specifically: Officials from NOAA’s Office of the CIO told us that in addition to having knowledge regarding the mission subject, team members need the proper training in IPT framework and discipline. Representatives from Commerce’s Office of the CIO explained that training will assist with ensuring all of the team members are on board with the new program, especially if they are being taken from their normal daily duties. The core members of the team, including all leadership roles, should be in place throughout the program lifecycle. IPTs should be in place from the initial concept and development phases, through the delivery and implementation of the last increment under the contract. The team lead should be 100 percent dedicated to the program during this time frame. However, there may be instances where other team member services are not needed on a full-time basis. In those cases, team member support to the IPT, when needed, should take priority over the team member’s other duties. It is also ideal to have contractor staff who are stable and consistent. Having continuity of government and contractor staff working on a project throughout its lifecycle reinforces accountability. Agency officials discussed the importance of maintaining stability in the team. Specifically: Representatives from the VA Veterans Benefits Management System and NOAA’s Geostationary Operational Environmental Satellite - R series program stated that core staff should be assigned to the IPT for the duration of the program. According to representatives from the VA Technology Acquisition Center and the Office of Information and Technology, members should be available for the duration of the IPT, adding that commitment and regular and consistent participation are critical to the success of the team. Representatives from GSA’s Assisted Acquisition Services, Federal Systems Integration and Management Center noted IPT members should be assigned as soon as the requirements are known. Each member should have a clear expectation for the level of involvement, time frame for participation, and response at the conclusion of the phase. They also stated that roles and responsibilities of team members should be revisited at each phase of the acquisition. Representatives from Commerce’s Office of the CIO noted that it is desirable that backup representatives on the IPT be well apprised of the team’s agenda, issues, and decisions. The third and final key characteristic is to operate the team using effective processes. As shown in figure 5, six key practices provide additional detail for the successful implementation of this characteristic. The IPT should have a charter that documents its need, purpose, and scope. The charter should further clarify and elaborate goals, outcomes, and performance measures. In addition, it should be reviewed by, and receive concurrence from, executive leadership. It should also be updated as necessary, but at least at the start of each work phase. Agency officials mentioned the value of documenting the team’s charter. Specifically: Officials with Commerce’s Office of the CIO stated that the charter should be established early on in the planning process, and it should include (1) the expectations of the program team, (2) the scope of the IPT’s authority, (3) the metrics by which the success of the IPT will be evaluated, (4) the identification of the customers, (5) the amount and types of funds available to the IPT, and (6) the expertise the team must have. Representatives from the VA Technology Acquisition Center and the Office of Information and Technology told us that the charter should document the roles and responsibilities of each team member. According to officials with Defense’s Office of the Under Secretary of Acquisition, Technology, and Logistics and the Office of the CIO, the charter should document the customers, end users, and other stakeholders who have a vested interest in the outcome of the IPT. For effective operations, it is important to create and document IPT-specific decision-making processes that align with the organization’s policies and procedures. These include rules and guidelines for things such as: (1) team structuring, (2) formal lines of communication, (3) establishment of authority, (4) resource allocation, (5) work review and approval, and (6) reporting requirements. Several agency officials discussed the importance of providing the IPT with rules and guidelines. Specifically: Officials from NOAA’s Office of the CIO explained that the team should establish the mission criteria, schedule, and performance measures before the program begins. The IPT should report on the status at the expected intervals using monthly written status reports and quarterly project reviews. Representatives of NOAA’s Geostationary Operational Environmental Satellite - R series program told us that team members should understand their roles and responsibilities so they know what is required of them and the value they bring to the team. According to representatives from the VA Veterans Benefits Management System, they document roles and responsibilities, including an organizational chart and a responsibility assignment matrix. Representatives from the VA Technology Acquisition Center and the Office of Information and Technology told us that each member needs to have his or her role defined based on expertise. Representatives from GSA’s Assisted Acquisition Services, Federal Systems Integration and Management Center stated that an IPT should have defined roles and responsibilities, as well as consistent, mature processes. To that end, they have established standard operating procedures, training, and templates for organizations to use. These include (1) a roles and responsibilities matrix template to document the structure, roles and responsibilities, and operating procedures; (2) a project management tool to document the acquisition schedule and to provide a quick overview of dates for major milestones; and (3) an acquisition start meeting template to document the roles, responsibilities, existing information, acquisition schedule, procurement integrity briefing, project administration, and next steps. Defense’s Office of the Under Secretary of Acquisition, Technology, and Logistics and the Office of the CIO officials stated that each IPT’s structure should be individualized based on the program’s task, acquisition, type of capability, technology, operational mission, and other various factors. Co-location places many or all of the most active team members in the same physical location. The benefits of co-location can include easier information sharing and communication, earlier identification of issues, and more effective decision making. At a minimum, the IPT lead and the contracting officer should be co-located. However, co-location is not always practical. Another option is temporary co-location—bringing staff members together on a limited basis during strategically important times. For example, an especially important time is requirements definition, which is an area where translation issues between business users and developers can cause problems if requirements are not clearly articulated, understood, and documented. As an alternative, effective virtual teams can be created through the use of shared networks, software, tools, databases, and teleconferencing, which allows team members from different locations to work together regardless of the physical location. According to recognized guidance, the benefits of virtual teams include the addition of skilled resources, reduced travel and re-location costs, and the proximity of team members to other critical resources. Agency officials highlighted the need to make trade-offs to facilitate teamwork. Specifically: Officials with Commerce’s Office of the CIO explained that IPTs are not periodic meetings; rather they are daily work routines where members must work closely with their teammates and the program manager to produce a viable product as defined by business requirements. As such, co-location of all members is preferable as it facilitates frequent and timely discussions, problem-solving, and decision-making. NOAA demonstrated commitment to this approach with its Geostationary Operational Environmental Satellite – R series program. Although the program is overseen internally within Commerce, it relies on acquisition experience and technical expertise supplied by the National Aeronautics and Space Administration. In order to leverage this knowledge, NOAA implemented an integrated program management structure and located the program office at the National Aeronautics and Space Administration’s Goddard Space Flight Center. Officials with the Geostationary Operational Environmental Satellite – R series program told us that bringing team members to the Goddard Space Flight Center was advantageous because the co-location ensured that engineering resources were available, if needed. Representatives from the VA Veterans Benefits Management System told us that they use a mix of virtual teams and co-location as appropriate. For example, temporary co-location often occurs during requirements elicitation, system design, and user acceptance testing. Officials from the Defense’s Office of the Under Secretary of Acquisition, Technology, and Logistics and the Office of the CIO noted that co-locating team members is desirable but not mandatory in today’s virtual world. The use of virtual technology provides a means for high success in meeting the goals and objectives of the IPT without all members being co-located. For example, the use of virtual technologies such as teleconferencing, portals, instant messaging, and e-mails may help ensure requirements are clearly articulated and adequate oversight of the contracted work is accomplished. Representatives from GSA’s Assisted Acquisition Services, Federal Systems Integration and Management Center told us that geography matters and there is no substitute for face-to-face communication. Ideally the program manager should work in the same location as the customer at least 2 days a week to provide the best customer service possible. However, officials added that they have examples of successful IPTs where the team is not co-located. In those cases, the use of virtual tools such as telephone, e-mail, online documents, video chat, web messaging, and virtual meetings assisted in ensuring a seamless acquisition process. Representatives from the VA Technology Acquisition Center and the Office of Information and Technology stated that although they consider co-location to be optimal, it is not always practical. As a result, they often use on-line tools to facilitate effective virtual meetings. Stakeholders are individuals or groups affected by the outcome of a project, and may or may not be assigned to the core team. Either way, stakeholder involvement should be viewed as a valuable asset to the team, and stakeholder satisfaction should be seen as a key project objective. Stakeholders should represent all relevant acquisition, technical, support, and operational organizations. They are working team members and should be included in activities such as planning, decision- making, commitments, communication, coordination, reviews, appraisals, requirements definition, and resolution of problems and issues. Reviews and exchanges are regularly conducted with stakeholders to ensure that coordination issues receive appropriate attention and everyone involved with the project is appropriately aware of status, plans, and activities. The involvement of stakeholders is especially important in Agile development, which emphasizes collaboration more than traditional approaches do. For example, in Agile development, project status is primarily evaluated based on demonstrations of working software provided to stakeholders and customers. Agency officials with whom we spoke discussed the value of actively involving stakeholders. Specifically: Officials with Commerce’s Office of the CIO stated that ensuring the stakeholders were supportive from the beginning to the end of the program was a critical success factor. Representatives with NOAA’s Office of the CIO noted that the IPT should engage with internal stakeholders through weekly or monthly status reports, monthly or quarterly interim project reviews, and milestone briefings. Representatives from the VA Veterans Benefits Management System told us that engaging with stakeholders requires ongoing collaboration and open communication to ensure transparency and the optimization of inputs and ideas. They also explained that the program solicited users’ input on requirements for the development and enhancement of the system. Field subject matter experts from across the country participated in requirements, design, and testing sessions with system developers. Representatives from the VA Technology Acquisition Center stated that IPTs should communicate with internal and external stakeholders regarding the status and progress of the project. According to officials in VA’s Office of Information and Technology, the appropriate representation within the team ensures that all stakeholders are aware of and committed to completing key project deliverables on time. This approach enables and requires coordinated teamwork from multiple organizations to be a key driver of the project’s daily performance. In addition, they noted that the customer community is involved in several ways throughout the project lifecycle. For example, the business sponsor is a representative and advocate for the customer community. The customer community is involved throughout the lifecycle of the project, and makes the final determination of acceptability in user testing to accept delivery of capabilities. Representatives from GSA’s Assisted Acquisition Services, Federal Systems Integration and Management Center told us that IPTs should engage with internal and external stakeholders as often as feasible. They explained that it is important for the team to fully understand the political landscape and be able to identify all critical stakeholders early in the process. Subsequently, teams should engage with stakeholders by keeping key players involved in the process to ensure they are working toward meeting the mission and strategy goals. Officials from Defense’s Office of the Under Secretary of Acquisition, Technology, and Logistics and the Office of the CIO stated that teams should engage with stakeholders on a regular basis and as frequently as possible. Ideally, the amount of communication and the manner in which it is documented would be tailored to fit the needs of the team. For example, teams may establish regularly scheduled meetings. Records from the meetings can be maintained in a form that allows for ready access at a later date. In addition, teams may establish methods to identify and resolve conflicts that arise among stakeholders. According to recognized guidance, IPTs need to be particularly sensitive to the internal dynamics and style of interaction between members both during and outside of meetings. It can be helpful to have ground rules about how to respectfully share and acknowledge different points of view, ensure balanced participation from all members, build trust and collegiality, deal with conflict, and maintain morale and team spirit. The use of a facilitator during meetings could be a valuable tool in effective communications. Agency officials with whom we spoke mentioned the importance of communication. Specifically: Officials from Commerce’s Office of the CIO stated that communications should be tailored to the technical level of the audience. One effective method of communication is the use of a program management tool to allow team members to access any information at any time. Communications should be two-way; there should be a way for the stakeholders to provide feedback to the IPT. Officials with NOAA’s Office of the CIO told us that the frequency of communication should be commensurate with the scope and complexity of the milestone or urgency of the pace of tasks. Representatives from the VA Veterans Benefits Management System explained that they have found that frequent and structured meetings are the most effective way of communicating progress and addressing issues. The IPT participated in daily and weekly meetings to discuss key topics, risks, and issues. In addition, functionality-specific meetings occur on an as-needed basis to ensure continued collaboration. Communication could be facilitated by an intranet site, a suite of communication materials, downloadable toolkits, factsheets, and explanatory videos designed to build awareness and provide necessary information for customers and end-users. Officials reported that information sharing and coordination with other VA organizations ensures awareness and understanding of changes prior to implementation. In addition, engaging stakeholders across multiple vehicles on a recurring basis was integral to the responsive and iterative approach of the team. Representatives from the VA Technology Acquisition Center and the Office of Information and Technology stated that they communicate progress and issues by meeting regularly (e.g., weekly/monthly), documenting results and issues in meeting minutes, conducting formal milestone reviews, and escalating issues as necessary. Representatives from GSA’s Assisted Acquisition Services, Federal Systems Integration and Management Center told us that after an initial acquisition kickoff meeting, the team works together to set up standing weekly (or more frequent depending on the project) meetings. During these meetings, they review schedules, plans, and deliverables with each other and the client. The IPT should be communicating often to ensure members are always working towards the same goal. Once a week the program manager updates the acquisition schedule so that leadership has the most up-to-date information. Once a systemic process exists for schedule communication, management can more easily identify outliers and focus on addressing problem areas. During the various meetings, team members must have the opportunity to voice dissent. Once decisions are made, the team must reach buy-in and proceed. According to officials from Defense’s Office of the Under Secretary of Acquisition, Technology, and Logistics and the Office of the CIO, the IPT should have regularly scheduled meetings, at least monthly, or more frequently if software is being deployed more often. Meetings are intended to bring together the program office, contractors, technical expertise, stakeholders, customers, and others to view the development, progress, and issues related to acquisition of the capability. In addition, there should be opportunities to discuss matters between meetings. There should be open discussions with no secrets. The IPT is often assigned the responsibility to oversee the performance and acceptance of contractors’ deliverables or services. If the contractors bear a large share of the risk for delivering the project’s results, they may play a significant role on the project team. The goal is to ensure that government personnel maintain control over key decisions and expenditure of funds. Agency officials with whom we spoke highlighted the importance of effectively overseeing contractors’ activities. Specifically: Officials from NOAA’s Office of the CIO stated that an IPT can benefit from contractors serving as administrative staff and subject matter experts. However, the number of government team members should be equal to or greater than the number of contractors. Contractor staff should not be making important business decisions, and government staff should review and approve recommendations made by contractors. Officials with Commerce’s Office of the CIO told us that the ratio of government staff to contractor staff should not matter as long as the contractor is doing the scoped work, maintaining its metrics, being held to specific performance standards, and overseen by the contracting officer’s representative. However, they noted that IPTs should try to keep a ratio of government to contractor staff that ensures enough government participation so that decisions, changes, and approvals, can be executed in an efficient manner, and the government maintains accountability and traceability. Officials with the VA Technology Acquisition Center and the Office of Information and Technology stated that contractors can serve in support functions such as document preparation and meeting facilitation. However, any inherently government function that requires decision-making should not be performed by contractors. Representatives from the VA Technology Acquisition Center and the Office of the CIO also agreed that that the majority of personnel on an IPT should be government employees. In addition, officials noted that any poor performance by contractors can be documented in performance reviews and can lead to corrective actions, or if necessary, contract termination. Finally, according to VA officials, contractor personnel should sign non-disclosure agreements. Representatives from the VA Veterans Benefits Management System noted that contractors can complement the IPT’s effectiveness by providing experiences or resources in areas such as systems engineering, software development, testing, requirements analysis, communication, change management, business architecture, and program management. However, the team members need to follow the roles, rules, and guidance set forth by the Federal Acquisition Regulation. Specifically, the government staff are to perform and complete inherently government tasks and contractors only perform work based on the statement of work for which they have an approved contract. In addition, VA officials noted that each contract is to have a dedicated contracting officer representative responsible for ensuring contract deliverables meet quality and schedule parameters established by the government. Representatives from GSA’s Assisted Acquisition Services, Federal Systems Integration and Management Center explained that it is important to document roles, responsibilities, and expectations of any contractor team member. According to these officials, the contracting officer, contract specialist, and program manager should be government employees, not contractor employees. However, these officials stated that functions such as assisting the program manager with financial management, tracking schedules, preparing deliverables, creating an operational framework, and serving as a technical writer are appropriate uses of contractor resources. The presence—or absence—of these IPT characteristics can have an impact on the success or failure of a program. We have previously reported on weaknesses in practices related to each of three characteristics (effective leadership, team composition, and processes) that have adversely impacted major IT acquisitions. Shortfalls in leadership. Our recent review of the Department of Homeland Security’s Human Resources Information Technology investment revealed a lack of oversight from the department’s executive steering committee. For example, the executive steering committee met only once from September 2013 through June 2015—in July 2014—and was minimally involved with overseeing the investment’s 15 key areas identified as needing improvement during that period. As a result of the executive steering committee not meeting, important governance activities were not completed, including review of the investment’s key strategic planning document. We reported that this this lack of involvement contributed to Department of Homeland Security being able to deliver only 1 of 15 human resources capabilities which the department said would be mostly implemented by June 2015. Until the executive steering committee effectively carries out its oversight responsibility, the department will be limited in its ability to improve human resource investments which are needed to carry out its mission. Shortfalls in team composition. Our previous work on efforts of VA to share electronic health records with Defense highlights the importance of having sufficient staff on the IPT. Specifically, in 2009 the two departments set up an Interagency Program Office to oversee the development of fully interoperable electronic health records. The office was given the responsibility for oversight and management, stakeholder communication, and decision-making. Specific tasks included the development of a plan, schedule, and performance measures to guide the departments’ interoperability efforts. In February 2011, we reported that the Interagency Program Office had not fulfilled some of its major responsibilities. The office was subsequently re-chartered and given more staff to complete its work. Specifically, officials with the Interagency Program Office noted that it was authorized to eventually have a staff of 236 personnel, more than 7 times the number originally allotted. However, the officials stated that as of January 2013, the office was staffed at only 62 percent—146 personnel. Officials stated that hiring additional staff remained one of its biggest challenges. As another example, our ongoing work regarding the U.S. Census Bureau’s plans to conduct the 2020 Census has demonstrated the need to provide its staff training related to program roles and responsibilities. Specifically, in 2013 the Census Bureau measured the skills and knowledge of the staff by conducting a workforce competency assessment. The assessment identified several mission-critical gaps. For example, the agency found that competency gaps existed in cloud computing, security integration and engineering, enterprise/mission engineering lifecycle, requirements development, and Internet data collection. It also found that enterprise-level competency gaps existed in program and project management, budget and cost estimation, systems development, data analytics, and shared services. These mission-critical gaps would have challenged the Census Bureau’s ability to deliver critical IT-related initiatives. In response, the agency identified actions to close the competency gaps by December 2015, including several training- related actions. For example, it planned to implement centralized and integrated professional training and development activities, create environments conducive to on-the-job training from embedded personnel, and leverage staff with related knowledge and experiences to provide in-house workshops that share skills and experiences. We reported that fully implementing these activities would be critical to ensuring that the Census Bureau has the skills it needs to effectively develop and implement systems vital to the upcoming Census. Shortfalls in team processes. Our prior work on the Federal Aviation Administration’s acquisitions program for air traffic control facilities demonstrated the problems associated with processes that did not facilitate sufficient involvement of stakeholders throughout the system’s development. Specifically, the Federal Aviation Administration did not include air traffic controllers in the design and testing of one of its integral air traffic control programs. Because of this, issues that could have been addressed early in the design phase were not discovered until implementation, resulting in cost and schedule impacts. Partly due to not having valuable stakeholder involvement, the program experienced a cumulative 60 percent cost increase and schedule delays averaging 4 years. In response, the agency took steps to involve stakeholders by signing a memorandum of understanding with the air traffic controllers’ union. The memorandum called for, among other things, a team of 16 controllers to be detailed from various locations to test and validate software fixes with engineers at the Federal Aviation Administration Technical Center. As another example, our prior review of the United States Department of Agriculture’s Farm Service Agency’s Modernize and Innovate the Delivery of Agricultural Systems program showed that agency policies for effective communication were not followed. For example, the program did not keep records of which artifacts were reviewed during meetings to assess system developmental progress and maturity and did not adequately track decisions and corrective actions. This hindered executive level governance over the program, which contributed, in part, to significant challenges for the program. As a result of these challenges, further development of the system was ultimately halted after the program had spent about $423 million and delivered only about 20 percent of the functionality which had been envisioned. Implementing the key characteristics of IPTs for major IT acquisitions can mitigate the risk of aforementioned problems from occurring. Also key to an agency’s success in developing IPTs is sustaining a workforce with the necessary knowledge, skills, and abilities to execute a range of management functions that support its mission and goals. One key element cuts across the characteristics and practices needed to build a strong IPT: IT workforce planning. For example, leadership needs accurate information about the team’s staffing needs in order to provide sufficient staffing resources. Agencies can help ensure IPTs have the requisite skill sets, team size, and set of disciplines by developing competency and staffing requirements, assessing gaps, and developing strategies and plans to address those gaps through additional training or other measures. Agencies can also utilize staffing strategies, such as contractor assistance, if appropriate, to address IT skill gaps and ensure effective team operations. As discussed previously in this report, a number of federal laws as well as guidance issued by OMB and OPM address IT workforce planning activities for federal agencies. Several of the requirements and recommended practices from those sources also generally align with key principles and activities identified in our and OPM’s strategic workforce planning models. Consequently, to support the evaluation of whether selected federal agencies are adequately assessing and addressing gaps in IT knowledge and skills, we established an evaluation framework based on these laws and guidance, and vetted it with internal and external stakeholders. The framework contains four steps: (1) setting the strategic direction for IT workforce planning, (2) analyzing the IT workforce to identify skill gaps, (3) developing and implementing strategies to address IT skill gaps, and (4) monitoring and reporting progress in addressing IT skill gaps. Each of the four steps is supported by key activities. Table 1 summarizes the four steps and eight key activities used in our evaluation of selected federal agencies. When effectively implemented, IT workforce planning activities can facilitate the success of major IT acquisitions. Ensuring program staff have the necessary knowledge and skills is a factor commonly identified as critical to the success of major IT investments. If agencies are to ensure that this critical success factor has been met, then IT skill gaps need to be adequately assessed and addressed through a workforce planning process. Selected federal departments had mixed progress in assessing their IT skill gaps. While they have demonstrated important progress in either partially or fully implementing key IT workforce planning activities, each of the five departments had shortfalls. The five departments have started focusing on identifying cybersecurity staffing gaps, but more work remains in assessing competency gaps and in broadening the focus to include the entire IT community. Figure 6 illustrates the extent to which selected departments have fully, partially, or not implemented key IT workforce planning activities. As shown in the figure, of the five departments, Defense had the most robust implementation with all eight activities fully or partially implemented. Commerce has not yet established a process to guide its IT workforce planning activities. Of the eight activities to assist an agency with effective workforce planning, Commerce has partially implemented three activities and has not implemented five activities. Table 2 identifies the extent to which Commerce has implemented key IT workforce planning steps and activities. Several circumstances have contributed to the department’s shortfalls in IT workforce planning. For example, Commerce’s efforts to gather and utilize information for IT workforce planning have been ad hoc. While Commerce participated in a government-wide IT workforce assessment in 2011, it was unable to demonstrate how it used information from the assessment for determining IT competency and staffing requirements, identifying gaps, and developing strategies to address gaps. Further, the department attempted to collect updated data in recent years on IT workforce staffing levels, certifications, and skill gaps. However, it was unable to demonstrate how they used this information for workforce planning and noted that data collected in 2015 on skill gaps were not used because the data were unreliable. In addition, Commerce officials noted that while the department has begun to draft IT competency requirements and has reviewed several sources, the department does not yet have policies and procedures that incorporate key IT workforce planning steps and activities. Commerce officials acknowledged that shortfalls exist in the department’s workforce planning activities and stated that they are working to develop a more effective IT workforce assessment plan in fiscal year 2017. Until Commerce fully implements key IT workforce planning activities, management will have a limited ability to assess and address gaps in knowledge and skills that are critical to the success of major acquisitions. As a result, it will be more difficult to anticipate and respond to changing staffing needs and control human capital risks when developing, implementing, and operating critical IT systems. Defense has established processes that have enabled it to perform key analyses and assessments on its IT workforce. Specifically, of the eight activities associated with workforce planning, the department has fully implemented one and has partially implemented seven. Table 3 identifies the extent to which Defense has implemented key IT workforce planning steps and activities. To its credit, Defense has established competency models, conducted gap assessments, and is developing strategies for two of its three major IT occupations and officials reported that the department is working on revalidating competencies for its third major IT occupation by fiscal year 2016. According to department workforce data from March 2015, these three occupations comprised approximately 93 percent of its IT workforce. However, Defense has not yet established competency models and conducted gap assessments for the remaining 15 IT occupations because it has focused initially on developing competencies and assessing gaps for its mission-critical IT occupations after developing a tool in 2014 that it could use in performing such enterprise assessments. Further, officials from Defense’s Office of the CIO have recognized limitations with assessing IT skill gaps solely based on existing occupational titles and position descriptions. As a result, the department is in the process of implementing strategies and plans to establish a set of work roles and a baseline set of knowledge, skills, and abilities that apply to personnel spread across a number of functional communities who perform significant cybersecurity, IT, and other cyber-related roles. According to Defense’s Strategic Workforce Plan for fiscal years 2014 through 2019, the department anticipates that this effort will help in monitoring the overall health and capability of the workforce at a granular level not previously attainable. By not fully implementing key IT workforce planning activities, Defense runs the risk that it cannot adequately assess and address gaps in knowledge and skills that are critical to providing support for major acquisitions. As a result, Defense may have difficulty in anticipating and responding to evolving staffing needs while developing, implementing, and operating critical IT systems. The Department of Health and Human Services (HHS) has begun building its capability to set the strategic direction for its IT workforce by taking foundational steps towards establishing a workforce planning process. Of the eight activities needed to perform workforce planning, HHS partially implemented six and did not implement two. Table 4 identifies the extent to which HHS implemented key IT workforce planning steps and activities. Several explanations exist for the department’s shortfalls in IT workforce planning. HHS does not have comprehensive policies that require the CIO to implement key IT workforce planning activities, such as conducting IT skill gap assessments and developing strategies and plans to address those gaps. Officials noted that they have such guidance under development. HHS has not recently conducted skill gap assessments of its IT or cybersecurity workforce because it decided to focus first on establishing competencies and career paths for its IT program manager and cybersecurity positions. To this end, department officials have acknowledged that more comprehensive IT workforce planning needs to occur to address requirements of laws, such as the Federal Cybersecurity Workforce Assessment Act of 2015, and have begun taking steps to do so. In particular, HHS identified planned steps that, when implemented, could help the department to code and assess skill gaps for its IT and cybersecurity workforce at a more granular level. HHS officials expressed concerns regarding the variety and complexity of requirements for IT workforce planning from federal laws and other guidance. Officials noted that additional guidance from OMB could help federal agencies avoid potentially duplicative and inefficient implementation of the various workforce planning steps and activities. To its credit, HHS has recently taken positive steps to implement key IT workforce planning activities. In June 2015, the department initiated a cybersecurity workforce development program and subsequently established competencies and career paths for cybersecurity related occupations. According to officials, HHS is currently working to merge the ongoing cybersecurity workforce development efforts into a broader IT workforce planning effort that will allow the department to conduct gap assessments and develop strategies, such as retention and recruitment plans, based on a more comprehensive workforce planning process. Until HHS fully implements key IT workforce planning activities, management will have a limited ability to assess and address gaps in knowledge and skills that are critical to the success of major acquisitions. As a result, it will be difficult for HHS to anticipate and respond to changing staffing needs and control human capital risks when developing, implementing, and operating critical IT systems. The Department of Transportation (Transportation) is building its capability to assess IT skill gaps, but it currently does not have foundational elements of a workforce planning process. Specifically, it has partially implemented five activities and has not implemented three activities. Table 5 identifies the extent to which Transportation implemented key IT workforce planning steps and activities. Transportation officials provided explanations for the department’s shortfalls in IT workforce planning. For example, the department has only recently established policies to guide its workforce planning activities. In addition, the department did not consider hiring staff to ensure that program managers were certified to be a priority. To its credit, Transportation has plans to improve its IT workforce. For example, the department is planning to (1) develop plans by the end of fiscal year 2016 that could lead to the creation of an IT acquisition cadre and use of direct hiring authority, (2) draft an approach for cross-functional training of IT acquisition and program personnel, and (3) develop a career path for program managers by fiscal year 2017. While these are positive steps, these actions are not yet rooted in an IT workforce planning process that lays the foundation for how the department is to analyze its IT workforce skill gaps, develop and implement strategies to address gaps, and monitor and evaluate progress in addressing the gaps. By not fully implementing key IT workforce planning activities, Transportation has a limited ability to assess and address gaps in knowledge and skills that are critical to the success of major acquisitions. As a result, it will be difficult to anticipate and respond to changing staffing needs and control human capital risks when developing, implementing, and operating critical IT systems. The Department of the Treasury (Treasury) has taken steps to improve its IT and program management workforce by partially implementing seven activities; however, the department has not yet implemented one key workforce planning activity. Table 6 identifies the extent to which Treasury has implemented key IT workforce planning steps and activities. According to Treasury’s March 2016 FITARA Common Baseline Implementation Plan, the department is working to develop plans and processes by which the CIO, chief human capital officer, and senior procurement executive will develop a common set of competency requirements for IT staff and a workforce planning process. Treasury has a policy for utilizing a department-wide strategic workforce planning model. However, the department has deferred the use of this model on the IT workforce until the results of an Internal Revenue Service IT workforce assessment pilot are available and have been reviewed by the CIO and chief human capital officer. Treasury’s FITARA Common Baseline Implementation Plan noted that the timing of these steps is difficult to estimate because each decision point depends on the outcome of the preceding step and because staff and managers would need to coordinate workforce planning with other time demands. According to its implementation plan, among other milestones, the chief human capital officer is to provide a recommendation to the CIO for a process and tools to conduct a competency-based workforce planning study of the Treasury IT workforce in fiscal year 2017. While Treasury’s plans are a good starting point, it is too soon to tell whether these plans will address the shortcomings we identified. By not fully implementing key IT workforce planning activities, Treasury has a limited ability to assess and address gaps in knowledge and skills that are critical to the success of major acquisitions. Until the department addresses the shortcomings in its IT workforce planning activities, it will be more difficult to anticipate and respond to changing staffing needs and control human capital risks when developing, implementing, and operating critical IT systems. Agencies can improve the success of their IPTs for IT acquisitions through effective executive leadership that emphasizes team support, empowerment, and oversight; effective team composition; and effective processes for team operations. When implemented, these key practices can better position agencies to efficiently make decisions that cross lines of expertise. The right mix of expertise to recognize problems early and the requisite authority to do something about them are contingent upon effective IT workforce planning. While the five selected departments have demonstrated progress by implementing key IT workforce planning activities, each had shortfalls. To their credit, all five had at least partially analyzed their IT workforce and implemented certain activities to enhance workforce skills. In addition, several departments identified promising activities that, when implemented, could bolster effectiveness in assessing and addressing IT skill gaps. For example, Defense and HHS have initiated efforts to assess the IT and cybersecurity workforce at a more granular level and the Internal Revenue Service within Treasury is piloting a workforce assessment tool that may help the department assess its skill gaps. However, only Defense demonstrated that it had implemented a workforce planning process. Further, none of the departments identified IT competency gaps for their entire workforce, and only three were performing some level of monitoring towards the closure of identified skill gaps. Until departments fully implement the key activities and steps, they will have a limited ability to assess and address gaps in knowledge and skills that are critical to the success of major IT acquisitions. To facilitate the analysis of gaps between current skills and future needs, the development of strategies for filling the gaps, and succession planning, we are making a total of five recommendations to the Secretaries of Commerce, Defense, Health and Human Services, Transportation, and the Treasury. We received comments on a draft of this report from the five departments to which we made recommendations—Commerce, Defense, Health and Human Services, Transportation, and the Treasury. Of those five departments, four agreed with our recommendations and one, Defense, partially agreed. The following summarizes each department’s comments. In written comments, Commerce agreed with our recommendation and stated that it will work to develop an action plan to address the key workforce planning steps and activities identified in this report. The department’s comments are reprinted in appendix II. In its written comments, Defense partially agreed with our recommendation and discussed its progress on selected activities. In commenting on the activity involving the development of strategies and plans to address gaps in competencies and staffing (activity 5), the department stated that it had provided additional information on its related efforts in its Strategic Workforce Plan for fiscal years 2016 through 2021. However, the department did not attach a copy of the workforce plan. Moreover, the workforce plan, as described, does not cover staffing gaps or address Defense’s entire IT workforce. In addition to its workforce planning strategies, the department commented on its efforts to develop competencies, as part of the activity to establish requirements for competencies and staffing (activity 2). The department stated that it has established competencies for the Information Technology Management and Computer Science series and is scheduled to complete competencies for the Telecommunications series, its third and final mission-critical IT occupation, by the end of December 2016. The department further stated that, in addition to its three mission-critical occupations, it has developed competencies for its next largest IT occupation, Computer Clerk and Assistant (series 0335). This is to result in a total of 95 percent of workforce competencies developed or to be developed by the end of December 2016. Nevertheless, while establishing competencies is an important step toward robust IT workforce planning, it remains important for Defense to also identify how it intends to complete the workforce planning cycle for staff represented by each of the occupations for which it has developed or plans to develop competencies. Assessing competency gaps and developing gap mitigation strategies are important next steps. Looking across all of the activities, the department further stated that, in addition to the four occupations comprising 95 percent of the IT workforce, half of the department’s remaining 14 IT occupations are filled with less than 100 staff, and that several of the remaining occupations are likely to experience attrition. The department added that it does not believe it is necessary to develop competencies, identify competency gaps, and develop gap closure strategies for the remaining 5 percent of its IT workforce, as these individuals would likely not have a role on integrated program teams or be in a position critical to the success of major IT acquisitions. We understand the importance of Defense prioritizing its efforts to focus on the 95 percent of its workforce that are likely to have a role on integrated program teams or be in a position critical to the success of major IT acquisitions. However, identifying gaps and developing strategies for the remaining 5 percent of its IT workforce will become more relevant as the department begins its transition to focus on work roles and knowledge, skills, and abilities rather than occupations. Therefore, we maintain that our recommendation is warranted. The department’s comments are reprinted in appendix III. HHS also provided written comments, in which the department agreed with our recommendation and identified several planned or ongoing actions to address it. The department stated that it is growing its capability for mature workforce analytics and planning, in part, through the identification and definition of critical IT and cybersecurity role categories and competency requirements. The department also noted that it plans to utilize codes from OPM and the National Institute of Standards and Technology in its efforts to assess skill gaps and staffing needs. In addition, HHS provided new documentation of its completion of an IT program manager career path. We modified our assessment and corresponding recommendation for the relevant activity (activity 6) to reflect these efforts. The department’s comments are reprinted in appendix IV. In written comments, Transportation agreed with our recommendation and described planned actions to address it. Specifically, the department stated that it is leveraging its Strategic Workforce Planning Guide to navigate its efforts in assessing IT skill gaps and enhancing workforce proficiency. The department also noted that actions underway include finalizing plans for creating IT acquisition cadres and using direct hiring authority, developing an approach for cross-functional training of IT acquisition and program management personnel, and collaborating across departmental offices on the development of an IT program manager career path. Transportation’s comments are reprinted in appendix V. In its written comments, Treasury agreed with our recommendation and identified planned and ongoing efforts to address it. Specifically, the department noted that, while an agency-wide assessment of the IT workforce has not yet been completed, several component bureaus—including the Internal Revenue Service, which comprises over 80 percent of the total Treasury IT workforce—have been assessing their workforce. In addition, the department stated that its FITARA Implementation Plan identifies intended steps for meeting the requirements established by Congress and OMB, including IT workforce management, and that it is on track to establish a more robust workforce planning capability by the end of fiscal year 2017. Treasury’s written comments are reprinted in appendix VI. In addition to its written comments on the recommendations, the department also provided emails containing its comments on selected findings in the draft report, which we addressed as appropriate. Specifically: Treasury stated that it did not agree with our assessment that the department has not implemented the key IT workforce planning activity to establish and maintain a workforce planning process (activity 1). However, the department’s efforts have not been sufficient to justify a higher rating for this activity. As noted in the report, while the department has a strategic workforce planning model, it has deferred applying the model to the IT workforce pending a review of a workforce assessment tool being piloted within the Internal Revenue Service. We do not consider this situation to reflect an established and maintained IT workforce planning process because the pilot has not been completed and reviewed by the CIO and chief human capital officer, which was identified as a foundational step in its FITARA implementation plan. Further, decisions are yet to be made regarding (1) which IT workforce planning approach the department will utilize: the process still being piloted at the Internal Revenue Service, the department’s existing strategic workforce planning model that does not specifically address how IT components are to be assessed, or a hybrid approach; and (2) how and when its selected approach will be applied to assess skill gaps for the department’s IT workforce. Treasury also stated that we did not give the department credit for a cybersecurity skill gap assessment that it performed, which relates to the key IT workforce planning activity to assess gaps in competencies and staffing (activity 4). We disagree. We noted in the report that Treasury had identified staffing gaps for IT positions, including its mission-critical occupation and cybersecurity specific positions. This was based in part on the cybersecurity staffing gap assessment that the department performed, which factored into our rating of “partially implemented” for this activity. The department did not agree with our assessment that it had not implemented the key IT workforce planning activity to report to agency leadership on progress in addressing competency and staffing gaps (activity 8). After evaluating reports to senior department leaders and OMB regarding its cybersecurity staffing gaps and efforts to address the gaps through a pilot cybersecurity recruitment and retention program—which the department provided with its comments—we changed our rating from “not implemented” to “partially implemented” and revised the description for this activity. In addition to the aforementioned departments, we sought comments from other federal agencies, including GSA, OMB, OPM, and VA. We received e-mails from GSA, OMB, and OPM stating that they had no comments on the report. We also received an e-mail from VA with a technical comment that we addressed as appropriate. We are sending copies of this report to interested congressional committees, the Secretary of Commerce, the Secretary of Defense, the Secretary of Health and Human Services, the Secretary of Transportation, the Secretary of the Treasury, the Director of the Office of Personnel Management, and the Director of the Office of Management and Budget, and other interested parties. In addition, this report will be available on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions on the matters discussed in this report, please contact me at (202) 512-9286 or at [email protected]. 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 major contributions to this report are listed in appendix VII. Our objectives were to (1) identify key characteristics of a comprehensive integrated program team (IPT) responsible for managing a major federal information technology (IT) acquisition, and (2) evaluate whether selected federal agencies are adequately assessing and addressing gaps in knowledge and skills that are critical to the success of major IT acquisitions. To identify key characteristics of comprehensive IPTs, we listed over 1,000 recommended practices. In doing so, we reviewed approximately 20 documents containing practices applicable to IPTs that were recommended by government and industry organizations, including: Department of Defense, Office of the Under Secretary of Defense (Acquisition and Technology), DoD Integrated Product and Process Development Handbook, August 1998; American Council for Technology-Industry Advisory Council, Key Success Factors for Major Programs that Leverage IT, May 2014; The MITRE Corporation, Integrated Project Team (IPT) Start-up Guide, October 2008; Software Engineering Institute at Carnegie Mellon University, CMMI® for Acquisition, Version 1.3, November 2010; Office of Management and Budget (OMB), 25 Point Implementation Plan to Reform Federal Information Technology Management, December 2010; OMB, Guidance for Specialized Information Technology Acquisition Cadres, July 2011; OMB, Contracting Guidance to Support Modular Development, June Project Management Institute, Inc., A Guide to the Project Management Body of Knowledge (PMBOK® Guide), Fifth Edition, 2013. PMBOK is a trademark of the Project Management Institute, Inc.; OMB, Circular No. A-11, Preparation, Submission, and Execution of the Budget, Part 7 (Capital Programming Guide, Version 3.0), June 2015; and OMB, U.S. Digital Services Playbook. To corroborate and validate the recommended practices and to identify examples of how the practices can be applied, we interviewed agency officials from eight different organizations: two agency IPTs, four offices of the chief information officer (CIO) with oversight responsibilities for IPTs, and two agencies’ acquisition centers of excellence. The two agency IPTs we interviewed were the Department of Commerce’s Geostationary Operational Environmental Satellite - R series and the Department of Veterans Affairs’ Veterans Benefits Management System. We selected these two IPTs from a pool of 13 candidates based on the extent to which they met multiple selection criteria and did not overlap with ongoing GAO work. The selection criteria were: (a) suggested by OMB officials as being high-impact programs that have had a challenging past performance and have current increased oversight from OMB; (b) active engagement with OMB’s U.S. Digital Service; (c) observed by OMB has having relatively strong teaming practices; (d) observed through the course of GAO reviews as having relatively strong teaming practices; and (e) observed through the course of GAO reviews as having a history of problems from which lessons learned could be derived. The four offices of the CIO we interviewed were from the Departments of Commerce, Defense, and Veterans Affairs. We selected Commerce, National Oceanic and Atmospheric Administration (within the Department of Commerce), and Veterans Affairs CIO officials because their departments had oversight responsibilities for the two IPTs we interviewed. We also selected CIO officials from the Department of Defense due to the department’s history in adopting IPT concepts. The two agencies’ acquisition centers of excellence we interviewed were the General Services Administration’s Assisted Acquisition Services and the Department of Veterans Affairs’ Technology Acquisition Center. We selected these two centers of excellence based on OMB’s 2011 guidance for agencies for formulating specialized IT acquisition cadres. In our interviews, we asked these officials to describe desirable characteristics of comprehensive IPTs, identify additional factors that are critical to the success of IPTs, and provide examples. We added their responses to our database of IPT recommended practices. We conducted a content analysis on the recommended IPT practices from our literature research and from interviews with agency officials. In doing so, team members individually reviewed the practices and assigned them to various categories and sub-categories. Then the team members met to compare their categorization schemes, discuss the differences, and reach agreement on the final overarching characteristics and specific sub-practices. We validated the outcome of our content analysis by sending the results to the agency IPTs, CIOs, and centers of excellence which we had interviewed, as well as two internal experts. We then obtained their comments and revised our final list of IPT characteristics and practices as appropriate. Finally, we created a graphic based on the total number of times literature and agency officials identified specific roles and responsibilities. In doing so, we incorporated the roles and responsibilities that were most frequently cited as core disciplines and organized the graphic in descending order. To evaluate whether selected federal agencies are adequately assessing and addressing gaps in knowledge and skills that are critical to the success of major IT acquisitions, we selected departments for our review, created an evaluation framework and validated it, and assessed the selected departments’ documents and activities against the evaluation framework. We selected the departments for our review based on a judgmental and non-generalizable sample of agencies’ data from the Federal IT Dashboard as of August 31, 2015. Specifically, we selected five departments—Commerce, Defense, Health and Human Services, Transportation, and the Treasury—based on the following factors: (1) largest number of major IT investments, (2) largest planned dollar total of major IT spending in fiscal year 2016, and (3) largest planned percentage of total major IT spending with development, modernization, and enhancements in fiscal year 2016. To create the evaluation framework, we reviewed relevant laws and guidance to identify steps and activities for federal agencies to conduct IT workforce planning, including: Clinger-Cohen Act of 1996; E-Government Act of 2002; Legislation commonly referred to as the Federal Information Technology Acquisition Reform Act; Federal Cybersecurity Workforce Assessment Act of 2015; OMB’s 25 Point Implementation Plan to Reform Federal Information OMB’s Guidance for Specialized Information Technology Cadres; OMB’s Management and Oversight of Federal Information OMB’s Cybersecurity Strategy and Implementation Plan for the OMB’s Federal Cybersecurity Workforce Strategy; OMB’s Circular A-130, Managing Information as a Strategic The Office of Personnel Management’s (OPM) Workforce Planning OPM’s workforce planning guidance on key elements and suggested OPM’s IT Program Management Career Path Guide; and GAO guidance on federal internal control standards as well as key principles for effective strategic workforce planning. We developed a framework consisting of four IT workforce planning steps and eight key activities, as shown in table 7. We validated the evaluation framework by soliciting comments from internal experts as well as officials from OMB and OPM and updated it as appropriate. We did not perform a legal analysis as to whether the selected agencies were in actual compliance with the laws we used to derive our evaluation framework. We assessed the selected departments’ documents and activities against the evaluation framework by requesting relevant IT workforce and human capital policies, as well as documentation from each of its most recent IT workforce competency and staffing gap assessments. We analyzed the policies and documents to determine whether they were consistent with the workforce planning steps and activities found in our framework. The documents we analyzed included: competency gap assessments, staffing assessments, strategic workforce plans, documentation of monitoring progress in addressing IT workforce skill IT workforce competencies and staffing requirements, gaps and reporting to department officials, documentation regarding IT acquisition cadres, documentation on cross-functional training of acquisition and IT documentation regarding career paths for IT program managers, documentation of efforts to strengthen IT program management, and documentation of the use of direct hire authority. We also interviewed cognizant officials at the five departments to discuss their policies, documentation, and implementation of the workforce planning steps and activities. Based on our assessment of the documentation and discussion with department officials, we assessed the extent to which the agencies implemented, partially implemented, or did not implement the steps and activities. We considered an activity to be fully implemented if a department addressed all of the underlying practices for the activity; partially implemented if it addressed some but not all of the underlying practices for the activity; and not implemented if it did not address any of the underlying practices for the activity. We conducted this performance audit from July 2015 to November 2016 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. In addition to the contact named above, individuals making contributions to this report included Colleen Phillips (Assistant Director), Josh Leiling (Analyst-in-Charge), Chris Businsky, Raj Chitikila, Rebecca Eyler, Torrey Hardee, Jamelyn Payan, Andrew Stavisky, Mark Stefan, and Brian Vasquez. | In fiscal year 2017, the federal government is expected to spend more than $89 billion on IT. In many instances, agencies have not consistently applied best practices that are critical to successfully acquiring IT investments, such as ensuring program staff have the necessary knowledge and skills. In an effort to aid agencies in successfully delivering projects, the Office of Management and Budget has called for the development and use of IPTs for federal IT acquisitions to ensure that projects consist of the appropriate mix of individuals. GAO was asked to review IPTs for federal IT acquisitions and the federal government's IT workforce planning. GAO's objectives were to (1) identify key characteristics of comprehensive IPTs responsible for managing major federal IT acquisitions, and (2) evaluate whether selected federal agencies are adequately assessing and addressing gaps in knowledge and skills that are critical to the success of major IT acquisitions. To do so, GAO reviewed relevant literature; interviewed IPT experts; and evaluated IT workforce efforts at five departments: Commerce, Defense, Health and Human Services, Transportation, and the Treasury. Integrated program teams (IPT) are cross-functional or multidisciplinary groups of individuals that are organized and collectively responsible for delivering a product to an external or internal customer. GAO identified three characteristics that contribute to the creation and operation of a comprehensive IPT: (1) executive leadership through team support, empowerment, and oversight; (2) team composition; and (3) processes for team operations. GAO also identified 18 practices supporting these three characteristics (see figure). For example, executive leadership is effective when sufficient resources are provided and teams are empowered to act, team composition is more robust when the IPT has cross-functional and multidisciplinary skill sets, and team operations are streamlined when team guidelines are established and stakeholders are involved as active members. When implemented, these practices can increase the IPT's likelihood of success by having the right mix of expertise to recognize problems early and by having the requisite authority to do something about them. While multiple factors contribute to a robust IPT, one aspect involves having a strong information technology (IT) workforce. To evaluate agencies' IT workforce planning efforts, GAO identified eight key workforce planning steps and activities based on relevant laws and guidance (see table). Five federal departments had mixed progress in assessing their IT skill gaps. While all five departments had demonstrated important progress in either partially or fully implementing key IT workforce planning activities, each had shortfalls. For example, four departments had not demonstrated an established IT workforce planning process. As shown in the figure, of the five departments, the Department of Defense had the most robust IT workforce planning process by fully or partially implementing all eight activities. However, the departments have not yet fully implemented all of the practices for various reasons. For example, policies were not comprehensive in requiring such activities or were not being applied to IT workforce planning at four departments, one department placed a greater emphasis on assessing its cybersecurity workforce, and two departments identified the need to perform more granular assessments of the workforce in order to identify skill gaps. Until the departments fully implement key workforce planning steps and activities, they risk not adequately assessing and addressing gaps in knowledge and skills that are critical to the success of major acquisitions. GAO recommends that selected departments implement IT workforce planning practices to facilitate more rigorous analyses of gaps between current skills and future needs, and the development of strategies for filling the gaps. Four departments agreed and one, Defense, partially agreed with our recommendations. |
VHA, with a fiscal year 1998 budget of over $18.5 billion and a workforce of about 190,000 employees, is charged with providing health care to the nation’s veterans and operates an integrated health care system that includes medical centers, outpatient clinics, nursing homes, and counseling centers. In October 1995, the House Committee on Veterans’ Affairs held a hearing on issues related to the management of VA’s health care system. The hearing raised concerns about how VHA manages the performance of its senior executives and deals with instances of poor performance and misconduct, particularly at the 173 medical centers. In October 1995, VHA implemented a major restructuring designed to address problems in operational efficiency, accountability, and the provision of quality health care. A significant component of that restructuring was the realignment of VHA’s management and field structure from 4 regional offices, each headed by a regional director who supervised the operation of 36 to 45 medical care facilities in his or her region, to 22 regional Veterans Integrated Service Networks. VHA designed the networks so that each, headed by a network director, is intended to coordinate the organization of various medical facilities in order to improve the efficiency of medical care provided to veterans in a geographic region. Typically, a medical center director, an associate or assistant director, and a chief of staff (collectively the “management triad”) have senior management responsibilities at each medical center. Medical center directors and network directors are senior executives who are appointed under either the Senior Executive Service (SES) or the Title 38 personnel system. Associate and assistant medical center directors are general schedule (GS) employees in grades 13 through 15. Chiefs of staff are appointed under Title 38. For purposes of this report, we referred to chiefs of staff as SES equivalents because of the breadth of their responsibilities and total pay. The appraisal systems governing the job-related performance of members of the management triads provide for an annual summary rating of one of five levels: Outstanding, Excellent, Fully Successful, Minimally Satisfactory, and Unsatisfactory. For the purposes of this report, we defined “poor or marginal performers” as those employees who, in the network directors’ view, performed at the Minimally Satisfactory or Unsatisfactory levels, whether or not they actually received such performance appraisal ratings. The appraisal systems also have provisions for managers to assist employees in improving their performance and to take formal, performance-based actions, such as demotions and removals, when their performance is rated less than Fully Successful. Like all VA employees, management triad members are expected to maintain high standards of conduct. Instances of misconduct, which we define as actions that would violate statutes, regulations, or VA policies, are subject to a departmental process of investigation and discipline calibrated to the offense. Misconduct includes, but is not limited to, such actions as misuse of government property, sexual harassment, and violations of travel regulations. To meet our objective of determining how VHA was identifying and dealing with poor and marginal performers at the triad level, we analyzed data obtained from VHA’s Management and Administrative Support Office on performance ratings, reassignments, and other performance-related actions. We did not verify the accuracy or completeness of these data, but we did follow up on the readily apparent omissions and inconsistencies we found in the data provided on ratings and other performance-related actions. Because VHA rating data indicated that no triad members received an official summary appraisal rating of less than Fully Successful during the 1994 through 1996 rating periods, we interviewed the 21 VHA network directors who were in their positions when we did the interviews during April to July 1997. Although VHA has 22 networks, we were able to interview only 21 of the 22 directors of these networks, because 1 had resigned from VA at the time we began our interviews in April. We did face-to-face interviews with 19 of the 21 network directors. For the remaining two directors, we did a teleconference with one and a videoconference with the other. We interviewed the network directors because they are directly responsible for rating and managing the medical center directors’ performance and are expected to be knowledgeable about, and ultimately responsible for, the ratings and performance of the associate and assistant medical center directors and chiefs of staff. Our purpose in interviewing the network directors was to (1) determine whether they believed some triad members were not performing to the Fully Successful level, despite what their official ratings showed; (2) identify what actions, if any, were taken to deal with the triad members whom they believed performed at a less than Fully Successful level; and (3) get their views on the effectiveness of the actions in dealing with the performance problems. We did not interview affected employees or representatives of VHA employee organizations. Consequently, we do not know whether their views on the effectiveness of the actions for dealing with poor or marginal performance would be similar to or different from the views expressed by the network directors. To facilitate the network directors being open and candid with us, we asked them to identify individuals, by position rather than by name, in their own networks whom they believed were poor or marginal performers, despite what the official ratings showed for 1994 through 1996. We also agreed to report the information that the network directors shared with us in a manner that would not identify them or their network. On the basis of the views expressed by the network directors during the interviews, we developed our definition of poor or marginal performers. To confirm our understanding of and obtain a consensus of the opinions expressed during the interviews, we sent a survey instrument to the network directors in July 1997 that summarized various opinions we had discerned in the interviews. All 21 network directors responded to the survey. We asked them if they agreed or disagreed with the 57 opinions or had “no basis” for comment because they either had no knowledge of the particular matter addressed in the opinion or believed they had not worked long enough at VHA to comment. We excluded the “no basis” responses in reporting the survey results, because we wanted to report the opinions of only network directors who had a basis for either agreeing or disagreeing with the opinions. We also excluded the “no responses” in order to use a more precise respondent base in reporting the survey results. The number of network directors who indicated “no basis” responses and “no responses” varied. For example, the number of network directors who indicated “no basis” ranged from no directors on 6 opinions to 10 directors on 1 opinion. Five network directors did not respond to 19 of the opinions. The average number of “no basis” and “no responses” was about four network directors per opinion. We also interviewed personnel officials in VHA’s Management and Administrative Support Office; VHA’s former Chief Network Officer, who was responsible for rating and managing the performance of the network directors; and officials at OPM who oversee agencies’ operation of the SES program. The purpose of the interviews with VHA officials was to corroborate the information provided by the network directors and to gather additional information about the number and management of poor and marginal performers at the management triad level the official record did not reflect, because the network directors were relatively new to their positions. At the time of our interviews with the network directors, nearly all of them had been in their positions 18 months. The purpose of our interviews with OPM officials was to help us determine whether actions taken by VHA to deal with poor or marginal performers were consistent with regulatory and statutory requirements. We did not attempt to judge the merits of the specific informal, performance-based actions taken. We asked officials of VHA’s Management and Administrative Support Office to confirm that the triad members whom the network directors identified to us by position and whom they believed were poor or marginal performers occupied those positions. We also asked them to provide information, if any, on other triad members not identified by the network directors who performed at a less than Fully Successful level at some point during fiscal years 1994 through 1996. VHA provided various documents that contained data on reassignments and other actions taken to address performance-related problems of triad members who had not been identified by the network directors. We also followed up on the informal, performance-based actions that VHA took during fiscal years 1994 through 1996 to deal with triad members who, according to the network directors’ views and data provided by VHA’s Management and Administrative Support Office, had been informally judged to be performing at a less than Fully Successful level. We did so by reviewing official personnel and employee performance files and collecting data from VHA’s Management and Administrative Support Office to determine whether (1) the less-than-satisfactory performers had been subjects of other informal actions or formal, performance-based actions as triad members during the 5-year period ending September 30, 1996; and (2) inconsistent personnel actions had occurred, such as less-than-satisfactory performers receiving performance awards in the same year that informal actions had been taken to deal with their performance. To meet our second objective of determining the effects, if any, of changes in organizational structure, policies, and procedures recently instituted by VHA on managing performance at the triad level, we interviewed personnel officials in VA’s Office of Human Resources Management (OHRM) and VHA’s Management and Administrative Support Office to identify the changes. We also reviewed various VHA documents to confirm that the recent changes had been implemented. These documents included samples of the network directors’ performance plans that contained new performance measures and directories and organization charts of VHA’s restructured field facilities. Finally, we asked the network directors for their views on the effects of these changes during our interviews and in our follow-up survey with them. We did not do an independent assessment of the effects of the changes. To meet the third objective of determining how VHA was identifying and dealing with instances of misconduct at the triad level, we reviewed VA and VHA manuals that (1) detail the policy and procedures that managers are required to follow in cases of alleged misconduct and (2) specify in a table of penalties the range of penalties available for specific types of misconduct. We analyzed data on the number, nature, and disposition of misconduct cases addressed in fiscal years 1994 through 1996, which we obtained from the records of VA’s Office of Inspector General (OIG), Office of Equal Opportunity (OEO), and OHRM. We also interviewed officials from these three organizations to clarify our understanding of the data provided and to obtain their insights regarding VHA’s practices in dealing with offenses of misconduct. We obtained the perspectives of the network directors on how misconduct was identified and dealt with at the triad level during our interviews and in a follow-up survey with them. We were not able to determine whether the number and types of misconduct complaints VHA received and substantiated involving its triad members were comparable governmentwide, because OPM’s Central Personnel Data File (CPDF) does not contain a record of misconduct complaints. Misconduct complaints are not contained in the CPDF, because they are not personnel actions. We compared the range of penalties available at VA for handling instances of misconduct with the range of penalties available at two judgmentally selected executive agencies—the Department of Commerce and the Department of Agriculture—because a governmentwide table of penalties does not exist. The number of executive branch agencies precluded us from doing a detailed comparison of the tables of penalties available at all of them. For that reason, we chose two large federal agencies to serve as points of comparison with VA and to provide a general illustration of the penalties that other government agencies use to address misconduct. A draft of this report was given to the Acting Secretary of VA and the Director of OPM for their review and comment. On March 31, 1998, designees of the Acting Secretary of VA, which included the director of VHA’s Management and Administrative Support Office and several VA officials from various offices, such as the Office of the Assistant Secretary for Human Resources and Administration and OIG, provided us with oral comments. Their comments are discussed on page 36. The Director of OPM provided us written comments on a draft of this report in a letter dated April 6, 1998. These comments are also discussed on page 36 and are reprinted in appendix I. We did our work in Washington, D.C., from March 1997 to January 1998 in accordance with generally accepted government auditing standards. VHA’s network directors did not use certain aspects of the formal performance management system to identify and deal with triad members whom they believed performed poorly or marginally. This is partially supported by the fact that rating data for the 3-year period ending September 30, 1996, showed that no triad members received a less than Fully Successful rating. The majority of the triad members received ratings of Outstanding or Excellent during 1994 through 1996. Consequently, VHA could not take any formal, performance-based actions on the basis of the triad members’ official performance ratings. The network directors cited several reasons, such as organizational culture and systemic problems, for not using the official performance appraisal and other formal means to identify and deal with less-than-satisfactory performers. Nevertheless, the network directors said they took actions to deal with triad members whom they believed performed poorly or marginally. According to the network directors, they used informal, rather than formal, means to deal with poor or marginal performers because they believed the informal means were effective, less time consuming, and less administratively burdensome. The network directors’ avoidance of the formal system to address less than Fully Successful performance is not unique to them. Prior to passage of the Civil Service Reform Act (Reform Act) (P. L. 95-454, Oct. 13, 1978), it was recognized that managers rarely gave unsatisfactory ratings, because the follow-on actions for dealing with unsatisfactory performance were viewed as time-consuming and expensive. We reported in 1990 that governmentwide, poor performers were not necessarily documented through the appraisal process and that supervisors were unwilling to use the formal process to deal with them. MSPB reported in 1995 and 1997 that supervisors perceived disincentives to using the formal system to deal with performance problems. For example, MSPB reported that supervisors were discouraged from taking formal actions against employees who performed at an unacceptable level, because they perceived the process for doing so as too complicated, time consuming, or onerous. The Reform Act revised the procedures for taking actions against poor performers to make it easier for managers to do so. However, the results of this study and our 1990 study and of recent MSPB studies indicate that managers perceive that this goal has not been achieved. Our review of VHA performance appraisal data revealed that none of the 477 management triad members received a rating lower than Fully Successful during the 1994 through 1996 rating periods. However, in responding to our survey, 20 of the network directors agreed (and 1 disagreed) that VHA had some poor or marginal performers within the management triads during that 3-year period. Fourteen of the 21 network directors said they had poor or marginal performers in their networks. The aggregate number of poor or marginal performers, according to the network directors, was 37. Also, VHA headquarters provided various documents, compiled in response to requests from us and from Senate and House congressional staff, that identified an additional 10 triad members whose performance was considered to be less than Fully Successful at some point during the 3-year period. Thus, VHA considered that 47 (or 10 percent) of the VHA management triad members performed below the Fully Successful level at some point during the 3-year period. According to the network directors and documents provided by VHA headquarters, the actions taken to address the performance-related problems of these 47 triad members included demotion, reassignment, and placement on a performance improvement plan (PIP). The fact that VHA officials did not rate any of their triad members as less than Fully Successful is not much different from what occurs governmentwide and in VA as a whole. Very few senior executives governmentwide received ratings of less than Fully Successful, according to data from OPM’s Executive Information System. The data showed that for the 1994 and 1995 rating periods, which ended September 30, eight senior executives each year received a rating of Unsatisfactory or Minimally Satisfactory. For the fiscal year 1996 rating period, five senior executives received a rating of less than Fully Successful. The number of executives who received a rating of less than Fully Successful during the 3-year period represented about one-tenth of 1 percent of an average of 5,066 senior executives rated during that period. OPM’s executive database system also showed that no senior executives in VA received a rating of Unsatisfactory or Minimally Satisfactory during the 3-year period. Data from OPM’s CPDF showed that of an average of 126 employees in other executive agencies who were in the same job series and grades as VHA’s associate and assistant medical center directors, 1 employee (or eight-tenths of 1 percent) received a rating of less than Fully Successful during the 3-year period. Also, the distribution of VHA’s ratings for its triad members at and above the Fully Successful level during the same 3-year period did not differ greatly from what occurred elsewhere in the government and in VA as a whole. VHA rating data showed that from 75 percent to 85 percent of the triad members were rated either Outstanding or Excellent during the 3-year period; 15 to 25 percent were rated Fully Successful. OPM’s data showed that for this same period, 91 percent of an average of 5,066 senior executives received either an Outstanding or Excellent rating, and about 9 percent received a Fully Successful rating. OPM’s data also showed that of an average of 288 VA senior executives rated during the 3-year period, 83 percent received ratings of Outstanding or Excellent. Of an average of 126 employees in other executive agencies who were in positions comparable to VHA’s associate and assistant medical center directors, OPM data showed that 85 percent of these employees received a rating above the Fully Successful level during 1994 through 1996. According to the network directors, informal means were used to deal with poor or marginal performers after holding frank, but generally undocumented, discussions with the employees. In responding to our survey, the majority of the network directors agreed that the following four informal means had been used at VHA, and about one-third to one-half of them also indicated that they had used these informal means within their networks to deal with poor or marginally performing triad members: reassigning an individual to a position more suitable to his or her skills, encouraging an employee to retire if eligible, encouraging an employee to accept another position (sometimes as part of a negotiated settlement), and using the opportunity of organizational consolidations to leave a poor or marginal performer out of the new structure. Other informal means that some network directors noted in the interviews included informally assigning a mentor to a struggling employee, detailing the employee to another position, and deferring a rating while the employee completed a PIP. However, in their responses to our survey, network directors said that one informal means that is not used is the passing along of poor performers to unwitting colleagues. The network directors were nearly uniform in stating that this method, although used in the past, was not now an option. Most network directors agreed that they now have an understanding among themselves that they will not pass marginal or poor performers to one another without first discussing the reasons and circumstances. Data provided by VHA headquarters officials confirmed that the types of informal actions identified by the network directors and earlier defined in this report had been taken with respect to triad members. The data VHA provided also identified action plans as a means for dealing with poor or marginally performing triad members. The action plans were designed to ensure that triad members implemented recommendations made as a result of reviews of their management of the medical centers. In total, the VHA data showed a record of 7 types of actions taken with respect to 29 of the 47 triad members identified by the network directors and VHA headquarters records. The VHA data did not show a record of actions (such as assignment of a mentor) that the network directors said were taken to deal with the performance of the remaining 18 triad members. For 11 of the 29 triad members, informal actions were initiated to address their performance problems after September 30, 1996, the end of our review period. According to our interviews with the network directors and data obtained from VHA’s Management and Administrative Support Office, the performance of the 11 triad members was considered poor or marginal at some point during fiscal years 1994 through 1996; however, the informal actions were initiated after September 30, 1996. For 19 of the 29 triad members, VHA took only 1 type of action; for 10 triad members, VHA took 2 types of actions. Table 1 shows the types of actions taken with respect to the 19 triad members. Of the remaining 10 triad members for whom 2 actions were taken, 5 were initially detailed and later retired or were reassigned, demoted, or placed on an action plan. For 4 of the 10, the rating periods were deferred or extended, and they later resigned or were demoted or reassigned. The remaining triad member was demoted and later voluntarily decided to retire. Of the four triad members whose rating periods were deferred, none received a formal performance appraisal for the rating period that had been deferred. One of the four triad members resigned from his position. According to a VHA Management and Administrative Support Office official, one of the remaining three triad members should have received a rating but apparently did not because of an administrative oversight. This official also said that the remaining two triad members were not rated, because there was no practical point in doing so once they had agreed to removal from their positions. We followed up on the 29 triad members (15 medical center directors, 5 associate directors, and 9 chiefs of staff) who had been subjected to these informal actions to determine if (1) they had been subjected to any other informal actions or any formal, performance-based actions during the 5-year period ending September 30, 1996; and (2) any apparently inconsistent personnel actions had occurred, such as a triad member receiving a performance-based award in the same year that the informal action was taken. In our review of the official personnel and performance files on the 15 medical center directors, we found that 1 of the 15 medical center directors had been subjected to another performance-based action during the 5-year period. After receiving performance counseling, the medical center director was placed on a PIP during the fiscal year 1993 rating period. For the remaining 14 medical center directors, the files did not contain evidence of informal or formal actions being taken or proposed to address performance problems from October 1, 1991, to September 30, 1996. For the remaining 14 triad members (the 5 associate directors and 9 chiefs of staff), data provided by VHA’s Management and Administrative Support Office did not indicate that any of the 14 had been subjected to other informal actions or to formal, performance-based actions during the 5-year period that ended September 30, 1996. However, data provided by VHA’s Management and Administrative Support Office showed that since September 30, 1996, one of the nine chiefs of staff has been subjected to a formal, performance-based action. The chief of staff was placed on a PIP and subsequently given a Minimally Satisfactory rating for the 1997 rating period. The VHA data also showed that the chief of staff was removed and downgraded from the position effective January 18, 1998. None of the 15 medical center directors received a performance award or a pay advancement in the year that informal action was taken. Also, none of the nine associate directors received a performance award in the same year that informal actions were taken. According to VHA officials, chiefs of staff do not receive performance awards because they receive special pay. During the interviews and follow-up survey with the network directors, they gave several reasons for avoiding rating triad members as less than Fully Successful and avoiding taking formal actions to remedy performance problems. The network directors described numerous instances during our interviews in which they had undertaken informal measures to improve poor performance. In responding to our survey, 15 network directors agreed (and 1 disagreed) with the opinion that informal means are more effective than formal means for dealing with poor or marginal performers. They also generally agreed with the opinion that informal means of dealing with performance problems were less adversarial (14 agreed and 4 disagreed) and less administratively burdensome than the formal means (18 agreed and 1 disagreed). Among the reasons cited by the network directors during the interviews for avoiding rating triad members as less than Fully Successful were the following: Three network directors said that it was especially difficult to lower a rating when the performance level had not changed and the adjustment was solely to correct the general problem of rating inflation that exists at the triad level in VHA. Another network director added that a factor contributing to rating inflation is that an individual’s prior performance rating greatly influenced his or her current year’s rating. A rating of less than Fully Successful requires that a formal remedial action be taken; when a formal action is invoked, it turns the problem into a dispute, according to six other network directors. Three of these six network directors also said that employees view ratings of less than Fully Successful and evidence in the personnel file of formal, performance-based actions as serious matters worth fighting. Thus, the directors were reluctant to give marginal and poor performance ratings and take formal performance-based actions, because this can result in an adversarial atmosphere, which they believe might hinder resolution of performance issues. One of the network directors recognized that the practice of not giving accurate appraisals can lead to certain problems. This director indicated during our interview that as a result of not formally identifying poor or marginal performers with the appropriate rating, it becomes difficult to differentiate among individual employees because the appraisals are so similar. This director, who has a private sector background, also noted during the interview that this practice does not occur just in VHA. He said that performance appraisals in many parts of the private sector were just as benign as those he had observed in VHA. In both the public and private sectors, he said, managers show little willingness to write accurate performance appraisals. Nine of the network directors also noted in the interviews that they believed that undertaking formal performance actions imposes a heavy administrative burden. One of the nine network directors noted that the formal process often transformed an effort to establish an employee’s lack of satisfactory performance into a legal dispute, where the objective became the resolution of a dispute. Thus, the formal process often led to a compromise, which two of the nine directors believed did not necessarily lead to the best or the desired result. As shown in table 2, in responding to our follow-up survey, the network directors also cited additional reasons that contributed to managers not giving less than Fully Successful ratings to triad members who should have received such ratings and not taking formal actions to remedy performance problems. Because none of the triad members identified by the network directors or VHA headquarters as poor or marginal performers had been officially rated as such, it made it more difficult for the network directors and other VHA senior managers to take certain formal, performance-based actions against the employees in dealing with the performance problems. For example, the reassignment, transfer, or removal of an SES employee for unsatisfactory performance is permitted under 5 U.S.C. 4314(b). However, because VHA officials gave triad members satisfactory or better ratings of record even though they viewed their performance as poor or marginal, the law did not permit the officials to take performance-based actions against the triad members. Thus, VHA could not take any action against the triad members unless they voluntarily agreed to the action VHA proposed to take, because the action was based on an informal assessment of their performance, not on an official rating of less than Fully Successful. This use of informal means to identify and deal with poor or marginally performing triad members can carry certain risks for the agency, especially when the agency has not documented the poor or marginal performance. The failure to accurately evaluate the performance of an employee is a failure to follow the requirements of the performance appraisal systems mandated by law. For example, performance appraisal standards for SES employees in chapter 43 of the United States Code require an accurate evaluation of performance that is based on criteria related to the job or position. Although the VHA network directors and the top VA human resource officials with whom we spoke said that the informal means have helped them to successfully deal with poor or marginal performers, reliance on these means carries certain risks for the agency. One of the two top human resource officials at VA with whom we spoke also recognized that risks are associated with using informal means, because such means generally do not preclude the employee from taking action against the agency. For example, triad members who were encouraged to retire and did so because the network directors perceived their performance to be poor or marginal but had not officially rated them as such could later appeal the actions taken regarding them. These employees could allege that their retirement resulted from coercion, deception, or misinformation from the network directors. In such cases, VHA would have to prove that the network directors had a valid basis for assessing the employees’ performance as unacceptable and that the employees retired voluntarily and not because of coercion, deception, or misinformation from the agency. As of the time we completed our audit work, one of the triad members had filed an appeal with MSPB regarding the informal action taken with respect to him. The triad member alleged that he was reassigned in retaliation for whistleblowing. We discussed VHA’s practice of relying on the informal system to identify and deal with poor or marginal performers with VA’s two top human resource management officials. They believed that the practice was appropriate in cases where the network directors were informally taking action to address a decline in the employee’s performance that had occurred at some point during an appraisal period, even though the employee had received a Fully Successful or higher rating for the prior appraisal period. These officials said that it is better to deal with a performance problem as it occurs rather than wait until the end of a performance appraisal period to deal with it. We agree that taking action under such circumstances is appropriate. We also note from our interviews with the network directors that there is a general aversion to documenting less than Fully Successful performance in official performance appraisals. The officials also recognized, however, that less-than-accurate appraisals of employees’ performance do occur and are inconsistent with performance appraisal policy. One of the officials characterized the performance appraisal system as cumbersome and ineffective in its outcomes and recognized that most VHA managers do not rely on it to address perceived problem deficiencies. He said that this approach may change over time as VHA develops more objective, quantifiable performance measures. Both officials expressed the view that reliance on informal means to address performance problems as well as a general aversion to documenting poor performance on official ratings is a governmentwide phenomenon and is not restricted to VHA. We also discussed with OPM officials VHA’s practice of relying on the informal system to identify and deal with poor or marginal performers. These officials said that supervisors should give honest and accurate appraisals. They also agreed that it is proper to informally deal with an employee’s decline in performance during an appraisal period rather than waiting until the end of a period and documenting the decline in an official appraisal. The OPM officials did not specifically address VHA’s practice, because they said they would need to know the details of individual cases. For example, was the unacceptable performance extended over a period of time during which the employee received inflated ratings, or did the unacceptable performance occur during the rating period in which the performance-based action was taken? The OPM officials pointed out that performance management can be difficult and human nature sometimes results in managers avoiding confrontation or giving an employee the benefit of the doubt. They suggested, however, that if a system is flawed, or perceived to be flawed, it should be examined with the objective of making it more usable by managers while providing appropriate protections to the employees. We recognize that the network directors’ avoidance of the formal system for identifying and dealing with unacceptable performance is not unique to them. Far less than 1 percent of employees governmentwide in positions comparable to those of the triad members received ratings below Fully Successful during fiscal years 1994 through 1996. In 1990, we reported in a governmentwide study that all poor performers were not necessarily documented through the appraisal process. Supervisors who responded to our questionnaire estimated that 89,500 (or 5.7 percent) of the estimated 1.57 million employees they supervised performed below the Fully Successful level at some time during fiscal year 1988. Yet, OPM data for that same year showed that about 0.6 percent of federal employees were rated below the Fully Successful level. We also reported that poor performers were sometimes not formally designated as such in a rating but instead were given a Fully Successful, because supervisors did not want to use the formal process to deal with them. In responding to our survey, the supervisors indicated that they would not likely use the formal process, because it took too long and used too much of their time. Even prior to passage of the Reform Act in 1978, managers rarely gave an unsatisfactory rating, because the follow-on actions for dealing with the unsatisfactory performance were viewed as time-consuming, expensive, and aggravating for all parties. Because the process for taking action on the basis of unsatisfactory performance was viewed as slow and burdensome, it deterred managers from taking action that might otherwise have been appropriate. To make the process for taking actions against poor performers easier for managers, the Reform Act changed the standard of evidence for taking actions on the basis of unacceptable performance from a “preponderance of evidence” to “substantial evidence.” However, the results of our study of VHA, our 1990 governmentwide study, and recent MSPB studies indicate that managers do not perceive that the process for dealing with poor performers is easy enough to use. MSPB reported in 1995 that very few federal managers used the procedures established by the Reform Act for taking performance-based actions against poor performers. Instead, some managers were able to work around the deficiencies of their poor performers by controlling assignments and using other strategies, such as reassigning them to other offices where they might improve. In responding to an MSPB survey, managers and supervisors cited various factors that discouraged them from taking formal actions. These factors were very similar to the reasons given by VHA’s network directors for not using the formal system to deal with performance problems. Managers and supervisors cited the following factors in response to MSPB’s survey: Most supervisors perceived the procedures established by the Reform Act to be too complicated, time-consuming, or onerous. Many supervisors were reluctant to create an unpleasant work environment and believed that if they took formal action against a poor performer, it was very possible that (1) higher level management would not support them, (2) their decision would be reversed upon review or appeal, or (3) they would be falsely accused of having acted for discriminatory reasons. About a third of the supervisors said they had difficulty relating performance deficiencies to their employees’ critical elements, and over a third (39 percent) found it difficult to document employee performance. Also, a 1997 MSPB study corroborated its 1995 findings on supervisors’ and managers’ reluctance to take formal, performance-based actions. According to MSPB’s 1997 report, 43 percent of second-level and higher supervisors believed that their organizations had a major problem in taking appropriate steps to correct inadequate performance. Fifty-nine percent of the second-level and higher supervisors also believed that their organizations had a major problem separating employees who could not or would not improve their performance to meet the required standards. VA supervisors and nonsupervisors responding to MSPB’s survey also believed that their agency had a major problem with correcting inadequate performance (41 percent) and separating poor performers (51 percent). OPM’s strategic plan for fiscal years 1997 through 2002, in part, calls for continuing its efforts to improve the capacity of managers to identify and resolve performance problems effectively. One of the strategies outlined in OPM’s plan for achieving this objective was to distribute by 1998 multimedia instructional materials to federal managers and supervisors on how to identify and resolve performance problems, including how to take successful action to remove a poor performer. On February 4, 1998, OPM’s director provided the heads of departments and independent agencies with a booklet and CD-ROM on addressing and resolving poor performance. According to OPM’s director, this material is designed to provide managers and supervisors with the information needed to understand the process of dealing with unacceptable performance and taking action when necessary. We recognize the importance of distributing instructions and guidance on how to identify and resolve performance problems. As previously discussed, VHA managers as well as managers at other executive agencies were reluctant to use the formal system, because they perceived the system as overly burdensome, complex, and time-consuming. For the VHA managers, their reluctance did not appear to relate to a lack of knowledge on how to identify and deal with poor performers using the formal system. However, to the extent VHA and other managers’ negative perception of the formal system is attributable to a lack of knowledge on how to identify and deal with poor performers, OPM’s instructions and guidance may help managers to overcome their reluctance to use the formal system. Over the last 2-1/2 years, VHA’s environment and organizational structure have been undergoing rapid change. In October 1995, VHA implemented a major restructuring that was designed to improve the efficiency of, access to, and quality of care provided to the nation’s veterans. A major component of the restructuring was the realignment of VHA’s management and field structure, which resulted in “the span of control” of the most senior-level field executive positions being substantially reduced. Also in fiscal year 1996, VHA implemented new, more quantifiable performance measures for evaluating and holding its senior executives accountable for their performance. According to the network directors, these changes have improved how VHA operates and will help them to identify and deal with poor or marginal performers. In responding to our survey, 19 network directors agreed (and 2 disagreed) that, overall, these changes would help in identifying and dealing with poor or marginal performers. The network directors recognized, however, that the new changes have also had an impact on how the triad members’ performance is now viewed under VHA’s new system of operating. Under the new system of 22 Veterans Integrated Service Networks that was created in October 1995, each network director is now responsible for approximately 24 triad members; under the old, “regional director” system, the director was responsible for at least 80 triad members. The network directors frequently emphasized in the interviews that the reduction in the number of triad members for whom they were responsible significantly improved their ability to gauge and manage performance. Network directors said they believed they now have the opportunity to become more familiar with all their triad members and to make their own assessments of their performance, rather than relying on the appraisals provided by the medical center directors. Management triad members would no longer, as one director put it, “have a place to hide.” The new, more quantifiable performance measures were first incorporated into the network directors’ performance plans in the Spring of 1996. For example, in order for a network director to be considered Fully Successful under the fiscal year 1997 outpatient surgery performance measure, 65 percent of the surgical procedures performed in the director’s network must be done on an outpatient basis. According to a VHA official, the network directors are responsible for meeting the performance measures, and how they elect to do so is up to them. The network directors may choose to include the performance measures in the medical center directors’ performance plans, but they are not required to do so. The VHA official also said that the performance measures are not a required part of the performance plans of the other triad members—the associate director and chief of staff. In responding to our survey, all 21 network directors indicated that they had included the same or similar performance measures in the medical center directors’ performance plans. The network directors generally agreed that VHA’s new, more quantifiable performance measures are an improvement on the former, more subjective measures. Several directors believed, however, that it was too early to tell exactly how well the new measures would work, because they had received their individual performance measures too late in the last two appraisal cycles to completely implement them. The performance measures were issued to the network directors about 6 months after the 1996 and 1997 rating periods began. One director cautioned that the performance measures could be unreasonable and cited the performance goal of “over 90 percent patient satisfaction with care” as an example. Nineteen directors agreed (and 2 disagreed) with the opinion that the new performance measures need some fine-tuning. The network directors recognized that the recent changes under VHA’s new operating environment—more quantifiable performance measures and reduced span of control over the medical centers as a result of the transition from a regional to a network structure—have altered how the performance of triad members is now viewed. For example, two network directors told us in the interviews that medical center directors who were once considered outstanding performers under the old environment are no longer considered to be such performers under the new environment. In responding to our survey, 11 network directors agreed (and 6 disagreed) that the recent changes in VHA’s operations and organizational structure have led to a decline in the performance appraisals of some triad members. For example, their performance appraisals may have dropped from the Outstanding or Exceptional level to the Fully Successful level. However, one of the six network directors who disagreed with this opinion said that it should not be presumed that a drop from Outstanding or Exceptional to Fully Successful reflects a drop in performance. Rather, this network director said that in some cases, it is more reflective of a difference in the network director’s management philosophy, particularly when the director was hired from outside the VA system. The triad members’ performance under the new environment also requires a new set of managerial and technical skills, according to another two network directors. For example, one network director said that it is becoming increasingly difficult for senior executives to perform at the satisfactory level if they do not possess certain technological or computer skills. The other network director said that the medical center directors today will need to have been exposed to doing cost-benefit analysis and profit and loss statements. This network director also indicated that a medical center director’s lack of the new skills, reluctance to adapt to the new changes, or lack of an understanding of what is required under VHA’s new environment can lead to him or her being considered a poor performer. Our analysis of the distribution of the medical center directors’ ratings for fiscal years 1994 through 1997 indicates that the recent changes in VHA, such as the new performance measures, have not led to an overall decline in their performance ratings. As shown in table 3, the percentage of medical center directors rated at or below the Fully Successful level did not increase over the 4-year period. Instead, there was generally a steady increase in the percentage of medical center directors who received either an Excellent or an Outstanding rating during this period. The table shows that nearly 78 percent of medical center directors were rated above Fully Successful in 1996, the first year that the changes were implemented, which is slightly lower than the percentage rated above the Fully Successful level in 1995. In 1997, 86 percent of the medical center directors were rated above Fully Successful, which represents a 7 percentage point increase over the percentage rated above the Fully Successful level in 1995, before the changes were implemented. The director of VHA’s Management and Administrative Support Office attributed the upward trend in the medical center directors’ ratings to the networks’ overall progress in achieving the performance measures. For example, he said that VHA’s 1997 Network Performance Agreement Report showed that the percentage of surgeries and diagnostic procedures performed on an outpatient basis increased to 69 percent, which represented a 33-percent increase over the 1996 rate of 52 percent. Also, the patients’ overall quality rating of these outpatient services increased slightly from 61 percent to 63 percent. This VHA official also believes that the upward trend in the medical center directors’ ratings may have been affected by the retirement of several poor or average performing medical center directors over the last 4 years, thus leaving a cadre of high-performing executives. VHA network directors did not consider misconduct to be a widespread problem within the management triad at VHA medical centers, although some directors acknowledged that instances of misconduct had occurred. In their survey responses, all but one of the network directors agreed that misconduct is not considered a widespread problem within the management triad at VHA’s medical centers. Misconduct offenses involving triad members had not occurred in most networks; 13 of 21 network directors agreed that “within the past 3 fiscal years, no conduct problems occurred within my network that involved triad members.” The network directors’ perception is confirmed by data compiled by VHA. According to these data, VA authorities received a total of 35 allegations of misconduct by management triad members during fiscal years 1994 through 1996. VA investigators substantiated 14 of the 35 allegations. As a result, VHA took disciplinary actions that ranged from a letter of admonishment to a demotion. Even so, VHA has been criticized for being too lenient in punishing some instances of misconduct. As a result of such criticism, VA has established a new procedure to give closer scrutiny to proposed disciplinary actions for misconduct. In addition, Congress recently passed the Veterans’ Benefits Act of 1997, which established a new process and structure for handling equal employment opportunity (EEO) complaints. Allegations of triad member misconduct, as well as misconduct by other VA employees, may surface through the EEO process, through management channels, or through the VA OIG. Investigations of such allegations may be conducted by OIG, EEO investigators designated by VA’s OEO, the Veterans Integrated Service Networks, or by administrative review boards established by VHA to address specific cases. Administrative review boards normally consist of senior officials outside the medical facility where the alleged misconduct occurred. Investigating misconduct allegations generally entails collecting and reviewing relevant documents as well as obtaining information from the employee identified in the allegation as having perpetrated the offense and from other individuals considered to have information pertinent to the case. The investigations are designed to obtain the facts of the case so that management can determine (1) if the allegation can be substantiated; (2) whether action is warranted; and (3) what type of disciplinary action, if any, should be taken. Regardless of what organization conducts the investigations, an investigative report is normally prepared and provided to senior VHA officials, usually the network director. The investigative reports generally do not recommend that specific disciplinary actions be taken on substantiated allegations of misconduct. Decisions on whether to take adverse or disciplinary actions, and the specific action that is appropriate, are generally made by the VHA officials who supervise the employee in question. In the case of triad members, that individual has been the cognizant network director, following consultation with senior VHA headquarters officials. VA investigations substantiated 14 of the 35 allegations. The 14 substantiated allegations involved 13 management triad members. For 6 of the 14 allegations, VHA took disciplinary action, which ranged from a letter of admonishment to a demotion. For the remaining eight allegations, no disciplinary actions were taken. Instead, five of the eight allegations resulted in the employees either retiring or resigning, and three resulted in the employees receiving counseling. Appendix II provides further details on the nature and disposition of each of the substantiated allegations. According to a VHA official, 2 allegations of misconduct were substantiated against 1 of the 13 triad members, a medical center director, during fiscal years 1994 through 1996. One of the two allegations involved installing a video camera in a restroom. The medical center director installed the video camera to discourage racial graffiti, according to another VHA official. The other allegation involved the medical center director lobbying his local congressman for funds to renovate buildings that would be given to a medical school affiliated with the medical center. In the 2 fiscal years preceding the period of our review, none of the 13 management triad members had been named in any allegations of misconduct, according to a VHA official. The number of disciplinary actions taken for misconduct at VHA and governmentwide, in proportion to the size of their respective workforces, was comparable during fiscal years 1994 through 1996. VHA data showed that 1 triad member was demoted during the 3-year period, which represented two-tenths of 1 percent of an average of 421 triad members employed as of the end of each fiscal year during that period. None of VHA’s triad members were suspended or discharged because of misconduct during this time period, according to VHA’s data. OPM’s CPDF showed that during this same 3-year period, a total of 11 actions were taken governmentwide, excluding VA. The 11 actions affected less than one-tenth of 1 percent of an average of 7,292 employees who were in similar positions governmentwide. In deciding on the appropriate disciplinary action to take, management officials are to consult a table of penalties, included in VA’s policy manual, which describes the disciplinary penalties appropriate for most types of misconduct. The table is not all-inclusive, because it is intended as a guide for managers to use in administering disciplinary and major adverse actions. Management officials generally retain the discretion to tailor disciplinary actions to the incident of misconduct by considering a variety of factors, both mitigating and aggravating. Such factors include the employee’s length of service, past disciplinary record, the severity of the misconduct, and whether the misconduct was intentional or inadvertent. However, in cases where a specific penalty is required by statute (such as a 30-day suspension for misuse of a government vehicle), such factors are not to be considered. One of 14 substantiated allegations involved a medical center director’s misuse of a government vehicle while on official business. Although VHA procedures require a mandatory minimum penalty for a first offense of this misconduct, VHA did not impose the penalty. Under the law, 31 U.S.C. 1349(b), “An officer or employee who willfully uses or authorizes the use of a passenger motor vehicle or aircraft owned or leased by the United States Government (except for an official purpose authorized by section 1344 of this title) or otherwise violates section 1344 shall be suspended without pay by the head of the agency. The officer or employee shall be suspended for at least one month, and when circumstances warrant, for a longer period or summarily removed from office.” In this case, the Deputy Under Secretary for Health decided that a reprimand was the appropriate corrective action, even though VHA’s table of penalties included the mandatory suspension. According to a VHA official, clear evidence did not exist that would have proven the medical center director’s action as a “willful” misuse of the government vehicle. Because a governmentwide, standard table of penalties does not exist, we compared VA’s table of penalties, which is applicable at VHA, with the tables of penalties of two other judgmentally selected executive branch departments—the Department of Commerce and the Department of Agriculture. The purpose of our comparison was to see if the range of penalties at VHA on the treatment of various instances of misconduct was similar to the range of penalties at those two departments. Specifically, we compared VA’s range of penalties for the types of misconduct involved in the 14 substantiated cases at VHA. The types of misconduct included sexual harassment, improper use of a government vehicle, fighting, participation in an activity that created the appearance of a conflict of interest, abusive language or behavior, and violations of the Privacy Act and merit system principles. This comparison showed no appreciable difference between the range of penalties available at VA and those available at the other two executive branch departments. For example, VA’s range of penalties for the first and second offenses of misuse of a government vehicle is identical to the range of penalties at Agriculture and Commerce. None of the three agencies’ tables of penalties list a penalty for a third misuse of government vehicle offense. Depending on whether the misconduct represented an employee’s first, second, or third offense, the range of penalties in some instances at VA was either slightly harsher or less punitive than the range of penalties available at Commerce and Agriculture. For example, VA’s suggested penalty for a third offense involving conflict of interest is more punitive than the penalty at Commerce. VA can remove an employee for a third conflict of interest offense, whereas Commerce’s penalty for a third offense of this same misconduct ranges from a 30-day suspension to a removal. On the other hand, VA’s suggested penalty for a second offense of fighting ranged from a 10-day suspension to a discharge. Agriculture’s penalty for the same offense ranged from a 14-day suspension to a removal. Viewed in this context, VA’s penalties generally conform to those provided for at the two other executive branch departments. Appendix III contains a table comparing the range of penalties available at each of the three departments. Although VHA took disciplinary actions to address instances of misconduct, these actions were not without controversy. VHA’s handling of 1 highly publicized case, which is among the 14 substantiated allegations listed in appendix II, led to VA changing its policy and procedures for handling conduct and performance problems that involve senior VA officials. The highly publicized case involved a former medical center director who allegedly committed sexual harassment. VA’s OIG investigated the sexual harassment allegations and determined that the former medical center director sexually harassed one of the three female employees who had alleged sexual harassment and that there was insufficient evidence to support a finding that the director sexually harassed the other two female employees. However, the OIG concluded that the former director’s behavior toward the two other women was abusive, threatening, and inappropriate. The OIG provided a draft report to the network director for review and comment in September 1996 and recommended that given the findings of misconduct by the former director, appropriate administrative action should be taken. The network director concurred with the OIG’s findings and recommendations and initially proposed removing the director from federal service. However, in December 1996, the network director rescinded the proposed adverse action, referring to a lack of evidence and doubts that a case would hold up on appeal. As a result, a negotiated settlement was reached that ensured the former director’s removal from the facility and SES. The former director resigned from SES, was downgraded to a GS-14 nonsupervisory position, and was reassigned to another VA medical center in a different state. He was allowed to permanently retain his SES pay and was transferred at government expense to another medical center. Some VHA employees, Members of Congress, and the media criticized the settlement as too lenient. However, a VHA official with whom we spoke believed that the settlement was made in the best interests of the department and avoided further disruption at the former medical center director’s facility. He acknowledged, however, that the decisionmaking process should have been better coordinated with VHA headquarters senior officials and the Office of General Counsel (OGC). Because there was additional evidence of possible misconduct by the former medical center director that was unrelated to the original allegations, the OIG opened a second investigation in May 1997. That investigation substantiated numerous incidents of misconduct by the employee. As a result, on August 1, 1997, VHA notified the employee of its intent to remove him from federal service. The employee retired on August 15, 1997. In the wake of the criticism received regarding the initial settlement with this employee, VA instituted a new policy in March 1997 designed to ensure more effective communication and coordination among top management officials when conduct problems that involve triad members and other VA executives are handled. VA revised its procedures for responding to allegations of improper conduct by establishing a panel composed of senior VA executives whose objective, among other things, would be to ensure departmentwide consistency in dealing with allegations of misconduct and to discuss the appropriate penalties for confirmed allegations of misconduct. Under these revised procedures, all proposed actions are to be reviewed by the respective VA administration head or Assistant Secretary, OGC, and the Office of the Assistant Secretary of Human Resources and Administration. After this review, the Office of the Secretary is to be informed of the results and is to consult with the Office of Public and Congressional Affairs before clearing the proposed action for implementation. Before VA implemented the new policy, authority to approve and implement such actions had been delegated solely to administration heads, Assistant Secretaries, or other key officials. The new policy does not differ dramatically from the old one it replaced, according to a VHA official. However, “It . . . systematizes the process,” ensuring more effective communication, coordination, and cooperation among VA’s senior management, the VHA official said. The new policy was designed to ensure that management coordination in handling misconduct cases that involve VA senior executives is more effective, the VHA official said. Most of the network directors believed that the recently instituted policy on how to handle and reach resolution of conduct problems that involve triad members and other VA executives will help ensure that such matters are consistently dealt with. This viewpoint was held by 12 of the 21 network directors, according to our survey. The new policy may facilitate the handling of conduct problems in the future. However, it is not clear whether or not the policy applies to all VHA medical center triad members. As worded, the new policy applies to occupants of positions “centralized” to the VA Secretary, which includes medical center directors who are members of SES as well as associate medical center director GS-15 employees. However, the wording does not specify whether or not the new policy covers Title 38 employees, who include medical center directors and chiefs of staff, and assistant medical center directors at the GS-13 or GS-14 grade level. According to the director of VHA’s Management and Administrative Office, all triad members are to be covered by the new policy. He said that Title 38 medical center directors are considered centralized to the Secretary by virtue of the positions they occupy. This official also said that the intent of the new policy is to include all members of management triads, including medical center directors, associate and assistant medical center directors, and chiefs of staff. In response to concerns about the effectiveness of VA’s policy of “zero tolerance” for sexual harassment and its handling of discrimination complaints, the Congress enacted and the President approved legislation in November 1997 designed to improve VA’s EEO system. The new law, entitled the “Veterans’ Benefits Act of 1997 (P.L. 105-114, Nov. 21, 1997), requires VA to (1) establish a new employment discrimination complaint resolution system to encourage timely and fair resolution of concerns and complaints, including those related to allegations of sexual harassment; and (2) submit reports to Congress on the implementation and operation of the new EEO system on April 1, 1998; January 1, 1999; and January 1, 2000. The law establishes an Office of Employment Discrimination Complaint Adjudication within VA. The Director of this office is to be responsible for making final agency decisions on the merits of any unlawful employment discrimination complaints filed by a VA employee, a function that is currently performed by VA’s OGC. The Director is also to be responsible for submitting reports to the Secretary of VA and to Congress on the implementation and operation of the Office of Employment Discrimination Complaint Adjudication. The law requires the Secretary of VA to enter into an agreement with a private entity to review and report to the Senate and House Committees on Veterans’ Affairs on the employment discrimination complaint resolution system within VA. VA is establishing a new organization, the Office of Resolution Management (ORM), to replace OEO’s Discrimination Complaint Service. Establishing ORM will effectively separate the function for adjudicating complaints from the line management function, according to the former Deputy Assistant Secretary for EEO, thereby providing greater assurances that VA employees perform the EEO complaint counseling and investigating functions in a professional and independent manner. The new organization eventually will establish 12 field offices located around the United States. ORM is expected to begin operation in April 1998 with the opening of 2 of the 12 field offices, according to the VA official responsible for coordinating the transition to the new EEO structure and process. Plans call for completing the implementation of ORM by the end of 1998. VA’s current process for handling sexual harassment complaints and other EEO discrimination complaints will change under the planned ORM framework. For example, VA’s Assistant Secretary for Human Resources and Administration, the Deputy Assistant Secretary for Resolution Management, ORM District Managers, and ORM Field Managers will serve as VA’s EEO officers, and the newly designed complaint resolution management structure will be linked to them. VA facility directors and heads of VA Central Office organizations will no longer serve as EEO officers under the new structure, which situates them outside the EEO complaint process. However, these officials will continue to be held accountable for maintaining a workplace free of discrimination. Also, the directors of VHA’s networks and medical centers, as well as directors of other headquarters and field offices, will no longer have authority to establish administrative review boards to investigate discrimination and sexual harassment complaints filed against members of the senior management teams, such as medical center directors, associate directors, assistant directors, and chiefs of staff, according to VA’s Deputy Assistant Secretary for Human Resources. Instead, these complaints and other complaints of serious misconduct will be investigated by rapid response teams, a concept that has been in use since the spring of 1997. These teams will be deployed by the Assistant Secretary for Human Resources and Administration. Procedures regarding the use of rapid response teams are under development, according to this VA official. As of March 4, 1998, the procedures had not been finalized. Depending on the nature of the allegations, the rapid response teams will generally consist of human resource specialists, attorneys, EEO specialists, and other officials deemed appropriate for the investigation, according to the VA official responsible for coordinating the transition to the new EEO structure and process. This VA official also said that the rapid response team, on the basis of its findings, will be responsible for identifying a range of penalties for management officials to consider in determining the appropriate disciplinary or adverse action. However, the final decision on what disciplinary action to take against the employee will be made by the appropriate supervisory official. This VA official also said that VA’s OIG authority to investigate complaints received directly from employees about sexual harassment, discrimination, and other activities that constitute a violation of law, rule, or abuse of authority will continue under VA’s new EEO process. According to this VA official, OIG prefers not to be involved in individual EEO cases, because it does not have authority to grant relief to complainants or take specific types of disciplinary or adverse actions. However, this VA official said that to the extent permissible, OIG and ORM will coordinate the investigation of EEO complaints more closely. VHA officials did not officially rate any triad member as less than Fully Successful during the 1994 through 1996 rating periods. At first glance, this fact would suggest that either VHA experienced no performance problems among its medical center executives during that period, or that VHA officials were not addressing performance problems. Our work has shown that neither is true. Rather, VHA network directors responsible for triad members acknowledged that the record of performance ratings did not capture the actual performance of all triad members and that poor performers did exist. But the network directors collectively held that identifying poor performers in official ratings is not an effective way to address the problem because, among other things, it necessitates formal actions that they perceived to be time-consuming, burdensome, and unlikely to produce the desired results. Instead, the network directors believed they had effectively managed poor performance through informal means. The network directors’ recognition that poor performers do exist, but are not identified as such on official ratings because of negative perceptions toward the formal system, raises an important question. Was the attempt in 1978 with the Civil Service Reform Act to make performance management systems more “user friendly” to managers in identifying and dealing with poor performers successful? When the Reform Act was passed, there was general recognition that managers rarely gave unsatisfactory ratings, because the system was viewed as time-consuming and aggravating to all parties. Our “case study” at VHA, our 1990 governmentwide study, and MSPB’s 1995 and 1997 surveys all suggest that little has changed in the 20 years since enactment of the Reform Act. We do not know for certain whether executives in other government agencies share the VHA network directors’ perceptions and also rely on an informal system to address performance. However, governmentwide OPM statistics and our prior work, which showed that far less than 1 percent of employees received less than Fully Successful ratings, suggest that such perceptions are not limited to VHA. Our overall impression is that VHA has taken seriously its responsibility to identify and deal with performance problems among triad members. However, our findings also suggest a problem exists. The problem is not necessarily with VHA or the network directors but with the federal performance management systems. Research has shown that when systems do not work, or are perceived not to work, employees find ways to work around the systems. This appears to be what is occurring at VHA. The network directors have adapted and worked around a system they have deemed to be a failure. Although this adaptation has apparently enabled network directors to take performance-based actions, it carries with it some significant implications for policymakers who are again considering civil service reform. Performance appraisal system requirements call for honest and accurate appraisals. A system that discourages such appraisals contradicts the fundamental premise of performance management and compromises the integrity of federal personnel management. OPM’s strategic plan for fiscal years 1997 through 2002 calls for, among other things, continuing OPM efforts to improve the capacity of managers to effectively identify and resolve performance problems. As part of this effort, OPM has distributed instructional materials to federal managers on how to identify and resolve performance problems. These are important efforts that may help alter managers’ existing perceptions that the formal performance management systems are not helpful in this regard. To facilitate its efforts, it would be useful for OPM to develop and monitor data showing the extent to which such negative perceptions change over the 6-year period covered by the strategic plan. OPM might use positive results showing that managers’ perceptions have improved to encourage other federal managers to make greater use of the formal performance management system for identifying and dealing with performance problems. Negative results showing that managers continue to believe that the system is not working as intended could form the basis for OPM, working with Congress, to develop and test alternative approaches to identifying and dealing with performance problems. VHA has also taken actions to discipline triad members who have engaged in misconduct. However, some of the actions that VHA took resulted in much controversy and concern about how effectively misconduct, especially sexual harassment, is dealt with at the senior management levels within VHA. Thus, VA implemented a new policy and process for handling conduct problems that involve VA senior management. However, we believe that VA needs to change the wording of its policy to clarify that all triad members are covered by it. VA also is in the process of establishing a new office and process for handling employment discrimination complaints as a result of legislation enacted in November 1997. We believe that VA’s final policy regarding the use of administrative review boards should clearly reflect, as currently intended by VA, that complaints of sexual harassment and discrimination made against any triad member cannot be investigated by an administrative review board. The changes VA is making in its EEO process, as well as those we suggest here, should lead to improvements in how VHA responds to and resolves misconduct at the senior management levels. Although OPM has developed training materials to help improve managers’ performance in identifying and dealing with poor performers, we believe that data are needed to show whether the training changes managers’ negative perceptions of the formal performance management system. Thus, we recommend that the Director of OPM develop data to show by 2002 whether managers’ perceptions of the formal performance management system improve following training and experience in proper use of the system. If perceptions improve, we recommend that the Director of OPM advertise this information and further encourage managers to use the formal performance management system. However, if the data developed by OPM continue to show that managers perceive that the formal system is too burdensome and unlikely to produce the desired results, we recommend that the Director of OPM work with Congress to develop and test alternative approaches that may be more effective than the existing performance management system. Although the intent of VA’s March 1997 policy on handling instances of misconduct that involve VA senior management is to include all triad members, in practice this may not occur. Thus, to avoid any potential confusion on which positions in the management triad are covered by the March 1997 policy, we recommend that the Secretary of VA revise the policy to specifically include all chiefs of staff who are appointed under Title 38 and associate and assistant medical center directors who are at the GS-13 and GS-14 levels. We also recommend that the Secretary’s policy on the use of administrative review boards clearly reflect that VHA officials cannot convene such boards to investigate employment discrimination complaints made against any triad member. We provided a draft of this report to the Acting Secretary of VA and the Director of OPM for comment. On March 31, 1998, we met with the director of VHA’s Office of Management and Administrative Support and other VA officials to obtain oral comments. In a letter dated April 6, 1998, the Director of OPM provided comments on a draft of our report. (See app. I.) The VA officials said that VA agrees with the two recommendations we made to the Secretary and considers both recommendations to be consistent with the policy direction in which VA is moving. The VA officials characterized our report as fair, objective, balanced, and thorough. They also commented that VHA managers, like managers elsewhere in the federal government, know how to use the formal system to deal with performance problems but are reluctant to use it and instead rely on the informal measures. The Director of OPM said that our findings showing that VHA managers tend to deal with employees who have performance and conduct problems in an informal manner before invoking formal systems are not surprising.She recognized that prior studies by us, MSPB, and OPM have shown that managers and supervisors in many agencies avoid taking formal actions, because they perceive the formal system as administratively burdensome, time-consuming, and not as effective as informal methods. She pointed out, however, that regardless of how simple or how well-designed a system is, it can be effective only if it is used. The Director of OPM said that our recommendation that OPM assess the effectiveness of its recently developed training materials aimed at helping to improve managers’ performance in identifying and dealing with poor performers is a good one, and OPM will assess the effectiveness of these and other materials used to help managers address performance and conduct issues. The Director said that OPM is working with its stakeholders to improve individual and organizational performance, including strengthening ways to hold executives and managers accountable for producing results and providing them tools to identify and rectify performance deficiencies. She said that OPM is encouraged that VHA managers are addressing performance and conduct problems. We are sending copies of this report to the Acting Secretary of VA and the Director of OPM. We are also sending copies to the Ranking Minority Member of the House Committee on Veterans’ Affairs, the Chairman and Ranking Minority Member of the Senate Committee on Veterans’ Affairs, other appropriate congressional committees, and other interested parties. Copies will be made available to others on request. The major contributors to this report are listed in appendix IV. Please contact Michael Brostek, Associate Director, or me at (202) 512-8676 if you have any questions. Admonishment was issued citing poor judgment in installing camera. Other allegations were not substantiated. Written reprimand to 10-day suspension Mandatory 30-day suspension to discharge Written reprimand to 10-day suspension The tables of penalties do not list a penalty for a third offense of these types of misconduct. In addition to those named above, the following individuals from the General Government Division made important contributions to this report: Ernestine Burt, Issue Area Assistant; Donna M. Leiss, Communications Analyst; Michael O’Donnell, Senior Evaluator; and William Trancucci, Senior Evaluator. 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 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 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. | Pursuant to a congressional request, GAO reviewed how the Department of Veterans Affairs (VA) manages the performance of senior executives and deals with instances of poor performance and misconduct, focusing on the Veterans Health Administration (VHA) during fiscal years 1994 through 1996. GAO noted that: (1) none of the 477 management triad members received a performance appraisal of less than Fully Successful during the 1994 through 1996 rating periods; (2) this is not much different from how other executive agencies rated their senior management employees during this 3-year period; (3) the network directors acknowledged in interviews, however, that the record of the performance appraisals did not capture the actual performance appraisals of all the management triad members; (4) most network directors agreed that they did not identify poor or marginal performance in the performance appraisals, because those ratings necessitate formal actions to remedy performance problems; (5) the network directors perceived those actions as time-consuming and distracting, burdensome, and unlikely to produce a desired result; (6) although network directors did not use formal means to deal with poor or marginal performers, they said they effectively managed poor performers through informal means; (7) the network directors' propensity to use informal, rather than formal, means to address performance problems is not unique to them; (8) prior studies by GAO and the Merit Systems Protection Board have shown that managers and supervisors governmentwide have avoided taking formal actions against less than satisfactory performers for some of the very same reasons cited by the network directors; (9) in its oversight capacity for federal personnel issues, the Office of Personnel Management (OPM) has included in its strategic plan for fiscal years 1997 through 2002 efforts to improve the capacity of managers to identify and resolve performance problems; (10) the network directors were nearly unanimous in asserting that the changes VHA recently implemented, particularly the reduction in the number of triad members for whom they were responsible, were helping them to identify and deal with poor performance; (11) most network directors did not consider misconduct to be a widespread problem among management triad officials, although they did acknowledge that instances of misconduct by employees at that level have occurred; (12) disciplinary actions that VHA took to address the misconduct created some controversy that primarily revolved around one sexual harassment case; and (13) the controversy about how VHA handled this case as well as concerns about the effectiveness of VA's zero tolerance policy for sexual harassment and employment discrimination led to administrative and statutory changes. |
Federal contracting began declining in the late 1980s as the Cold War drew to a close and defense spending decreased. This decline in federal contracting continued for most of the 1990s, reaching a low of about $187 billion in fiscal year 1999. Spending subsequently increased to about $204 billion in fiscal year 2000. As figure 1 shows, between fiscal year 1990 and fiscal year 2000, purchases of supplies and equipment fell by about $25 billion, while purchases of services increased by $17 billion, or about 24 percent. Consequently, purchases for services now account for about 43 percent of federal contracting expenses—the largest single spending category. The growth in services has largely been driven by the government's increased purchases of two types of services: information technology services, which increased from $3.7 billion in fiscal year 1990 to about $13.4 billion in fiscal year 2000; and professional, administrative, and management support services, which rose from $12.3 billion in fiscal year 1990 to $21.1 billion in fiscal year 2000. The increase in the use of service contracts coincided with a 21-percent decrease in the federal workforce, which fell from about 2.25 million employees as of September 1990 to 1.78 million employees as of September 2000. As federal spending and employment patterns were changing, changes were also occurring in the way that federal agencies buy services. Specifically, there has been a trend toward agencies purchasing professional services using contracts awarded and managed by other agencies. For example, in 1996, the General Services Administration (GSA) began offering information technology services under its Federal Supply Schedule program, and it now offers services ranging from professional engineering to laboratory testing and analysis to temporary clerical and professional support services. The use of the schedule program to acquire services has increased significantly over the past several years. Other governmentwide contracts have also come into use in recent years. The Federal Acquisition Streamlining Act of 1994 authorized federal agencies to enter into multiple award, task- and delivery-order contracts for goods and services. These contracts provide agencies with a great deal of flexibility in buying goods or services while minimizing the burden on government contracting personnel to negotiate and administer contracts. The Clinger-Cohen Act of 1996 authorized the use of multiagency contracts and what have become known as governmentwide agency contracts to facilitate purchases of information technology-related products and services such as network maintenance and technical support, systems engineering, and integration services. While we have seen the environment change considerably, what we have not seen is a significant improvement in federal agencies' management of service contracts. Put simply, the poor management of service contracts undermines the government's ability to obtain good value for the money spent. This contributed to our decision to designate contract management a high-risk area for the Departments of Defense and Energy, the two largest purchasers within the federal government. Improving contract management is also among the management challenges faced by other agencies. Compounding these problems are the agencies' past inattention to strategic human capital management. As you may know, in January 2001, we designated strategic human capital management a governmentwide high-risk area. Our work, as well as work by other oversight agencies, continues to identify examples of long-standing problems in service contracting, including poor planning, inadequately defined requirements, insufficient price evaluation, and lax oversight of contractor performance. For example, We found that the Department of Defense's (DOD) broadly defined work descriptions for information technology services orders placed against several governmentwide contracts prevented establishing firm prices for the work. Work descriptions defined services broadly because the orders covered several years of effort, and officials were uncertain what support they would need in future years. The 22 orders we reviewed—with a total value of $553 million—typically provided for reimbursing the contractors' costs, leaving the government bearing most of the risk of cost growth. Further, although competition helps agencies ensure they obtain the best value under contracts, a majority of these orders were awarded without competing proposals having been received. The DOD Inspector General found problems with each of the more than 100 contract actions—with a total value of $6.7 billion—for professional, administrative, and management support services it reviewed. For example, contracting officials typically did not use experience from prior acquisitions of the same services to help define requirements more clearly. In one case, officials continued to award cost reimbursement contracts— and accepted the risk of cost overruns—despite 39 years of experience purchasing the same services from the same contractor. Further, officials typically did not prepare well-supported independent cost estimates to help them assess whether the costs contractors proposed were reasonable. Finally, the Inspector General found that oversight of contractor performance was inadequate in a majority of cases, and in some cases DOD officials could not show that they had actually reviewed the contractors' work. We found that DOD personnel sought competing quotes from multiple contractors on only a handful of orders for information technology services placed against GSA's federal supply schedule contracts. On 17 orders—valued at $60.5 million—contracting officers generally compared the labor rates offered by their preferred contractor with labor rates of various other contractors' supply schedule contracts instead of seeking competing quotes. This limited analysis did not provide a meaningful basis for assessing whether a contractor would provide high-quality, cost- effective services because it did not evaluate the proposed number of labor hours and mix of labor skill categories. Therefore, contracting officers' ability to ensure that DOD got the best services at the best prices was significantly undermined. The Inspector General at the Department of Transportation found that on an $875-million contract for technical support services, the Federal Aviation Administration did not develop reliable cost estimates or use these estimates to assess whether costs the contractor proposed were reasonable. Further, the agency generally did not gather data to evaluate the quality of contractor performance nor ensure that contractor personnel had the education and experience required for the jobs they were being paid to perform. The Inspector General at the Department of Energy reported on a $218-million contract for security services at its Oak Ridge operations.This contract was intended to consolidate security services under a single contractor and to reduce costs by reducing staffing and eliminating duplicative management structures. Oak Ridge officials, however, did not define what security-related work the new contractor would perform and did not analyze staffing levels or propose cost reduction measures to promote efficient contractor performance. Consequently, the number of security personnel actually increased from 640 prior to the consolidation to 744 afterwards, while Oak Ridge incurred an estimated $7.5 million in avoidable costs instead of achieving an anticipated $5 million in savings. While these examples highlight the need for federal agencies to improve their management of service contracts, their capacity to do so is at risk because of past inattention to strategic human capital management. We are concerned that federal agencies' human capital problems are eroding the ability of many agencies—and threaten the ability of others—to perform their missions economically, efficiently, and effectively. For example, we found that the initial rounds of downsizing were set in motion without considering the longer term effects on agencies' performance capacity. Additionally, a number of individual agencies drastically reduced or froze their hiring efforts for extended periods. Consequently, following a decade of downsizing and curtailed investments in human capital, federal agencies currently face skills, knowledge, and experience imbalances that, without corrective action, could worsen given the number of current federal civilian workers that are eligible to retire through 2005. I would like to use DOD's experience to illustrate this problem. As we recently testified, DOD's approach to civilian workforce reduction was not oriented toward shaping the makeup of the force. Rather, DOD relied primarily on voluntary turnover and retirements, freezes on hiring authority, and its authority to offer early retirements and "buy-outs" to achieve reductions. As a result, DOD's current workforce is not balanced and therefore risks the orderly transfer of institutional knowledge. According to DOD's Acquisition 2005 Task Force, 11 consecutive years of downsizing produced serious imbalances in the skills and experience of the highly talented and specialized civilian acquisition workforce, putting DOD on the verge of a retirement-driven talent drain. DOD's leadership had anticipated that using streamlined acquisition procedures would improve the efficiency of contracting operations and help offset the effects of workforce downsizing. However, the DOD Inspector General reported that the efficiency gains from using streamlined procedures had not kept pace with acquisition workforce reductions. The Inspector General reported that while the workforce had been reduced by half, DOD's contracting workload had increased by about 12 percent and that senior personnel at 14 acquisition organizations believed that workforce reductions led to problems such as less contractor oversight. While I have discussed DOD's problems at length, we believe our concerns are equally valid regarding the broader civilian agency contracting community. For example, our analysis of personnel data maintained by the Office of Personnel Management (OPM) shows that while DOD downsized its workforce to a greater extent than the civilian agencies during the 1990s, both DOD and the civilian agencies will have about 27 percent of their current contracting officers eligible to retire through the end of fiscal year 2005. Consequently, without appropriate workforce planning, federal agencies could lose a significant portion of their contracting knowledge base. Congress and the administration are taking steps to address some of these contract management and human capital challenges, in particular by emphasizing the increased use of performance-based service contracts and by stressing the importance of integrating strategic human capital management into agency planning. Performance-based contracts describe desired outcomes rather than direct work processes. According to the Office of Federal Procurement Policy, the use of performance-based contracts should result in lower prices and improved performance, among other benefits. To encourage their use, in April 2000, the Procurement Executives Council—a senior level coordinating body comprised of officials from more than 20 federal departments and agencies—established a goal that 50 percent of service contracts will be performance-based by fiscal year 2005. The goal of increasing the use of performance-based contracts was reaffirmed in a March 9, 2001, memorandum issued by the Office of Management and Budget (OMB). Further, as required by last year's defense authorization act, the Federal Acquisition Regulation was revised on May 2, 2001, to establish a preference for using performance-based contracting when acquiring services. While we support the use of performance-based approaches, it should be recognized that performance-based contracting is not a new concept. The Office of Federal Procurement Policy issued a policy letter in April 1991 that directed using performance-based contracting to the maximum extent practicable. However, this approach was not widely adopted by federal agencies, and the Procurement Executives Council's interim goal of having 10 percent of service contracts awarded in fiscal year 2001 be performance-based is indicative of the current level of performance-based contracting in the government. Consequently, the extent to which agencies provide the necessary training, guidance, and tools to their workforce, and establish metrics to monitor the results of the contracts awarded using performance-based approaches, will affect whether this effort achieves its intended results. With regard to human capital management, it is clear that both OPM and OMB have substantial roles to play. OPM has begun stressing to agencies the importance of integrating strategic human capital management into agency planning and has focused more attention on developing tools to help agencies. For example, it has developed a workforce planning model and has launched a website to facilitate information sharing about workforce planning issues. OMB has played a more limited role; however, OMB's role in setting governmentwide management priorities and defining resource allocations will be critical to inducing agencies to integrate strategic human capital into their core business processes. Toward that end, OMB's current guidance to agencies on preparing their strategic and annual performance plans states that the plans should set goals in such areas as recruitment, retention, and training, among others. Earlier this month, OMB instructed agencies to submit a workforce analysis to it by June 29, 2001. The analysis is to include summary information on the demographics of the agencies' permanent, seasonal, and temporary workforce; projected attrition and retirements; an evaluation of workforce skills; expected changes in the agency's work; recruitment, training, and retention strategies being implemented; and barriers to maintaining a high- quality and diverse workforce. The information developed may prove useful in identifying human capital areas needing greater attention. Over the past decade, federal spending patterns changed, the federal workforce declined, and new contracting vehicles and techniques were introduced. Consequently, the current environment in which the government acquires services is significantly different than the one it operated under in 1990. However, the government's long-standing difficulties with managing service contracts have not changed, and it is clear that agencies are not doing all they can to ensure that they are acquiring services that meet their needs in a cost-effective manner. The increasing significance of contracting for services has prompted—and rightfully so—a renewed emphasis by Congress and the executive agencies to resolve long-standing problems with service contracts. To do so, the government must face the twin challenges of improving its acquisition of services while simultaneously addressing human capital issues. One cannot be done without the other. Expanding the use of performance-based contracting approaches and emphasizing strategic human capital planning are welcomed and positive steps, but sustained leadership and commitment will be required to ensure that these efforts mitigate the risks the government currently faces when contracting for services. Mr. Chairman, this concludes my prepared statement. I will be happy to respond to any questions you or other Members of the Subcommittee may have. For further information, please contact David E. Cooper at (202) 512-4841. Individuals making key contributions to this testimony included Don Bumgardner, Ralph Dawn, Tim DiNapoli, Julia Kennon, Gordon Lusby, Monty Peters, Ron Schwenn, and John Van Schaik. | Federal agencies spend billions of tax dollars each year to buy services--from clerical support to information technology assistance to the management of national laboratories. The federal government spent more than $87 billion in services--a 24 percent increase in real terms from fiscal year 1990. Some service procurements are not being done efficiently, putting taxpayer dollars at risk. In particular, agencies are not clearly defining their requirements, fully considering alternative solutions, performing vigorous price analyses, and adequately overseeing contractor performance. This testimony (1) describes service contracting trends and the changing acquisition environment, (2) discusses the challenges confronting the government in acquiring services, and (3) highlights some efforts underway to address these challenges. GAO found that purchases of services now account for about 43 percent of federal contracting expenses--the largest single spending category. The growth of services has been driven largely by the government's increased purchases of information technology services and professional, administrative, and management support services. Poor contract management has undermined the government's ability to obtain good value for the money and continues to be a major problem for the two biggest service purchasers-the Departments of Defense and Energy. Performance-based service contracts and the integration of strategic human capital management into agency planning are two ways to address some of the contract management and human capital challenges. |
Our assessment identified differences in both Hepatitis C activities that were included in VA’s original fiscal year 2000 budget: screening and antiviral drug therapy. VA budgeted $195 million for these activities, but only spent $50 million, a $145 million difference. However, VA’s briefing paper shows only a $95 million difference because VA’s reported expenditures include $50 million for activities not specifically budgeted, such as treatment of conditions related to Hepatitis C. (See table 1.) We believe that management decisions could have contributed to lower than expected screening and treatment expenditures, in addition to the factors VA cited. VA expended $14 million for Hepatitis C screening—one-third less than the amount budgeted for fiscal year 2000. VA’s budget assumed that almost 985,000 veterans would be screened for Hepatitis C exposure at an average cost of $21 per veteran. However, VHA estimates that only 478,000 veterans were screened at a cost of $30 per veteran—a shortfall of over 50 percent. VA’s briefing paper reported that two factors caused this workload difference. First, VA points out that the budget estimate may have been unrealistically high because it was based on “untested assumptions” concerning the number of veterans who use the VA health care system who would need to be screened for Hepatitis C. Second, VA noted that the number screened may be underreported due to inadequate data systems. While VA’s reasons are valid, management decisions also could have contributed to the lower than expected number of veterans who were screened, causing the screening workload assumption to appear unrealistically high. For example, VHA decided to include Hepatitis C funds as part of its general medical care resource distribution process, without clearly communicating how much was available for screening and treatment of the Hepatitis C virus. As a result, network and medical facility staff we interviewed were generally unaware that they had received $21 million in funding that VA had requested for increased Hepatitis C screening. Network budget officers, medical center managers, and clinical staff told us that they thought VHA did not receive additional funding to support increased Hepatitis C activities. Those who thought funds were available were unsure of the amount. Such perceived funding inadequacies appear to have caused some local managers to adopt a cautious approach regarding who to screen and when. At the sites we visited, we noted that while some facility directors instructed providers to screen all users, others limited screening to selected clinics or left it to individual providers to decide who should be screened. Our review of medical records at these sites confirmed that some facilities had limited screening to certain clinics and that some providers had screened few veterans for Hepatitis C. In addition, such situations may have occurred because headquarters managers failed to establish performance targets for networks, which could be used to monitor Hepatitis C screening and treatment workloads. Although VHA promised in its fiscal year 2001 budget request to establish such performance targets, none have yet been adopted. VA’s briefing paper states that meaningful and measurable indicators will be identified and incorporated into performance goals for its 2003 budget request. Also, VHA’s efforts to evaluate or track performance were further hampered by a lack of basic data on the numbers of veterans screened. Notably, after VHA introduced a system to track screening at medical facilities late in fiscal year 2000, the reported number of veterans screened increased dramatically at many facilities we visited. Providers told us the tracking system was a powerful incentive to increase the number of veterans screened. For antiviral treatment, VA spent $36 million—one-fifth of the amount budgeted for fiscal year 2000. VA’s budget assumed that nearly 17,000 veterans would be treated and that 70 percent would complete a 12-month antiviral drug therapy regimen. VA reported, however, that 4,455 veterans received antiviral drug therapy and that most dropped out of treatment before 6 months. VA’s briefing paper characterized its budget estimate as being unrealistically high. VA explained that fewer patients received antiviral therapy because of the high number of patients who reject or defer therapy, or who do not qualify as candidates under treatment guidelines. In addition, treatment expenditures were lower because larger than expected numbers of patients were unable to tolerate the frequent side effects of antiviral drugs, such as anemia, respiratory symptoms, or depression and, therefore, ended treatment prematurely. VA’s reasons seem valid. However, implementation problems relating to VHA’s decision to distribute Hepatitis C funding through its general allocation system without alerting networks to the portion budgeted for Hepatitis C activities could also be a major contributing factor. As previously discussed, staff at local facilities we visited perceived that little or no funds had been appropriated to implement VA’s Hepatitis C initiative. Providers at some of these facilities told us that this perceived funding shortage was a factor that ultimately could explain the unexpectedly low number of veterans treated. Because of the slowly evolving nature of liver disease caused by the Hepatitis C virus, treatment can frequently be postponed, however, without adversely affecting a patient’s health or recovery prospects. VHA’s budget officials told us that when the budget plan for fiscal year 2000 was originally prepared and submitted to the Congress, Hepatitis C funds were expected to be used solely for screening veterans and providing antiviral therapy. Subsequently, VHA decided to report expenditures for treatment of conditions related to the Hepatitis C virus. Of VA’s reported expenditures, $50 million was used for those purposes. Our assessment of VHA’s records indicates that most of this $50 million in expenditures involved inpatient care and pharmaceuticals. (See table 2.) To gain an understanding of these activities, we reviewed medical records at one medical center in consultation with that facility’s Director of Hepatology. This review indicated that inpatient expenditures frequently involved treatment of secondary problems relating to advanced Hepatitis C—including fluid retention in the abdomen, internal bleeding, neurological impairment, and liver cancer. Treatments varied from stabilizing patients’ conditions to liver transplants. Our review of medical records indicates that outpatient expenditures frequently involved treatment of conditions that could preclude the use of antiviral drug therapy. For example, because excessive alcohol consumption reduces the effectiveness of antiviral therapy, VHA may provide alcohol use counseling and treatment in order to provide veterans with the best opportunity to benefit from antiviral treatment. Veterans who are intravenous drug users also need counseling and drug treatment before starting antiviral therapy. VA’s briefing paper reported that expenditures for such related medical conditions were probably undercounted for many veterans. To be counted, VHA requires providers to include a Hepatitis C code in its computerized records system when veterans receive inpatient or outpatient services for liver-related conditions, such as cancer; such coding signifies that Hepatitis C was a co-morbid condition. Officials at one network we visited were aggressively trying to improve coding accuracy. Their efforts suggest that more than half of their Hepatitis C-infected veterans received treatments for Hepatitis C-related conditions that were not coded as such. This problem persists systemwide, despite VHA’s efforts over the past 2 years to encourage—through training and other educational aids— accurate coding by providers. VA officials told us that the fiscal year 2002 budget estimate for Hepatitis C of $171 million includes funding for all these activities: screening, antiviral therapy, and treatment of Hepatitis C-related conditions. This estimate, they said, was developed using the same estimating model that was used to identify the Hepatitis C expenditures reported for fiscal year 2000, rather than the model used to develop fiscal year 2000 and 2001 budget estimates. Also, VA’s briefing paper reported that its budget planning process for fiscal year 2003 will include a more comprehensive revision of its Hepatitis C model. In this regard, VHA proposes the creation of a registry for its patients with Hepatitis C infection. This registry will document important demographic and clinical data, including all inpatient and outpatient care regardless of diagnostic coding of individual episodes of care. VA plans to develop a new software system to interface with existing electronic medical records, which VHA estimates could become operational by the fourth quarter of fiscal year 2002. Distributions to 22 networks appear adequate, given that funding levels could support significant expansion of screening and treatment workloads. VA included $340 million to screen and provide antiviral drug therapy to veterans in its fiscal year 2001 budget request. In November 2000, VHA distributed these funds to the 22 networks as part of their overall patient care funding using its Veterans Equitable Resource Allocation model. At our request, VA identified amounts that each network received as result of the $340 million being included in its distribution. These amounts ranged from $5.7 million to $28.3 million. Our assessment shows that amounts distributed to the 22 networks for fiscal year 2001 should allow each network to provide Hepatitis C screenings for all previously unscreened veterans when they visit VA medical facilities for care during fiscal year 2001. Potential screening workloads for each of the 22 networks range between an estimated 70,000 veterans and 298,000 veterans. Networks could spend an estimated $128 million to screen such potential workloads, leaving $212 million available to provide antiviral therapy. This remaining $212 million appears sufficient to support antiviral therapy workloads for each network at a significantly higher level than fiscal year 2000. Networks, for example, provided a total of 22,275 months of antiviral therapy to 4,455 patients in fiscal year 2000. This workload is the equivalent of 1,856 patient years of care. For fiscal year 2001, networks could double their workloads at a total cost of about $82 million, leaving $130 million for further expansion of antiviral treatment workloads or increased treatments for conditions related to Hepatitis C, such as alcohol or drug treatment. VA recently has reported that its Hepatitis C-related spending estimate for fiscal year 2001 was reduced to $151 million, which represents VA’s best estimate of how much networks are likely to spend for Hepatitis C screening and treatment. VHA budget officials told us, however, that the entire $340 million originally requested remains available to the 22 networks for Hepatitis C use, should networks’ workloads warrant. These funds, however, are not limited to Hepatitis C use. At this time, VA appears unable to develop a budget estimate that can reliably forecast Hepatitis C funding needs. This situation is troublesome, because over the past 30 months, VA has spent over $145 million previously requested for Hepatitis C activities, but has limited experiential data that can be used to estimate Hepatitis C patients’ clinical needs—one of the most critical elements for budget development. VHA, however, appears to be taking reasonable steps to improve future budget estimates and thereby minimize the potential for large differences. Most notably, VHA’s proposed Hepatitis C patient registry could provide critical data needed to improve budgetary estimates, as well as overall program management. VHA, however, estimates that it could take 15 months before this registry becomes operational, which suggests that it may not provide budgetary information in time to help formulate VA’s fiscal year 2004 budget. In the meantime, VHA’s ongoing efforts to upgrade its data collection systems should help improve budget estimates for fiscal year 2003. These efforts, however, have provided only minimal help in the development of VA’s fiscal year 2002 budget for Hepatitis C spending. As a result, it is not possible to conclude with certainty whether VA’s $171 million spending estimate for fiscal year 2002 is appropriate. VA’s budget forecasting uncertainties do not appear to have adversely affected the availability of fiscal year 2001 Hepatitis C funds for the 22 networks. Our assessment shows that, for fiscal year 2001, each network will receive an adequate portion of the $340 million requested to significantly expand Hepatitis C screening and treatment workloads. | The Department of Veterans Affairs (VA) requested and received $195 million for Hepatitis C screening and treatment in fiscal year 2000. VA's budget documentation showed that it had spent $100 million on Hepatitis C screening and treatment, leaving a difference of $95 million between its estimated and actual expenditures. However, GAO's review revealed that the difference was actually much larger--$145 million. VA's documentation showed that only $50 million was used for budgeted activities and $50 million was used for an activity not included in its original budget--treatment of conditions related to Hepatitis C. It appears that VA is unable to develop a budget estimate that can reliably forecast its Hepatitis C funding needs at this time. However, VA's Veterans Health Administration (VHA) appears to be taking reasonable steps to improve future budget estimates and thereby minimize the potential for large differences. Such steps include developing a Hepatitis C patient registry that could provide the critical data needed to improve budgetary estimates. However, this registry could take as long as 15 months to become operational, which suggests that it may not provide budgetary data in time to formulate the 2004 budget. In the meantime, VHA's ongoing efforts to upgrade its data collection systems should help improve budget estimates for fiscal year 2002. These efforts, however, have provided only minimal help in the development of VA's 2002 budget for Hepatitis C spending. As a result, it is not possible to conclude with certainty whether VA's fiscal year 2002 spending estimate of $171 million is appropriate. |
Cyclone Nargis left nearly 140,000 people dead or missing, up to 800,000 displaced, and roughly 2.4 million severely affected. The strong tropical cyclone struck Burma’s impoverished Irrawaddy Delta on May 2, 2008, with a storm surge of 12 feet and continued east-northeast through the Rangoon division (see fig. 1). Strong winds and heavy rainfall led to the flooding of inland areas and agricultural lands, the destruction of 450,000 homes, and the devastation of food stocks, livelihoods, and infrastructure, according to the Tripartite Core Group joint assessment. For examples of Cyclone Nargis’s destruction in the delta region, see figure 2 and our video. The assessment stated that the cyclone destroyed or severely damaged more than 50 percent of schools and nearly 75 percent of health facilities in the affected areas. The cyclone also impaired access to clean water because the salt water contaminated communal water collection systems and destroyed household rainwater collection containers. Prior to the cyclone, Burma had significant humanitarian needs resulting from decades of chronic underinvestment in essential services by the Burmese government, ongoing ethnic conflict, and government policies that stifle economic growth. In the week following the cyclone, the Government of Burma said it was accepting international aid but was not ready to accept international aid workers, insisting that the disaster could be handled internally and therefore they did not need experts. Due to the inability to enter Burma, many foreign donors, including the U.S. government, began assembling staff in Bangkok, Thailand, to be ready for quick deployment if granted access. The U.S. and other donors also had military ships anchored off the coast of Burma, ready to supply humanitarian assistance if allowed by the Burmese government. The Government of Burma restricted the movement of the few international aid workers who were in Burma when the cyclone hit as well as those it eventually allowed to enter the country. The Burmese Government has had a longstanding policy requiring approval for any international staff to travel outside of Rangoon. Within the first two weeks after the cyclone struck, the government set up military checkpoints outside of Rangoon, blocking access to the cyclone-affected areas for anyone without the proper travel approvals. Despite the inability of international aid workers to get into Burma and government restrictions on the movement of international aid workers within Burma, some aid was delivered. International agencies already in Burma launched operations within a few days, working through their local staff or in partnership with local organizations. The Burmese government provided some assistance to cyclone-affected areas. One U.S. official reported that the Burmese military set up a logistics center in Rangoon and delivered some relief supplies. One report also suggested that the Burmese army and navy rescued some people stranded in remote areas; set up camps for displaced people; and restored some electricity, communication, and transportation links. Burmese citizens and local organizations also assisted cyclone victims. According to the same report, within hours of the cyclone, the first local response efforts were underway, led by monks, doctors, students, artists, intellectuals, travel agents, and small business owners. Several hundred new and existing groups, including a contingent of Burmese citizens returning from abroad, provided relief. While most of the larger international agencies initially focused on the main population centers, many of these small, informal groups assisted the most isolated areas. Several officials cited the local response as one of the main reasons there was not a further loss of life in the weeks immediately following the cyclone; however, they reported that the local response was exhausting its supplies by the end of May 2008. Under pressure by the international community and UN entities to allow international aid workers access to affected populations, the Burmese government pledged on May 23, 2008, during a visit by the UN Secretary General, that it would begin granting international aid workers access to Burma and the cyclone-affected regions. The Association of South East Asian Nations (ASEAN), of which Burma is a member, played a leading role in getting international disaster response workers into Burma. ASEAN took the lead in coordinating assistance offered by the international community, with full support from the UN, and in late May 2008 formed the Tripartite Core Group (TCG). The TCG’s mission was to facilitate trust, confidence, and cooperation between the Government of Burma and the international community on matters concerning Cyclone Nargis humanitarian relief and recovery work. The TCG consisted of three members from the Burmese government, three from ASEAN, and three from the UN. The TCG started its work on May 31, 2008, and met once a week until its mandate ended in July 2010. The TCG facilitated the issuance of visas and permits to travel, as well as visa extensions for UN and foreign aid workers. The TCG also led the post-Nargis Joint Assessment, conducted in June 2008, and helped facilitate the entry and deployment of 10 commercial helicopters used in conducting assessments and delivering relief supplies. Since 1997 the U.S. government has imposed sanctions on Burma mainly due to the ruling Burmese military regime’s actions and policies. The State Law and Order Restoration Council (later known as the State Peace and Development Council) that took power in 1988 has routinely restricted freedom of speech, religion, and movement and committed other serious human rights violations against the Burmese people. It has condoned the use of forced labor and taken military action against ethnic minorities living within the country. Burma’s ruling regime has also periodically blocked or impeded activities undertaken by UN and international NGOs in Burma, as we previously reported. In 1990, national parliamentary elections resulted in an overwhelming victory for the National League for Democracy party, led by Aung San Suu Kyi. However, the ruling State Law and Order Restoration Council refused to yield power and maintained its policies of autocratic rule. Parliamentary elections held in November 2010—described by a U.S. government source as “flawed”—saw the ruling regime’s party garner more than 75 percent of the seats. Parliament convened in January 2011 and selected the former Prime Minister as President. The government source reported that the vast majority of national-level appointees named by the new President are former or current military officers. The current U.S. sanctions against Burma limit, among other things, the export of financial services by U.S. persons or from the United States to Burma and new U.S. investment in Burma. The Treasury’s Office of Foreign Assets Control (OFAC) manages the U.S. sanctions program by issuing licenses, monitoring compliance, and bringing enforcement actions against violators of the sanctions. The sanctions have developed through laws, such as the Burmese Freedom and Democracy Act of 2003 and the Tom Lantos Block Burmese JADE (Junta’s Anti-Democratic Efforts) Act of 2008, as well as through presidential executive orders. U.S. law also requires that the United States withhold a share of its voluntary contributions to most UN organizations proportionate to their funding for programs in Burma. Generally, aid donated to Burma on behalf of the United States is not intended to benefit sanctioned entities, such as senior Burmese government officials or persons associated with the military regime that have been designated as such by OFAC. Further, State identifies Burma as a “major illicit drug producing country” that has failed to adhere to its obligations under international counter-narcotics agreements and is, therefore, banned from receiving some U.S. aid under the Foreign Assistance Act of 1961. To operate legally in Burma, USAID used funds provided with notwithstanding authority and obtained OFAC licenses. Notwithstanding authority allowed USAID to provide humanitarian assistance to Burma despite other provisions of law limiting agencies’ ability to operate in Burma. This authority automatically applied to USAID’s Office of Foreign Disaster Assistance (USAID/OFDA) programs because the law allows for international disaster assistance, including relief and rehabilitation, to be provided notwithstanding any other provision of law. Other appropriations were also provided with notwithstanding authority to fund humanitarian assistance in Burma for individuals and communities impacted by the cyclone. OFAC licenses have allowed USAID and its grantees and contractors to operate in Burma, in order to conduct financial transactions and other activities otherwise prohibited by the U.S. sanctions. In response to the humanitarian crisis in Burma following Cyclone Nargis, UN and U.S. agencies obligated roughly $334.8 million in assistance, as of March 2011. Of this total, the UN obligated $288 million and the United States obligated $84.6 million—$37.8 million of which went to UN agencies, and is therefore included in the UN total as well. Of the remaining U.S. assistance, $33.9 million was provided through NGOs and $12.9 million was provided by DOD. UN agencies played a critical role in implementing international assistance in response to Cyclone Nargis. Eleven UN agencies obligated $288 million since 2008, $37.8 million (13 percent) of which came from U.S. funding, and provided emergency response and recovery assistance. The UN, through the acting Humanitarian Coordinator and the country team, organized the emergency and early recovery phase of the Cyclone Nargis response and assigned UN agencies and NGOs lead responsibility for particular relief sectors, as shown in figure 3, an interactive graphic. (See app. II for mission descriptions of the UN agencies.) Figure 1. Text goes here Figure 3: UN Assistance by Sector, 2008 through March 2011 Interactive instructions: The online version of this matrix is interactive. Hover your mouse over each UN organization for a description of that organization. To view these descriptions in the offline version, see appendix II. (illion U.S. doll) Lead responsibility for the sector; also provided assistance UN OCHA provided a broad array of coordiantion assistance across the sectors. Four UN agencies—the World Food Program (WFP), United Nations Children’s Fund (UNICEF), United Nations Development Program (UNDP), and the Food and Agriculture Organization of the United Nations (FAO)— contributed approximately 90 percent of the $288 million. Nearly half of the total funding came through WFP, which distributed food and supplied common services, such as providing trucks and cargo vessels for transporting humanitarian assistance, to the UN and other responding agencies. These four UN agencies provided the following activities and services: WFP. As the UN’s largest assistance provider for this humanitarian emergency and the lead agency responsible for the food, logistics, and telecommunications sectors, WFP obligated nearly $130 million for associated activities, as of March 2011. WFP distributed food in the Irrawaddy Delta and Rangoon Division, reaching nearly one million people and supplying more than 70,000 tons of food according to WFP reports. The food commodities included rice, beans, vegetable oil, salt, ready-to-eat meals, and high-energy biscuits. In urban areas of the Rangoon Division, where markets remained viable, WFP conducted a cash transfer program that provided cash assistance to purchase a week’s worth of food to more than 49,000 beneficiaries. However, the Burmese government cancelled this program in June 2008. According to WFP officials, the Burmese government maintained that the cash transfer program had a negative impact on the economy because it used informal rather than formal exchange rates. In August 2008, following the termination of the project, WFP began providing food rations for 131,400 Rangoon beneficiaries. In fall 2008, WFP and its partners began to shift their focus from relief food provision to early recovery efforts in order to establish opportunities for work and livelihood redevelopment— principally in the occupations of farming and fishing. In addition to food assistance, WFP helped supply and coordinate common services to the UN and other responding agencies. WFP established five logistics hubs across the delta to provide forward locations for temporary food storage prior to distribution, and bases for transportation to onward destinations by road, waterways, or air. Upon completion of air operations in August 2008, WFP reported that it had transported 4,177 tons of food and relief supplies from the UN staging area in Bangkok. Helicopters delivered 1,088 tons of emergency food and nonfood items to 160 remote locations. Because the delta is a labyrinth of waterways, WFP contracted a fleet of barges, push tugs, and river boats, which various agencies used to transport an additional 10,405 tons of humanitarian supplies, as well as trucks for inland travel. UNICEF. UNICEF led three sectors—education; nutrition; and water, sanitation, and hygiene—and obligated more than $79 million for associated activities, as of March 2011. UNICEF reported that strong winds and heavy rainfall from Cyclone Nargis left more than 4,000 schools and more than 600 health facilities destroyed or badly damaged. As a result, their immediate priorities included preventing disease outbreaks, ensuring availability of safe drinking water, establishing temporary learning spaces for children, creating child- friendly spaces for traumatized children, and tracing and reintegrating the families of separated children. UNICEF said it constructed and maintained 300 emergency latrines, installed 558 large rainwater containers and 8 water treatment plants, administered more than 110,000 measles vaccinations to children in cyclone-affected areas and deployed health assistants to severely affected townships, provided school kits to 2,322 schools to facilitate resuming of the school year and renovated 965 schools and 702 staff houses, and supported 27,000 children through a range of care and protection activities in 272 locations in 13 affected townships. UNDP. As the lead agency for the early recovery sector, UNDP was the only UN agency with project offices located in the delta region prior to Cyclone Nargis. UNDP’s eight project offices and associated staff helped distribute supplies, such as water, food, plastic sheets, cooking utensils, medicine, and clothing. UNDP obligated nearly $34 million, as of March 2011, and adapted its pre-cyclone Human Development Initiative projects to meet the early recovery needs of Cyclone Nargis survivors, focusing primarily on livelihood re-establishment, but also including grass-roots interventions in the areas of primary health care, the environment, HIV/AIDS, training and education, and food security. UNDP also adapted its micro-enterprise/micro-credit program to support enterprise creation and rehabilitation, including helping affected populations to rebuild their houses. FAO. To restore and strengthen food security by helping to restore livelihoods in agriculture and fisheries production in Burma’s cyclone- affected provinces, FAO obligated about $17 million, as of March 2011. As the lead agency for the agriculture sector, FAO provided crop, vegetable, and fruit seedlings; fertilizers; technical assistance for crop and livestock production; improved fishing techniques; fish processing equipment; livestock and fisheries inputs; veterinary equipment; and animal vaccinations. In response to Cyclone Nargis, the U.S. government obligated $84.6 million since May 2008—$74.9 million for emergency response activities and $9.7 million for longer-term recovery assistance. Of the total funds obligated, USAID obligated $71.7 million, of which $37.8 million went to UN programs, and DOD obligated $12.9 million. U.S. assistance covered multiple sectors throughout the delta region; however, certain townships received a more extensive range of assistance. (See app. III for a map that shows the location and type of emergency assistance that U.S. agencies provided in response to Cyclone Nargis.) As the lead agency for the U.S. government’s response to Cyclone Nargis, USAID/OFDA established a disaster assistance response team in the region within days after the cyclone struck. USAID/OFDA also immediately provided $250,000 to UN agencies for emergency assistance. Due to the delay in the Burmese government’s issuance of visas, USAID deployed the disaster response team to Bangkok, and a logistics team established operations in Utapao, Thailand. The U.S. government’s emergency response consisted of $33.9 million in assistance from USAID/OFDA, $28.1 million in food aid assistance from USAID’s Office of Food for Peace, and $12.9 million in assistance from DOD, as shown in figure 4. USAID/OFDA obligated the nearly $34 million as follows: $21.5 million was provided through 21 awards in 2008 to 20 different NGOs and UN organizations. Most of the awards were for emergency shelters, relief commodities and hygiene and sanitation facilities, including providing the means to access safe drinking water. Some awards also helped support capacity building for the local communities, particularly for food production. $5 million was provided in 2009 through seven awards to seven NGOs and UN organizations. These awards were largely modifications to the 2008 awards that extended the original grant time periods and provided extra funding for ongoing activities. $4.5 million was provided to procure and distribute relief commodities to various NGOs for distribution throughout the delta region in the early weeks following the cyclone. $2.9 million was provided for administrative, travel, and logistical support for the emergency response. This included travel and transportation costs for the disaster assistance response team members. In addition to USAID/OFDA, USAID’s Office of Food for Peace obligated $28.1 million of Food for Peace emergency food assistance between September 2008 and January 2009, which WFP distributed to affected populations. The 23,640 metric tons of assistance included beans, rice, vegetable oil, and corn-soy blend. The first U.S. food shipment, consisting of 300 metric tons of corn-soy blend, arrived in Burma in September 2008 from U.S. prepositioned food stocks in Djibouti, Africa. Most of the other food supplies arrived from the United States between November 2008 and January 2009, approximately 7 to 9 months after Cyclone Nargis struck Burma. DOD provided $12.9 million in transportation assistance and emergency supplies after Cyclone Nargis struck Burma. Between May 12 and June 22, 2008, DOD operated a U.S. government air-bridge with C-130 aircraft between Thailand and Burma and provided critical supplies, such as water, food, and emergency shelter material. The U.S. government air- bridge completed 185 airlifts and delivered more than $4 million of USAID/OFDA emergency relief supplies and commodities from DOD, UN agencies, NGOs, and the Government of Thailand. Upon the insistence of the Government of Burma, and because of a lack of other viable options, DOD provided early shipments of supplies to the Government of Burma for delivery. Soon thereafter, DOD consigned all emergency supplies flown to USAID’s NGO partners. To sustain the efforts initiated in the immediate aftermath of Cyclone Nargis, USAID’s Regional Development Mission for Asia (USAID/RDMA) obligated an additional $9.7 million to fund four cooperative agreements in the priority sectors of livelihoods; health; water, sanitation, and hygiene; and shelter starting in May 2010, as shown in figure 5. This assistance was targeted to provide for critical needs in sectors that required continued support as assistance moved into the recovery and reconstruction phases. USAID said its programs complemented other ongoing donor-funded programs, involved high levels of community participation, and fostered local beneficiary ownership. Ultimately, USAID will have supported relief and recovery in the Cyclone Nargis-affected communities for 4.5 years after the disaster at the close of these agreements. Prior to delivery of assistance, USAID took several actions to help ensure that funds were used as intended and did not benefit sanctioned entities. First, USAID selected grantees that had experience working in Burma and with the United States. To provide immediate emergency assistance, USAID/OFDA generally selected grantees already working in Burma who were also familiar with USAID regulations and restrictions. In addition, USAID/OFDA said that they required all grantees, or their sub-grantees, to be registered to work in Burma before grants were finalized. This ensured grantees were able to begin providing assistance immediately. In providing follow-on assistance, USAID/RDMA decided to provide recovery funds to organizations that had received USAID/OFDA grants, a strategy that they said allowed them to implement their programs faster. They said these organizations had built relationships with the affected villages, were familiar with all the U.S. restrictions, and had demonstrated success operating in Burma. Officials reviewed the previous performance of each grantee in selecting organizations for the follow-on assistance. Second, USAID/OFDA, State, and DOD officials initially decided to provide only low-value emergency relief supplies to limit the risk of theft by the Burmese military. Given that the Government of Burma insisted on receiving and distributing all aid in the initial days of the response, U.S. agencies said they chose their mix of relief supplies carefully to limit the risk of diversion by the Government of Burma. A State official told us that they chose certain goods, such as bottles of water and plastic sheeting, specifically with this purpose in mind. This official stated that the Government of Burma requested items such as helicopters and vehicles that could have been diverted, which the U.S. government did not provide. Third, USAID/RDMA included written guidance in its agreements to emphasize restrictions and help grantees determine who in Burma is restricted from receiving U.S. assistance. For example, each agreement contains a clause clarifying that assistance cannot be provided to or through the Government of Burma, while recognizing that situations may arise where government workers, such as teachers or local health officials, may observe USAID-funded training. U.S. officials told us that they provide this extra guidance to help organizations better understand the restrictions. USAID/RDMA has also tried to design its programs to reduce the risks that U.S. assistance will benefit Government of Burma employees. For example, since U.S. funds generally cannot be used to provide any benefit to official village midwives because they are Government of Burma employees, USAID/RDMA approved grantees to work with community health workers, who are not government employees, as part of their health sector programs. In addition to the guidance in the agreements, USAID conducted post-award briefings with all partners to discuss the terms of the agreements, with an emphasis on ensuring that U.S. assistance does not benefit sanctioned entities. A USAID legal advisor participated in these briefings to answer participants’ questions about how to differentiate between beneficiaries and local government employees. Finally, USAID obtained licenses from OFAC, or ensured its grantees had valid licenses, which allowed grantees to conduct all operations— including financial transactions—necessary to implement humanitarian assistance programs in Burma without violating U.S. sanctions. USAID ensured that all of its grant agreements included copies of OFAC licenses. Under the terms of the licenses, USAID and its grantees had to continue to ensure that U.S. funding did not benefit sanctioned entities in Burma. Amid numerous travel and operational constraints, USAID has taken actions to monitor grantees’ program delivery; however, we found that their site visits were not always documented as required. USAID does not have an official presence in Burma, so staff must request permission to enter Burma weeks prior to any planned monitoring site visits; however, the Burmese government often does not grant permission in a timely manner, according to USAID officials. In addition, the Government of Burma placed numerous and significant restrictions on international travel to the affected region, which USAID officials said negatively affected their ability to conduct monitoring. USAID/OFDA officials also reported difficulties in conducting monitoring due to staffing constraints. They stated that a disaster of this magnitude could warrant fifteen to twenty members on the response team. However due to the inability to get visas for all team members, there were only four members in Burma during the height of the emergency response, and ultimately only seven team members gained access to Burma. USAID’s ability to monitor is also constrained by the remoteness of the cyclone-affected areas. For example, one USAID grantee runs programs that are located on Middle Island, which took us 16 hours of travel by car and boat to reach under good conditions from Rangoon, where the U.S. embassy is located. As discussed below, despite the numerous constraints, USAID conducted some monitoring of its programs: Emergency assistance. USAID and State officials told us they monitored emergency assistance from May 2008 through May 2009. USAID/OFDA officials reported that members of USAID’s disaster assistance response team made visits to the cyclone-hit delta region to oversee implementation of USAID-funded grant activities and to discuss results with beneficiaries from May 2008 to July 2008. However, the USAID-provided documentation of visits during this time focuses on the assessment of needs in the region, with no detailed discussion of monitoring of USAID programs. Further, USAID assigned an emergency disaster response coordinator—who was stationed in Burma from September 2008 to May 2009—to monitor program activities. She told us that during her time in Burma, she made only one monitoring site visit to each partner because of Burmese government-imposed travel restrictions. While she did not prepare formal trip reports, she told us that she reported her activities to USAID/OFDA staff members through e-mails and conversations and also reported her activities and findings to embassy staff for inclusion in classified cables issued by the embassy. However, while she was sometimes asked to clear information on the cables, she reported that she never saw finalized cables containing information she submitted. Food aid. To oversee USAID’s food aid contributions to Burma, USAID assigned a food aid official to the disaster assistance response team in Bangkok roughly 2 weeks after Cyclone Nargis hit Burma. However, the food aid official returned to Washington, D.C., when she was unable to obtain a visa and monitored food aid activities from there, relying on disaster assistance response team members, other embassy officials, and WFP staff in Burma to monitor food assistance in a limited capacity. The official said she had regular informal communication via e-mail and telephone with WFP staff in Washington, D.C., and Burma. She was able to travel to Burma several months later, in September 2008, during which time she conducted site visits with WFP personnel across the Irrawaddy Delta. Her site visits included observations of food distributions and an inspection of a WFP warehouse. Upon returning, she drafted a trip report that was circulated within USAID, but was never finalized. The report included, among other things, her observations from the field visits and challenges encountered in the response. Recovery assistance. To monitor recovery assistance, USAID officials visited cyclone-affected areas three times between 2010 and 2011 and made several other visits to Rangoon, where they met with grantees. USAID officials said that while the Burmese government typically grants access, the level of uncertainty surrounding when they will grant the access makes it difficult to monitor aid delivery on short- term notice, limits the number of site visits they make, and precludes them from properly planning monitoring visits. USAID officials responsible for monitoring recovery assistance provided us with nine trip reports, including two for trips to monitor grantee activities. The trip reports include headings for information such as activities monitored, key meetings, issues identified, recommendations, and photographs from site visits. We found that one of the two reports was generally lacking in detail. For example, the report included no detail on what the officials actually observed during the visit or any discussion of the activities they monitored in terms of potential issues or progress. USAID staff reported that State officials from the embassy in Rangoon also conducted some monitoring activities; however, they did not receive instructions on monitoring procedures. According to a USAID official, State officials provided additional support for USAID staff on some site visits, or if traveling in the vicinity of USAID programs, they were asked to observe some of the activities and report back to USAID. While this monitoring was helpful, a USAID official told us that these State officials had not received formal USAID training on what to look for during site visits or how to conduct effective monitoring visits. All USAID agreement officers and their technical representatives are required to attend mandatory training that includes monitoring procedures. USAID’s monitoring activities, including their limited number of site visits, involve little financial oversight, which is to help ensure funds are used as intended. USAID monitoring consists of program and financial monitoring. Program monitoring is focused on the effectiveness of USAID programs and is carried out by field officers, program officers, and the relevant agreement officer’s technical representative (AOTR). Financial monitoring is carried out by the AOTR and the relevant mission’s office of financial management. For financial monitoring, USAID primarily relies on its reviews of grantee’s quarterly self-reported cumulative expenditure data, and the grantee’s annual single audit to reveal any instances of financial noncompliance. Grantees are required to submit regular financial reports that are reviewed by the program office and the mission’s office of financial management. These reports include cumulative financial transactions, such as drawdowns and expenditures. The office of financial management and the AOTR review these reports to assess the reasonableness of grantee drawdowns. USAID does not require grantees to provide supporting documentation, such as invoices or detailed transactions. An official in USAID/RDMA’s office of financial management told us that the AOTR, who is also the relevant program officer, compares these reports to information obtained from site visits and progress reports to ensure the information grantees report is reasonable. USAID officials said that staff conducting monitoring in Burma, including the relevant AOTR, focused their site visits on programmatic issues but did not review grantee internal control frameworks or review disbursements to determine whether funds were used for intended purposes. However, USAID officials told us they consider their observation of grantees’ use of materials procured with grant funds and the connection of those materials to the program activities described in the grant agreement to be a review of grantee financial actions. A USAID contracting officer reported that, given the limited amount of time the AOTR spends in the field monitoring, the emphasis is often on the programmatic side of her monitoring responsibilities. Further, the AOTR stated that the administrative burden associated with obtaining permission to enter Burma and travel to grantee sites detracts from USAID’s ability to monitor the Cyclone Nargis-related programs more closely and make more meaningful assessments. USAID officials also told us they rely on the grantees’ annual single audits, in addition to their review of grantee financial reports, to monitor compliance with their grant agreements; however, we found that relevant USAID program staff were not aware of some internal control weaknesses and questioned costs included in a grantee’s single audit report. Two of the three grantees we reviewed were required to submit single audits, and one had significant findings. We reviewed the June 30, 2009, and June 30, 2010, single audits of one of the grantees and the December 31, 2009, single audit of a second grantee. We found that the June 30, 2009, single audit of the first grantee had 11 findings related to internal controls and compliance with federal program requirements. For example, the auditors questioned cash payments to Burmese villages totaling $641,695 because the grantee did not provide the auditor with sufficient documentation for the cash payments. Officials from the grantee’s Bangkok office told us that they addressed the auditor’s findings and that they now maintain records of cash payments made to beneficiaries. We reviewed the same grantee’s June 30, 2010, single audit report and noted that 9 of the 11 prior year findings related to the grantee’s programs in Burma had been resolved, and the grantee is taking steps to resolve the remaining two findings. During our fieldwork, USAID program officials responsible for overseeing the Burma programs said that they were not aware of the single audit findings. USAID officials told us that the USAID Inspector General’s office reviews the single audit reports and distributes the audit packages to the relevant program offices. In this instance, because the Bangkok program staff did not receive any information from the Inspector General’s office, they assumed that the single audits did not contain any findings related to the programs in Burma. USAID/RDMA officials told us that they would also have expected to uncover any audit findings during their preaward survey conducted in March 2010; however, the 2009 audit that contained the relevant findings for the first grantee was not released until a month after USAID’s request for audits, and the grantee did not forward the report when it was released. USAID/RDMA officials stated that if they had been informed of the single audit findings, they most likely would have awarded the grant to the NGO, but they would also have requested information from the grantee about how they were addressing the audit findings. In conducting a limited transaction review of selected USAID grantees, we found that two of the three grantees incurred questionable costs because they failed to obtain USAID’s mandatory prior approval for each international trip funded by the grants. According to USAID regulations, the grantees may only charge international travel costs to the award when USAID has previously approved each separate international trip for which such costs are incurred. Under USAID regulations, prior approval means securing USAID’s permission in advance of incurring costs on restricted items, and such advance permission may be obtained by specifying items in an approved budget. According to USAID guidance, “ailure to comply with prior approval requirements generally causes USAID to deem the costs unallowable.” Although the USAID award agreements require grantees to obtain prior approval for international travel, we found that this was not always done. For example, we found that for one grantee who has completed a $4.9 million grant, USAID had approved one traveler for six international trips between Thailand and Burma. However, this grantee incurred costs for 15 trips in 2008—10 trips between Thailand and Burma and 5 trips between Thailand and other countries, including Pakistan and Japan—at a total cost of about $7,357. A grantee official told us that they did not seek USAID prior approval for the additional trips, but that they did subsequently inform USAID of the trips in their required periodic reports. For another grantee, although the USAID agreement did not authorize any international travel, a grantee official told us that four international trips totaling approximately $3,633 had been paid for under their ongoing USAID award. USAID officials told us that their practice is to review written requests that grantees submit for international travel and to grant approval if the work and travel proposed are to be performed in conformance with the award terms and sufficient funds are available. They also said that unplanned international travel can arise as a legitimate need for grantees in Burma due to the challenges in obtaining visas for non-Burmese staff. With regard to the international trips taken by the two grantees mentioned above, USAID/OFDA officials told us that they rely on some monitoring by the program staff and annual audits to detect unapproved travel; however, they said they did not approve the first grantee’s international trips we questioned. Under USAID regulations on grant administration, USAID retains the right to recover funds from its grantees for any costs charged to the grant that a final USAID audit determines to be disallowed costs. USAID/RDMA officials told us that for the second grantee, USAID approval for international trips was not necessary because they were within the budget limitations specified in the agreement for travel and transportation. However, we reviewed the agreement, noting that the travel and transportation budget is approximately $137,000; however, the agreement did not expressly specify any international travel. Therefore compliance with existing regulations, guidance, and the USAID award agreement would require USAID’s prior approval for each separate international trip. This grantee did not obtain such prior approval, and therefore incurred questionable costs that may be unallowable under its agreement. In this grantee’s agreement USAID reserved the right to an earlier recovery of unallowable costs, which includes requiring the grantee to refund the disallowed amount during the grant’s performance period. Additionally, USAID policy provides that in certain circumstances USAID may ratify the grantee’s activities by approving the disallowed international travel expenditures after the travel has occurred and the costs have been incurred. Given the difficulties in traveling to USAID-funded project sites in Burma to conduct monitoring, USAID relies on its partners’ monitoring of program activities and self-reporting to gauge program progress and to identify any issues for follow-up during their limited number of site visits. USAID told us that both the UN and NGO partners had established operations in the cyclone-affected region and had procedures for monitoring assistance. The UN agencies we reviewed told us that they had established a presence in the delta and conducted monitoring visits using Burmese local staff, supplemented by international staff site visits, as feasible. In addition, the UN agencies are subject to internal audits on a regular basis. For example: WFP relied on both its existing oversight mechanisms as well as international organizations’ staff present in the delta prior to Cyclone Nargis to carry out monitoring and oversight of its operations. According to a WFP official, these mechanisms helped the agency account for the purchase of commodities, their transport to established warehouses, and their distribution to implementing partners for distribution to affected communities. UNICEF set up five hubs throughout the delta region responsible for monitoring and oversight. In addition, UNICEF headquarters has an office of internal audit that audits each country office on a regular basis. The September 2009 audit of UNICEF’s Burma Country Office included all major areas related to operations and programs, including emergency funds. The audit did not find any problems in the way UNICEF conducts its business in Burma. UNDP reported that all of its projects were implemented at the village level, with direct implementation and supervision by UNDP project personnel and by NGOs with direct UNDP supervision. In addition, an Independent Assessment Mission is organized annually to verify UNDP compliance with its mandate in Burma. The three missions in 2008, 2009, and 2010 concluded that UNDP’s program fully complied with the mandate. In addition, UNDP has provided written assurance to State each year to certify its compliance with the following U.S. conditions: (1) UNDP’s work must focus on eliminating human suffering and addressing the needs of the poor, while providing no benefit to the Government of Burma, and (2) UNDP’s work must be undertaken only through internal or international private voluntary organizations independent of the Government of Burma and in consultation with stakeholders, including the leadership of the National League for Democracy and National Coalition Government of the Union of Burma. USAID also reported that NGOs established local offices in the delta region to oversee operations, conducting site visits with local and international staff. During our site visits with three implementing partners, we observed field-level internal controls, which are designed to safeguard funds. For example, several NGOs had cash transfer programs. To address the risk that individuals could steal or misuse funds, the organizations developed systems for documenting cash receipts and disbursements and for ensuring physical control over funds. For example, as illustrated in figure 6, one village we visited safeguarded cash by establishing lock boxes that required four assigned villagers be present to open—three key holders and the village president. Similar processes for documenting cash receipts and disbursements and ensuring physical controls were also utilized by other partners we examined. In addition, each implementing partner used methods to encourage local oversight by beneficiaries, such as forming local committees to make important resource allocation decisions and distributing transparency flyers to advertise the amount and recipients of delivered aid. In addition, one partner hired young female villagers as bookkeepers because, according to program officials, in this culture, Burmese villagers would more likely be willing to ask young females questions, as opposed to older males. Bookkeepers in two villages told us they had received several inquiries into the bookkeeping and expenditures from fellow villagers. USAID has also relied on UN and NGO partners’ required reports and informal communication to monitor progress and keep informed of issues. USAID required most NGO grantees to formally report to USAID quarterly, with some required to report semiannually. USAID requires UN partners to report based on standard guidelines in ADS for awards to public international organizations. USAID/OFDA and USAID/RDMA officials also communicated informally with grantees in Bangkok and Rangoon. Even with this communication and reporting, we found that USAID program staff still observed issues requiring follow-up during the site visit to one grantee, reinforcing the importance of USAID site visits. During our site visit, USAID staff expressed concern about the way the grantee reported program results and the possibility that the reports may not be fully accurate because the local manager may be reluctant to raise issues or problems, given the Burmese cultural norms which discourage providing negative information. USAID staff told us that they will discuss this with the grantee and possibly revise the information the grantee reports to help ensure problems are identified. USAID, State, UN, and international NGO officials said they examined all reports of potential misuse of assistance within their programs and found no evidence of misuse, although they did find that some beneficiaries sold small amounts of materials. For example, a USAID official told us that a beneficiary may sell an item, such as a USAID supplied tarp, he no longer needs in order to buy items that he does need. However, USAID officials told us this may not be a misuse of assistance as it still allows beneficiaries to obtain goods they need. USAID and DOD officials said they kept very detailed lists of all relief supplies provided. USAID said they gave these lists to U.S. Embassy staff who used them in market surveys. In these surveys, Embassy staff, including Burmese national staff, monitored local markets in the delta and Rangoon for evidence that U.S.-provided relief materials were being sold. USAID/OFDA officials also reported that branding USAID-donated goods was important for effectively monitoring assistance, as any diverted aid would be easily identifiable. In a highly publicized example of potential diversion of assistance, WFP reported that during the first week of the Cyclone Nargis response, the Burmese government airport authorities briefly took control of the contents of two flights, including 38 tons of high energy biscuits, when they landed. However, these contents were released to WFP the next day after negotiations with the Ministry of Social Welfare. Our analysis of 16 evaluative reports from NGOs, governments, and UN agencies as well as interviews with U.S., UN, and NGO officials found that organizations responding to Cyclone Nargis experienced similar challenges in four main categories: access to affected populations, coordination among responding organizations, implementation of assistance, and in-country disaster response capacity. We also identified some lessons learned to confront these, and other, challenges from these organizations’ experiences in responding to Cyclone Nargis. In analyzing the various challenges each organization reported facing in their response to Cyclone Nargis, we developed the four main categories, as well as several subcategories, to capture the similarities of challenges reported and quantify the number of times each type of challenge was reported. We then reviewed the lessons identified and selected those relevant to the overall categories and subcategories. Not all responding organizations faced the challenges reported or might find the lessons applicable. (App. IV contains additional information on the challenges and lessons learned, and app. V discusses U.S.-specific challenges.) According to the reports we reviewed, restricted access and poor infrastructure delayed assistance, limited coverage, and complicated emergency response and recovery operations for some organizations in Burma (see fig. 7). The most frequently cited challenge regarding restricted access was obtaining travel authorizations from the Burmese government, both to enter Burma and to travel around the country. The Government of Burma initially restricted foreigners from entering into Burma and required government issued authorizations for international staff to travel within Burma. Consequently, the emergency relief and humanitarian efforts became highly dependent on Burmese nationals and international staff already in Burma. These responders were often overworked and operated beyond their mandate or outside their areas of expertise. In addition, responders faced poor roads and infrastructure and high transportation costs. Many areas were only accessible by boat or by air and, given the scarcity of boats, hiring them became very difficult and air drops were too expensive. The reports we reviewed suggest that similar access and infrastructure constraints call for creative approaches to negotiating with the host country government and looking for ways to modify normal operations, such as by bringing in national staff from other countries and owning boats as opposed to trying to hire them in a market experiencing shortages and inflated prices. Our review found that coordination among donors was also problematic (see fig. 8). Difficulties in communicating between headquarters in either Bangkok or Rangoon and the field were the most commonly reported coordination challenge. As a result, occasionally decisions made at headquarters conflicted with those made in the field. Reports mentioned the physical distance between the locations and the limited, and unreliable, telecommunication services in the delta, as some of the reasons contributing to the communication challenges. Reliable internet access was generally lacking in the field, and the Burmese government restricted the importation and use of communications equipment. Another widely experienced challenge was gathering and sharing data among responding organizations. Many reports noted that shared information was often inaccurate, unreliable, and inconsistent. Some reports attributed this challenge to factors such as mistrust among organizations, poor information management practices of some groups, and a lack of commonly used and readily available reporting mechanisms or common databases accessible by all responding organizations. Lastly, USAID’s after action report on the U.S. Cyclone Nargis Emergency Response cited a challenge within the U.S. government of carrying out a coordinated response. Conflicting agendas amongst USAID, DOD, and State officials resulted in coordination difficulties related to the appropriateness, timing, procurement, and distribution of aid. USAID officials reported that, while their response was based on humanitarian needs, State and DOD also had political motives which included engagement with the Burmese government. As a result, USAID officials reported that DOD conducted air lifts for a longer period of time than some USAID officials thought was necessary, and in some cases provided aid that USAID considered inappropriate. The lessons we identified emphasize the need for installing common reporting formats for all organizations to use and improving support to the field offices, including providing more resources such as local information centers. The reports we reviewed highlighted implementation challenges, including the use of incompatible relief supplies, inappropriate targeting, and inability to monitor (see fig. 9). Many reports cited examples of donated or procured assistance supplies that were inferior in quality or incompatible with local conditions, which limited their usefulness. Examples included tents, which proved to be inappropriate given the delta’s hot and humid conditions; 5-gallon water bottles, which were heavy and difficult to transport; and medical supplies that had instructions printed only in non-Burmese languages. In addition, cultural norms and inadequate information about affected populations complicated responders’ efforts to effectively target and distribute aid. For example, some organizations based targeting decisions on the level of need of individuals; however, Burmese culture values fairness and equality, and as a result many villages would redistribute supplies to ensure all villagers received something, thereby reducing the efficacy of the organizations’ efforts to target the neediest with their aid. Lastly, the lack of trained personnel in the field, the remoteness of certain locations, or lack of government approval hindered robust monitoring and evaluation mechanisms. Strategies reported to improve effectiveness of implementation included engaging with local beneficiaries to involve them in the development of procurement, targeting, and distribution strategies. Our review found that limited emergency preparedness and response capacity in Burma exacerbated the impact of the disaster and hindered efforts throughout the response (see fig. 10). One of the most frequently cited capacity challenges was the inability to meet the high demand for technical, skilled, and experienced disaster responders. The number of staff in Burma experienced or trained in disaster relief was below what was needed. As a result, some positions had to be filled with personnel that had no previous experience and limited knowledge of humanitarian response principles, which caused delays or difficulties in carrying out the response. Also, many organizations described their interaction with local organizations in coordinated response activities as limited due to Burmese political, cultural, or capacity factors. These factors included language and cultural barriers, lack of access to electronically shared information, limited modes of transportation, and insufficient time and staff to attend coordination meetings. In addition, the response to Cyclone Nargis was hampered by weak early warning systems and disaster preparedness plans in Burma, as well as among international organizations. Lastly, emergency supply stocks and prepositioned food supplies were lacking within the country. Responders cited the improvement of in-country emergency preparedness and response capacity through personnel training and local engagement as critical. In response to the urgent humanitarian needs in Burma resulting from Cyclone Nargis, the U.S. government has obligated about $85 million for emergency response and recovery activities under difficult conditions stemming from political concerns and operational constraints. USAID has taken actions to monitor its assistance and ensure funds have been used as intended and did not benefit sanctioned entities. Given USAID’s limited ability to visit project sites in Burma, actions such as conducting more comprehensive financial oversight, documenting site visits, and communicating past audit findings become even more important to help ensure funds are used for intended purposes. The fact that single audit reports are issued several months after the end of an entity’s fiscal year, further supports the need for current, on-going financial monitoring. Periodic reviews of grantee internal controls together with a review of some of the grantee’s disbursement transactions and supporting documentation would strengthen USAID’s financial oversight and help ensure compliance with the terms of the grant agreements, including compliance with international travel requirements. Reviewing questionable costs for international travel under the completed and ongoing grants could enable USAID to recover any costs that USAID determines to be unallowable. Documenting site visits, as required by USAID policy, provides a record that can be particularly useful when program staff change. By including relevant and sufficient detail, these documents create a historical record on which future monitoring and grant award decisions can be based. Finally, better communication of single audit findings among the USAID offices would ensure that program staff become aware of important issues they should pursue when monitoring assistance. We recommend that the Administrator of USAID direct the appropriate mission and offices to improve management of grants related to Burma by taking actions, such as: enhancing financial monitoring of agreements by including periodic reviews of grantee internal controls, transactions, and disbursement records; providing grantees with specific guidance on the approval process for international travel requests, and ensuring that USAID staff monitor grantees’ expenditures for compliance with related laws, regulations, and grant agreements, including international travel; reinforcing the requirement for staff to formally document site visits to grantees; and ensuring all relevant offices are made aware of audit findings in a timely manner. We also recommend that the Administrator of USAID direct the appropriate mission and offices to follow-up on the questionable costs associated with international travel that we identified in this report and take action as appropriate on any identified unallowable costs. USAID and DOD provided written comments on a draft of this report. We have reprinted their comments in appendixes VI and VII. These agencies, along with the Departments of State and the Treasury and the UN Country Team in Burma, provided technical comments and updated information, which we have incorporated throughout this report, as appropriate. USAID, the agency to which we directed our recommendations, concurred with our recommendations. USAID said that financial monitoring is critical and that financial reviews should be enhanced as allowable given regulatory and operational limitations. They also said that existing guidance in USAID awards should be adhered to and enforced and USAID’s ability to conduct preawards surveys and timely audits should be enhanced. USAID also recognized the importance of documenting oversight while noting that in disaster response environments, the main focus is on life-saving and life-sustaining activities. USAID agreed that relevant offices and officials should be aware of adverse audit information given their monitoring responsibilities. USAID also agreed to conduct appropriate follow-up actions with the grantees on questionable costs associated with international travel that we identified. In addition, USAID commented on our characterization of their actions to ensure funds were used as intended, as well as the evidence that assistance had not been misused. We made changes consistent with the information we obtained. We are sending copies of this report to interested members of Congress; the Administrator of USAID; the Secretaries of Defense, State, and the Treasury; the UN Country Team in Burma; and relevant NGOs. The report is also available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-9601 or [email protected]. 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 describe assistance provided by UN and U.S. agencies in response to Cyclone Nargis, we reviewed documents, including grants, cooperative agreements, and progress reports, from UN agencies, the U.S. Agency for International Development (USAID), Department of Defense (DOD), Department of State (State), and nongovernmental organizations (NGO). We also interviewed United Nations (UN), U.S., and NGO officials in Washington, D.C.; Bangkok, Thailand; and Rangoon, Burma; and conducted site visits to select USAID-funded recovery projects in Burma. The team obtained the data for UN agency assistance to Burma from the UN Office for the Coordination of Humanitarian Affairs (UN OCHA) Financial Tracking Service. We report UN agency obligations. In assessing this data we found that the service data are reported by donors and appealing organizations. UN OCHA reported that they cross-check and reconcile the data to ensure there is no duplicate reporting of funding and to verify the accuracy of the numbers reported. The tracking service makes efforts to collect and report all humanitarian assistance. However, the service guarantees only that suitable humanitarian funding information sent to it will be posted; it cannot guarantee that it will find and record information not sent to it. Given this limitation, it is possible that we may have underreported total assistance obligated through UN agencies. Overall, through our review of UN OCHA procedures for capturing and reporting the data, we found the data sufficiently reliable to report on obligations as compiled by UN OCHA. We obtained data on U.S. obligations from USAID and DOD. For USAID obligations, we verified these data against the underlying agreements and found the data to be sufficiently reliable to report on total assistance obligated by the Office of Foreign Disaster Assistance, Regional Development Mission for Asia, and Food for Peace. For DOD obligations, we interviewed officials on their process for recording and reconciling expenses and found the total amount of assistance reported by DOD to be sufficiently reliable for our purposes. To assess USAID actions to help ensure funds were used as intended and did not benefit sanctioned entities, we reviewed program and financial files for funds USAID awarded in response to Cyclone Nargis and spoke with USAID officials about their monitoring of programs. The documents we reviewed included grants and cooperative agreements awarded for Cyclone Nargis response activities, progress reports, and Department of the Treasury Office of Foreign Assets Control licenses. We also conducted a limited internal controls review of three NGOs, which collectively account for 66 percent of funding that USAID awarded to international NGOs to respond to Cyclone Nargis. We also met with officials from these three NGOs and with USAID officials responsible for financial oversight of the NGOs’ programs. In choosing the three NGOs to review, we selected those organizations that had ongoing recovery activities in response to Cyclone Nargis, in addition to having conducted emergency response and relief activities. This risk-based approach to grantee selection allowed us to examine the evolution of oversight by USAID from the immediate aftermath of Cyclone Nargis to the current recovery phase, more than 2 years later. The three organizations that met these criteria received multiple USAID awards beginning in 2008 to conduct emergency relief operations, such as distribution of commodities, as well as to conduct recovery work, such as rehabilitating markets and reconstructing sanitation facilities. For our limited internal controls review of these three NGOs, we interviewed grantee officials, reviewed single audit reports; and performed detailed reviews of transactions. We also tested certain grantee expenditures. We reviewed supporting documentation for selected grantee expenditures for sufficiency, compliance with laws, regulations, and grant agreements, as well as appropriateness. While we identified some questionable expenditures, our work was not designed to identify all improper or questionable expenditures or to estimate their extent. To report on the challenges and lessons learned from the Cyclone Nargis emergency response, we reviewed relevant evaluative reports from U.S. government and UN agencies, and NGOs involved in the response. We selected 16 reports for content analysis based on their methodology. Specifically, the reports needed to outline reasonable methods for collecting data—such as surveys and interviews with responders—and a process for filtering this information prior to reporting. The reports offer a range of scope and content. While some reports evaluate a specific organizational response, others include the efforts of and information from several organizations. Some reports focus on the early months of the response, while others evaluate efforts up to almost two years after the onset of the emergency. Table 1 lists the reports we included in our review. Once we selected reports that met the above criteria, two analysts separately identified challenges and lessons learned cited within each document. We defined “challenge” as any significant obstacle that hindered a specific response effort. We defined “lesson learned” as any successful or promising approach derived from a Cyclone Nargis response that could enable actors to overcome challenges or improve efforts in future emergencies. Furthermore, a “lesson” must be derived from a common or well-proven response experience and address Burma’s unique political, social, or environmental circumstances. After the two analysts independently identified reported challenges and lessons based on these criteria, they compared the results and reconciled inconsistencies. A supervisory analyst reviewed their work. We also gathered information on challenges and lessons from interviews with the previously mentioned responding organizations. We used this input to substantiate data gained from the document review, as well as supplement it with information that was not previously reported. For reporting purposes, once all the challenges were identified, we tallied each under broad categories and subcategories that summarized the similarities amongst the various challenges being reported. These categories and subcategories were developed by us based on an analysis of the challenges identified as well as our experience from previous disaster assistance work. Similarly, we reviewed the lessons we identified from the various reports and selected relevant lessons that address the subcategories of challenges we identified. Not all responding organizations faced the challenges reported or might find the lessons applicable. We did not assess the feasibility of implementing the lessons learned. We conducted this performance audit from July 2010 to July 2011 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. Table 2 describes the overall mission of each UN agency that provided aid after Cyclone Nargis, as depicted in figure 3. The U.S. government funded emergency humanitarian assistance for townships in Burma damaged by Cyclone Nargis. As shown in figure 11, the townships of Bogale, Labutta, and Mawlamyinegyun received the most extensive range of assistance, covering at least five of the seven relief sectors the U.S. funded. Our analysis of 16 evaluative reports from NGOs, governments, and UN agencies found that organizations responding to Cyclone Nargis experienced interconnected challenges and developed lessons learned in four categories: access to affected populations, coordination among responding organizations, implementation of assistance, and in-country capacity. In analyzing the various challenges each organization reported facing in their response to Cyclone Nargis, we developed the four main categories, as well as several subcategories, to capture the similarities of challenges reported and quantify the number of times each type of challenge was reported. We then reviewed the lessons identified and selected those relevant to the overall categories and subcategories. Not all responding organizations faced the challenges reported or might find the lessons applicable. According to 13 reports, the time needed to gain access to affected populations delayed assistance and complicated logistics. The Government of Burma restricted foreigners from entering into and traveling within Burma. Furthermore, many responders had to negotiate with government authorities to operate in affected areas. Consequently, the response became highly dependent on nationals and those already in Burma. These responders and others who gained access were often overworked and operated beyond their mandate or outside their expertise. Eight reports described transportation obstacles as further restricting access. Responders faced poor roads and infrastructure, high transportation costs, difficult climatic conditions, and remote affected areas. Only one report cited the challenge of donor imposed restrictions, which prevented access to local authorities, limiting meaningful coordination and capacity-building. This challenge was, however, cited in several interviews with implementing partners. Some partners described restricted access to health workers, teachers, and technical experts as particularly cumbersome. One UN Development Program (UNDP) official stated that U.S. restrictions significantly hindered the effectiveness of its development work in Burma. The inability to coordinate with Burmese government officials created difficulties for the USAID disaster assistance response team, one Office of Foreign Disaster Assistance (USAID/OFDA) official said. The analyzed reports suggest that similar restricted situations call for creative approaches to negotiating with the Government of Burma and operational flexibility, such as the following: According to the Association of Southeast Asian Nations (ASEAN), the Tripartite Core Group was “an innovative example of a body that ASEAN and other regional associations around the world could replicate in response to future emergencies.” According to the UN Children’s Fund (UNICEF), although they generally experienced good working relationships with the Government of Burma, some negotiations were necessary. Discussions to gain access required skilled negotiation with support from Burmese nationals. UNICEF brought in their Burmese staff working in other country offices because they did not require entry visas and internal travel permits, whereas their foreign counterparts did. If a similar situation arises, the Protection of Children and Women Cluster recommends exploring alternative coordination methods to engage local actors that do not have Burmese government authorization to operate, without putting them at risk. For example, during the Cyclone Nargis response UNICEF was the only organization with a formal agreement with the Ministry of Education to carry out emergency education activities. The UN agency included other relevant actors in education activities through the cluster system. According to one NGO, the cluster system was initially effective in organizing responders, but geographical (rather than sectoral) clusters would have been more appropriate, given the restrictions on access and the inability of some organizations to reach affected populations. Boats and helicopters helped to overcome ground transportation obstacles and reach remote villages. However, boats were in scarce supply and difficult to hire. For more effective future responses, one report suggests that organizations could own or rent boats on a monthly basis. Coordination was somewhat difficult between headquarters (either in Bangkok or Rangoon) and provisional field offices, according to 12 reports. Problems stemmed from limited telecommunication services, the isolation of and weak leadership at field offices, unclear division of responsibility between headquarters and the field, and poor understanding of how information should be communicated from the field back to headquarters. Ten reports described poor information management and issues related to data gathering as obstacles to coordinating, planning, or monitoring. Difficulties stemmed from limited baseline data on affected populations at the onset of the emergency, weak assessment structures and capacities, and the restrictive political context. These problems were exacerbated by some organizations’ hesitancy to share information and a lack of commonly used and readily available formats and databases for data exchange. Many reports noted that shared information among responding organizations was often inaccurate, unreliable, and inconsistent. Communication among responders was also hindered by limited telecommunications (radio, telephone, and Internet services) and government restrictions on the importation and use of certain communication equipment. Internet access at field locations was particularly problematic. Six reports found that coordination among international humanitarian organizations lacked coherence. These reports cited reasons such as high turnover of cluster leadership, weak strategic planning and guidance, and poor coordination of assessment and distribution activities. The lessons we identified below emphasize the need for clearer guidance on responsibility, increased support for field staff, and common reporting formats: Coordination of future response activities could be improved with the use of statements of intent that clearly define each actor’s role. The Emergency Shelter Cluster Review advocated for the replication of the “Bangkok-Yangon decision-making model” in similar emergency events, in which those outside the country provide logistical support and field offices have decision-making authority over operational matters. According to ASEAN, field offices were “indispensable” in providing strategic direction and facilitating coordination. To improve coordination between the field and headquarters, one report recommends establishing local resource centers and NGO liaison officers at field locations. Another report noted that increasing visitation and technical advising from Rangoon to the field would be helpful. Analyzed reports described the Myanmar Information Management Unit and cluster managed resources—including update documents, Google Group networks, and maps—as useful approaches to information management. However, the responsibilities of cluster information managers need to be expanded, including increasing coordination with the UN Office for the Coordination of Humanitarian Affairs reports officer and the UN Communications Group. Reports described the need for common reporting templates and information management tools to improve the consistency and reliability of shared information. Some shortsighted decisions by responders and Burma’s highly restrictive operating environment hindered the effectiveness of some response activities. Ten reports cited examples of assistance supplies that were inferior in quality or incompatible with local conditions, which limited their usefulness. Examples included tents, food, water treatment and filtration systems, information technology equipment, building materials, and fishing boats. Multiple reports and interviews identified U.S.-donated bottled water, tarpaulins, and medical supplies as particularly problematic. For example, DOD-procured water bottles were heavy and difficult to transport and medical supplies had instructions printed in non-Burmese languages. Generic packages, such as the Red Cross’s shelter toolkit and the UN Food and Agriculture Organization’s fishing gear, needed revision to meet the needs of local practices. Multiple reports credited local dissatisfaction of some aid commodities to poor participatory consultation and limited local procurement. According to 10 reports, effective targeting and distribution of assistance was obstructed by political, logistical, or organizational capacity factors. Inadequate information about affected populations, logistical obstacles in reaching remote areas, and time and staff constraints complicated responders’ efforts. The Burmese practice of redistribution within communities limited the efficacy of targeting: many Burmese communities would decide who received aid based on principles of fairness rather than need. Carrying out protection programs was also challenging in Burma, given the political sensitivity associated with individual rights. The Protection of Women and Children Cluster found it difficult to advocate for the inclusion of women and children in high-level strategy and planning. Coordinating the transition between relief and early recovery activities was also problematic. Donors’ focus on food and water distribution in the first months of the emergency delayed the initiation of and support for livelihood and economic recovery activities. According to UNDP, failing to target “medium to big farmers” exacerbated unemployment among the landless poor who depended on farmers for income. Interviews we conducted with NGOs confirmed weaknesses in livelihood responses, but also highlighted the same for shelter recovery. Six reports found that procuring commodities in Burma was difficult due to factors such as inadequate supply and quality, lack of registered suppliers, and government-controlled supply chains. Implementing partners also told us the restricted banking system was a challenge, along with a declining exchange rate (with respect to the dollar), which made materials more expensive. Contrastingly, international procurement was costly and subject to Burmese government restrictions and approval. An interview revealed that USAID’s food aid shipped from the United States took up to 3 to 5 months to reach Burma. Monitoring, evaluation, and oversight mechanisms were limited in Burma. Three reports cite such contributing factors as the overall restrictive environment, remoteness of affected areas, inadequate staff capacity, and limited resources of local authorities. In one interview, an implementing partner explained that Burmese staff are reluctant to report bad news, which is an obstacle to reporting fraud or misuse. The analyzed reports presented various strategies to improve the effectiveness of assistance through specific implementation efforts, such as the following: Reports described local procurement, incorporation of traditional practices and robust local engagement as strongly contributing to beneficiaries’ satisfaction with assistance. UNICEF’s water, sanitation, and hygiene division balanced this goal with the need to respond quickly by importing expensive goods only while local, low-cost solutions were being created. Reports cited rainwater harvesting, ceramic water filters, and earthenware water storage as successful local solutions. The Red Cross found that bamboo and timber shelter kits were better accepted than generic versions. With regard to fishing gear kits, FAO recommends supplying materials that can be used by beneficiaries to construct gear to meet their own requirements. Furthermore, nonlocal varieties of seed and livestock should only be distributed if local counterparts are not available. Because tents are inappropriate in Burma, UNICEF recommends developing and propositioning a “semi-permanent school kit” or temporary spaces that could be used as schools capable of withstanding the Burmese climate. Economic recovery should be identified and initiated as soon as possible after a disaster, with improved coordination of livelihood strategies between the Agriculture and Early Recovery Clusters. According to Save the Children, cash distribution and in-kind grants, such as those distributed through their Livelihood Quick Impact Project, were effective in promoting early recovery. In situations where markets were functioning, UNDP found that cash grants and cash-for- work were more effective than in-kind assistance. Targeting efforts should factor in the Burmese tradition of equity that underlines redistribution. FAO recommends engaging communities in discussions of aid and allowing them to decide how it should be distributed in a transparent way. The Protection of Children and Women Cluster Review describes the established Vulnerability Network as a creative response to the challenging operating environment in Burma prior to Cyclone Nargis but also states the need for a broader protection cluster to address remaining protection gaps. Analyzed reports also emphasized the need for improved procurement resources and processes, such as local market assessments, “preferred supplier” relationships for key commodities, and joint buying agreements. One report stated that a scheme like World Concern’s Joint Procurement Initiative is potentially useful but only if initiated at the onset of the emergency. Technical field officer positions helped facilitate monitoring and interaction with implementing partners during the Cyclone Nargis response. One report recommends further building community-level capacity for monitoring. UNDP claims that at this level “diverse and representative membership,” robust accountability systems, and a culture of transparency are essential to preventing mismanagement of assistance. In an interview, one USAID official stated that clear branding of donated goods was the key to effective monitoring in Burma. According to 13 reports, a limited number of experienced personnel and technical specialists in-country had difficulty meeting all response needs. The inexperience of some cluster coordinators created delays and complications in the field. While local responders were generally better accepted by local citizens and government authorities, they generally had limited capacity and experience. Seven reports describe local engagement in coordinated response activities as limited, due to Burmese political, cultural, or capacity factors. These factors included language and cultural barriers, lack of access to electronically shared information, limited modes of transportation, and inadequate time and staff to attend cluster meetings. Local responders without formal operating agreements with the Government of Burma often censored their input, which limited participation at cluster meetings. International organizations noted time pressure, limited access to affected populations, and lack of confidence in local capacity as obstacles to engaging local actors. The response to Cyclone Nargis was also hampered by weak early warning systems and disaster preparedness plans at all levels—local, national, and among international organizations. In addition, emergency supply stocks and prepositioned food supplies were lacking within the country. Responders cited the improvement of in-country emergency preparedness and response capacity through personnel training and local engagement as critical. The following are recommendations culled from the reports that we analyzed. Many reports emphasize the need to build local capacity and better incorporate national actors into contingency planning and cluster activities. Standby arrangements with skilled personnel with humanitarian and remote management experience could be established by organizations operating in Burma. This should include a roster of local actors involved in the Cyclone Nargis emergency response who receive capacity training that is updated periodically over the long-term. One report recommends prioritizing local capacity- building in areas now under the responsibility of expatriates. Recommended strategies to improve local engagement included: training facilitated through learning resource centers in the field; appointing local counterparts for cluster leadership, such as information managers; providing Burmese translation at cluster meetings and for key documents; and developing alternatives to electronic information sharing. Engaging and gaining the buy-in of local authorities and other government actors (i.e., medical, education, and development affairs officers) is also key to facilitating local participation. A database of in-country information technology and communications support, suppliers, warehousing, and transportation providers would also be helpful. One implementing partner said that prepositioning relief supplies was essential, and noted the usefulness of doing so before Cyclone Giri hit Burma in 2010. The partner further suggested establishing reserve warehouses in Southeast Asia. In responding to Cyclone Nargis, U.S. agencies experienced numerous challenges including Burmese restrictions on access to affected areas; U.S. legal restrictions; and difficulties coordinating, planning, and staffing activities. USAID issued recommendations to address the lessons learned from many of these challenges. U.S. officials said Burmese government restrictions that limited their entry into Burma and access to Cyclone Nargis-affected areas constrained their response, limited their ability to assess needs, and made it difficult to monitor aid delivery. The Burmese government granted visas to disaster assistance response team members slowly and incrementally; with only 7 of 10 team members eventually granted visas. Once in Burma, the team faced various travel restrictions and administrative barriers to providing relief, according to a team official. The official stated that he had to notify the Burmese government 4 days ahead of time to receive their approval for a flight carrying relief commodities to land. He also had to provide a manifest of the commodities and persons on board four days in advance and to work with local partners to ensure they would be available to offload the supplies as the airplanes landed. Further, the Burmese government sometimes denied travel permits for USAID and other officials and set up numerous checkpoints in the early days of the response. The team also had to tap a wider breadth of resources to assess the extent of damage and need for supplies. USAID officials said that obtaining permission to travel to the Cyclone Nargis- affected areas remains difficult. They said that while the Burmese government typically grants access, the level of uncertainty surrounding when they will grant the access makes it difficult to monitor aid delivery on short-term notice, limits the number of site visits they make, and precludes them from properly planning monitoring visits. These officials said they would like to visit Burma and project sites whenever they want to monitor implementation. USAID officials also said that U.S. restrictions limiting their ability to work with the Burmese government made it difficult to coordinate U.S. response and recovery activities. USAID/OFDA officials told us that typically the disaster assistance response team is able to work with the national government to coordinate a response. This was not the case in Burma and it created difficulties for the team. USAID officials told us that the restrictions on whom the United States can work with were a significant constraint and made it difficult to develop recovery programs. For example, in many villages midwives (who are government employees) are the only source of healthcare; therefore, not working with them makes it very difficult to improve health conditions in these villages. Some of USAID’s implementing partners, including UNDP, said this constraint limited the effectiveness of their programs, especially in the areas of health and emergency preparedness, as they were not able to engage with key personnel. Some partners described restricted access to health workers, teachers, and technical experts as particularly limiting given the importance these officials have in their sectors. One NGO cited a reluctance to accept USAID funding given the constraints it would place on that organization’s activities. USAID’s after action report and our interviews with U.S. government officials revealed that U.S. agencies struggled to carry out a “whole of government” response. USAID said that while their response was based on humanitarian needs, State and DOD also had political motives which included engagement with the Burmese government. Conflicting agendas resulted in coordination difficulties related to the appropriateness, timing, procurement, and distribution of aid. One USAID/OFDA official reported that once U.S. and international responders were allowed into Burma, competing priorities among U.S. agencies strained the response to Cyclone Nargis. USAID officials stated that in their opinion, DOD did not procure the commodities needed in Burma. For example, a company in Thailand produces mosquito nets that meet international standards. USAID asked DOD to buy nets from this provider. DOD originally agreed to do this but then later denied the request. They stated that the nets were not dense enough to fill the airplanes to capacity. Instead DOD provided items such as 5-gallon water bottles, which USAID stated are inappropriate for a number of reasons, including that people cannot transport them easily. The USAID officials stated that it was clear that DOD had different goals than USAID in providing assistance to Burma. A DOD official reported that all decisions on goods transported were made after consultations with DOD, State, and USAID officials. A State official reported having significant input on the decision to provide 5-gallon water bottles, as these goods had little risk of being misused. USAID/OFDA officials told us that three USAID teams had to communicate effectively to conduct USAID’s response—the response management team in Washington, D.C.; USAID/OFDA in Bangkok, Thailand; and disaster assistance response team in Burma—complicating communication efforts. USAID’s after action report also cited numerous challenges related to information management. These included difficulty in communicating with the disaster assistance response team due to geography, limited available communication systems, and a lack of systematic reporting. The report also cited difficulty in tracking commodities because USAID/OFDA headquarters and the assistance response team used different tracking systems. USAID/OFDA headquarters used the standard USAID tracking tools, while the assistance response team had to use DOD tracking mechanisms. As part of their after action report, USAID/OFDA issued numerous priority recommendations to address their communication and coordination challenges. For example, the report recommended developing a standardized commodity tracking system and setting up email accounts by position, not person to address challenges related to managing information. It also recommended developing an overall outreach strategy to raise USAID/OFDA’s visibility and get information on USAID/OFDA’s mandate, mission, and role as lead federal agency for foreign disaster response to key decision makers in other agencies, Congress, and partners in part to address the challenge of coordinating with DOD. USAID/OFDA reported that as of July 2011, it had implemented or was implementing each of these recommendations. For example, USAID/OFDA designed and implemented a formal in-kind grant agreement to facilitate better commodity tracking. In addition, USAID/OFDA is working on a video and resource kit for USAID/OFDA regional advisors and team leaders to use with senior U.S. officials in disaster-affected countries. U.S. agencies reported challenges related to the planning and delivery of assistance as well. According to USAID’s after action report, planning processes and products recently instituted for better response decision making were not well understood and did not meet needs. Some respondents noted a disconnect between planning and the flow of day-to- day work. Others noted difficulty understanding the purpose and timing of the Response Action Plan, a key planning document, stating that other tools were developed to track pending actions. Recommendations to address these challenges included a system for tracking day-to-day tasks in the planning process that may change more frequently than the response plan. Also it was recommended that USAID/OFDA’s senior management team define the goal for the first response action plan in the disaster assistance response team activation meeting. Subsequent goals should be defined in the planning meetings and conference calls. As of July 2011, USAID reported that it had implemented these recommendations. U.S. agencies also experienced staffing difficulties in responding to Cyclone Nargis. USAID’s after action report stated that staffing of response management teams and disaster assistance response teams were inconsistent and in some cases inadequate for the mission. Staffing seemed inequitable among the necessary field functions—over staffing some sectors, such as military liaison, and under staffing other important sectors, such as logistics. Also, USAID did not always follow staffing guidelines in response management policy and procedures, such as assigning staff with the necessary skills. Finally, due to the high demand for the limited number of specialists with specific needed skills, such as health and shelter, USAID/OFDA had difficulty finding technical specialists to meet all field needs. As a result, USAID/OFDA reported not having sufficient representation within all relevant sectors in the UN clusters, including the water, sanitation, and hygiene; shelter; and health clusters. USAID developed the following recommendations to address the staffing challenges: The disaster assistance response team staffing process must be strategic, systematic, and deliberate. The team should drive field staffing requirements. USAID/OFDA should seek to expand the number of technical specialists available for field assignments at both the strategic and operational levels. Technical input within the UN cluster process must be early in order to influence the overall direction of the response. To the extent possible, USAID/OFDA should not put technical people in nontechnical roles, because it further reduces the number of available specialists when needed. USAID reported that as of July 2011, it had implemented the first recommendation on the staffing process and was working on the other two recommendations. They stated that USAID/OFDA has worked aggressively to supplement staffing in key technical functions. This effort has included adding full time staff in areas such as health, nutrition, and shelter. 1. We acknowledge that USAID faced numerous constraints in conducting monitoring, and we recommend steps USAID can take to enhance oversight. We deleted the word “some” from before “actions.” Regarding the statement in our draft report that “U.S. and UN agencies said that they found little evidence that assistance had been misused,” USAID said no misuse of resources has been encountered. They requested that we change the word “little” to “no”, which we have done consistent with the information we obtained. They suggested we report that “there is no evidence that United States Government (USG) resources went to sanctioned entities”; however, this conclusion is beyond the scope of our report. 2. USAID requested we clarify that, with the exception of international travel, we found no evidence of expenditures not compliant with related laws, regulations, and grant agreements in USAID programs in Burma. Our report discusses the questionable costs we identified from the selected transactions we reviewed. Our work should not be generalized to cover all USAID expenditures. Cheryl Goodman, Assistant Director; Michael Maslowski; Bonnie Derby; Ranya Elias; Elizabeth Guran; Kimberly McGatlin; Susan Ragland; Kai Carter; Ashley Alley; Sada Aksartova; David Dayton; Martin de Alteriis; Lauren Fassler; Will Horton; Etana Finkler; and Jena Sinkfield made key contributions to this report. | Cyclone Nargis hit Burma's impoverished Irrawaddy Delta on May 2, 2008, leaving nearly 140,000 people dead or missing and severely affecting about 2.4 million others, according to the UN. The Burmese military government initially blocked most access to the affected region; however, amid international pressure, it slowly began allowing international aid workers entry into the region. Since 1997, the United States has imposed sanctions to prohibit, among other things, the exportation of financial services to Burma and transactions with Burmese officials. In response to a congressional mandate, GAO (1) described the assistance UN and U.S. agencies have provided in response to Cyclone Nargis, (2) assessed USAID actions to help ensure funds are used as intended and do not benefit sanctioned entities, and (3) described the challenges responders experienced and the lessons learned. GAO reviewed financial and program documents; interviewed U.S., UN, and nongovernmental organization (NGO) officials; and traveled to Thailand and Burma. UN and U.S. agencies provided about $335 million for emergency response and recovery activities after Cyclone Nargis. Of that total, 11 UN agencies obligated roughly $288 million for assistance in various sectors, including food, health, water and sanitation, and agriculture. The U.S. government provided about $38 million of the UN's total as part of its roughly $85 million in obligations for emergency response and longer-term recovery activities. Of the $85 million U.S. response, the U.S. Agency for International Development (USAID), which led U.S. efforts, obligated about $72 million. The Department of Defense obligated about $13 million to procure and deliver emergency relief supplies. USAID took actions to help ensure U.S. funds were used as intended and did not benefit sanctioned entities, but had some monitoring weaknesses. USAID took actions prior to the delivery of assistance, including selecting partners experienced in working with USAID and in Burma and providing extra guidance to help ensure funds were not misused. To monitor assistance, USAID has conducted some site visits. However, USAID's monitoring contains little financial oversight and we found that two grantees charged USAID for unapproved international travel. Also, in some cases site visits were not sufficiently documented. USAID relies on external audits of grantees, but relevant USAID staff were not aware of audit findings related to one grantee's cash payments to villagers in Burma. The grantee subsequently addressed the audit findings. Lastly, U.S. and UN agencies said they examined reports of misuse of assistance in their programs and found no evidence that assistance had been misused. GAO's review of 16 after-action reports from donors, NGOs, and UN agencies, showed that those responding to Cyclone Nargis experienced similar challenges and developed lessons learned in four main areas: access, coordination, implementation, and limited in-country disaster response capacity. Responders found it difficult to reach affected areas because the Burmese government limited their travel and the infrastructure was poor. Responders also had difficulty coordinating between headquarters and field offices for several reasons, including limited telecommunication services. A U.S. report highlighted coordination challenges amongst U.S. agencies, stating that agencies' conflicting agendas resulted in difficulties related to the appropriateness, timing, procurement, and distribution of aid. Implementation challenges include supplies that were incompatible with local conditions, such as medicines with instructions printed in non-Burmese languages and difficulties monitoring aid. Capacity challenges included a lack of experienced disaster specialists in Burma, which resulted in nonqualified individuals being placed in positions out of necessity. To address some of these challenges, reports suggested that organizations increase support staff and use the same reporting systems. Other reports prioritized involving local communities in decision making and improving emergency preparedness and local response capacity. GAO recommends that the Administrator of USAID (1) take four actions to improve the management of grants related to Burma, including enhancing financial monitoring and reinforcing the requirement to document site visits, and (2) review the questionable costs for international travel GAO identified. USAID concurred with GAO's recommendations. |
Without accurate and timely accounting, financial reporting, and auditing, it is impossible to know how well or poorly IRS has performed in certain facets of its operations such as tax collections. In addition, IRS’ management and the Congress’ ability to make informed decisions that are “fact based” is substantially hindered when the underlying information that provides the basis for decisions is called into question or when fundamental information is lacking. Our efforts to audit IRS accounting records have resulted in disclaimers of opinion each year. This means that we were unable to determine whether the amounts reported by IRS in its financial statements were right or wrong. Financial reporting at this level and auditable financial statements, as required by the CFO Act, are fundamental tenets of effective financial management. Our disclaimer of opinion means that you do not know whether IRS correctly reported the amount of tax it collected in total, how much money IRS has collected by type of tax and on accounts receivables, the cost of its operations including tax systems modernization (TSM), or any other meaningful measure of IRS’ financial performance. In essence, poor accounting and financial reporting, especially when combined with the absence of an audit, obscures facts. As a result, users of information reported or taken from the underlying accounting systems, risk making errant decisions—whether for budget purposes or operationally—because they relied on questionable information in making decisions. Four of the more significant reasons IRS needs good financial management are to provide for its day to day operations basic accounting that meets the minimal financial management goals of the CFO Act for financial reporting, implement effective internal control procedures—including safeguarding of assets, and ensure IRS’ compliance with pertinent laws and regulations—for example, the Anti-deficiency Act and others related to budget integrity; ensure accurate accounting for and reporting of revenue collections in compliance with the law and help the Congress and others assess the impacts of various tax policies on the budget and to offer accountability to the American taxpayer; better assess and improve IRS’ operating performance; and improve its image as a fair tax collector that holds itself to the same or higher standards than it applies to the taxpaying public. Over the 4 years that we have performed financial statement audits at IRS, IRS has moved from an agency that did not and could not reconcile its fund accounts (Fund Balance With Treasury), akin to a taxpayer’s bank account, to an agency that now attempts to reconcile its accounts regularly even though some unresolved amounts still exist and an agency that could not support the propriety of amounts recorded in its accounting records or that they were recorded in the right accounting period to an agency that has developed and is implementing a strategy that if properly carried out, should be able to accomplish both. If IRS does not achieve and sustain the capacity to perform day to day accounting on its over $7 billion in annual appropriations and the more than $1.4 trillion in taxes it collects, it will not be able to credibly report on the cost and effectiveness of its operations. Furthermore, like any other business or individual that may have similar problems, IRS can assert that no money is missing and that it is in compliance with the Anti-Deficiency Act and other laws; however, if these problems persist, it cannot and does not know if its assertion is true. The following example shows the implications of poor accounting and financial reporting for IRS’ day to day operations. In recent years, IRS has reported the costs of TSM along with projected future costs. However, IRS does not know what its TSM costs have been in total or by specific project. Its efforts to achieve cost accounting for TSM obscure the nature and amount of actual costs of TSM projects through grouping large amounts of costs into generic codes as opposed to tracking these costs on a project specific basis. In addition, no separate records were maintained on TSM costs incurred before 1994. Also, IRS cannot readily link costs projected to be incurred in IRS’ investment strategy with costs that are recorded in its accounting records. To do so would require substantial analysis that would likely require using estimating techniques for which results could not be validated. Thus, no credible records exist to make cost-benefit analysis of the overall project or to assess each project segment as it moves through various stages. In addition to day to day accounting and reporting, IRS’ ability to accurately account for and report tax collections is critical to the Congress, the federal government as a whole, and the American taxpayer. IRS’ inability to account for tax collections in total and by type of tax collected reduces the Congress’ and others’ ability to (1) fully assess the effectiveness of tax policies to achieve their intended goals, (2) know the amount the general revenue fund is subsidizing the Social Security Trust Fund, (3) determine whether excise taxes are being collected and distributed in accordance with legislation, and (4) assess IRS’ collection efforts on unpaid taxes. While IRS is making interim efforts to increase its capability to account for tax collections, longer term solutions will be needed before IRS will be able to provide this information in an accurate and timely manner. The following example shows the implications of poor accounting and reporting for tax collections. In recent years, IRS has reported collections against accounts receivables of about $25 billion annually. However, IRS cannot reliably report cash collections on accounts receivable, and the amounts reported are estimates. IRS’ financial management system does not include a detailed record of debtors who owe taxes (a subsidiary accounts receivable record) that tracks these accounts and their related activity from one reporting period to the next. As a result, IRS has to employ sampling techniques to project estimated collections on accounts receivable. The lack of a detailed subsidiary record also severely hampers the ability to readily and reliably assess the performance of IRS’ various collection efforts because reliable information on accounts receivable activity from one period to the next is not readily available. The ability to account for day to day operations and tax collections accurately is the foundation for any efforts to assess and improve IRS’ operational performance. Even though IRS reports that it collects over $1.4 trillion in taxes and processes billions of documents including tax returns, refunds, correspondence, and the manifold other things it does as part of its tax administration mandate, this reporting does not tell you how well it did it or the cost effectiveness of operations. Good financial management would include developing a cost accounting system that accurately tracks the costs of each part of IRS’ operations. In addition, the related outcomes from operational improvement efforts, including additional revenue collected and other qualitative performance indicators, would be accounted for and linked to the respective operational costs associated with accomplishing the outcomes. Right now, IRS does not have the capacity to account for its costs and outcomes in a manner consistent with good financial management. The following example shows the implications of not having good financial management accounting and reporting in place. IRS reported, as part of its compliance initiative budget requests, that it would achieve certain levels of return in collecting unpaid taxes with the additional funding. These requests typically showed past performance from compliance initiatives and projected future collections expected from the proposed compliance initiative. They also typically showed that a substantial return on investment had been and would be achieved from compliance initiatives. IRS’ financial management systems, however, cannot reliably provide information that links cash collected on tax accounts with its respective programs used to collect unpaid taxes and the program’s related costs, including those supported by its compliance initiatives. As a result, the information provided as IRS’ performance from compliance initiatives was prepared using estimates, selective analysis of information, and unvalidated criteria. We found that the reported incremental collections and the associated costs were not verifiable. IRS currently has a system under development (called the Enforcement Revenue Information System) that will attempt to track and correlate this information. Finally, IRS needs to have good financial management to show that it does not have a double standard for financial management—one that taxpayers must adhere to and another that applies to itself. If IRS had to prepare its own tax return, with the many problems we have found during our financial statement audits of IRS, it would not pass the scrutiny of an IRS audit. Many of its expenses would be disallowed because they were unsupported or reported in the wrong year, and the amounts and nature of its revenue would be questioned. As much as any federal agency and more than most, IRS routinely interacts with taxpayers. Taxpayers’ views of the government and on the fairness of tax administration are shaped in a big way by their perception of IRS. For IRS to demand the kind of recordkeeping it requires for taxpayers to support tax returns (a form of financial reporting) and to not be able to sustain a comparable or better set of records to support its own financial reporting does not bode well. These concerns and views have been conveyed in many published articles on the state of financial management at IRS, and these articles clearly show taxpayers’ expectation for IRS to be able to meet the standards that it expects others to meet. The financial management problems I have discussed today are but a few of the challenges that IRS must confront. These, though, must be overcome for IRS to be able to credibly report the results from its operations whether through annually required financial statements or ad hoc reports provided to the Congress and other users on the various aspects of its operations. It is crucial that IRS maintain its capacity to process the billions of documents and handle the multitude of other tax administration challenges that it is responsible for managing. However, as evidenced in the examples I have highlighted for you today, it is comparably crucial that IRS address its many financial management problems so that decisionmakers can make “fact based,” informed decisions on IRS’ staffing levels, tax policies, and other matters based on the verifiable reported results from IRS’ operations. We issued disclaimers of opinion on each of our four annual audits of IRS’ financial statements (from fiscal year 1992 through fiscal year 1995). Notable improvement has occurred across IRS as a result of these audits, which were required by the CFO Act as expanded by the Government Management Reform Act. These two pieces of legislation, and particularly their requirement for audited financial statements, have been instrumental in bringing IRS’ top-level management focus to financial management problems that had been neglected for years. Because of our audit efforts, IRS’ management, for the first time, has a fuller understanding of the depth and breadth of the financial management problems that beset the agency and has, as a result, begun taking actions to address the problems. The reasons for our disclaimers of opinion were IRS’ inability to provide support for its reported over $1.4 trillion in collected revenues in total and by type of tax (i.e., income, social security, etc.), accurately identify and provide support for its reported tax receivables that were estimated in the tens of billions, reconcile its Fund Balance With Treasury accounts (these accounts represent IRS’ remaining approved budgetary spending authority—the federal government equivalent of bank accounts), and accurately account for and provide support for significant amounts of its almost $3 billion annually in nonpayroll expenses to establish that these expenses were appropriately included in the respective years’ reported expenses. IRS has made progress on addressing some of these problems, and we have worked closely with it to identify interim solutions to address the problems that can be fixed quicker and partially address the problems that will require longer term solutions. IRS has developed an action plan, with specific timetables and deliverables, to attempt to address the reasons for our audit disclaimer. To date, IRS reported it has identified substantially all of the reconciling items for its Fund Balance With Treasury accounts, except for certain amounts that IRS has deemed not to be cost-beneficial to research further because they were thought to be insignificant or that IRS had exhausted all avenues available to resolve the difference and could not; designed an interim solution, until longer term solutions can be identified and implemented, to capture the detailed support for revenue and accounts receivable; and begun designing a short-term and a long-term strategy to fix the problems that contribute to its nonpayroll expenses being unsupported or reported in the wrong period. We are currently reviewing progress in each of these areas as part of our audit of IRS’ fiscal year 1996 financial statements and will report the status of these efforts as part of our report that will be issued at the completion of this audit. In closing, I want to reiterate that preparing auditable financial statements and obtaining an unqualified audit opinion on those financial statements are basic to good financial management and one indicator of the condition of financial management of an entity. While IRS has made progress, the catalyst for fixing the problems will be its senior management’s continued commitment as well as sustained effective congressional oversight. IRS has recognized its problems and essentially knows what needs to be done. It is now a matter of carrying out improvement plans. This concludes my statement, and I will be glad to answer any questions. 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. 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 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. | GAO discussed the Internal Revenue Service's (IRS) financial management challenges. GAO noted that: (1) GAO efforts to audit IRS accounting records have resulted in a disclaimer of opinions each year; (2) IRS' inability to account for tax collections in total and by type of tax collected reduces the Congress' and others' ability to fully assess the effectiveness of tax policies to achieve their intended goals, know the amount the general revenue fund is subsidizing the Social Security Trust Fund, determine whether excise taxes are being collected and distributed in accordance with legislation, and assess IRS' collection efforts on unpaid taxes; (3) while IRS is making interim efforts to increase its capability to account for tax collections, longer term solutions will be needed before IRS will be able to provide this information in an accurate and timely manner; (4) right now, IRS does not have the capacity to account for its costs and outcomes in a manner consistent with good financial management; (5) IRS needs to have good financial management to show that is does not have a double standard for financial management--one that taxpayers must adhere to and another that applies to itself; (6) IRS has made progress on addressing some of these problems, and GAO has worked closely with it to identify interim solutions to address the problems that can be fixed quicker and partially address the problems that will require longer term solutions; and (7) IRS has developed an action plan, with specific timetables and deliverables, to attempt to address the reasons for GAO's audit disclaimer. |
The Census Bureau’s mission is to collect and provide comprehensive data about the nation’s people and economy. Core activities include conducting decennial, economic, and government censuses; conducting demographic and economic surveys; managing international demographic and socioeconomic databases; providing technical advisory services to foreign governments; and performing other activities such as producing official population estimates and projections. The Census Bureau is part of the Department of Commerce and is in the department’s Economics and Statistics Administration, led by the Under Secretary for Economic Affairs. The Census Bureau is headed by a Director and is organized into directorates corresponding to key programmatic and administrative functions as depicted in figure 1. According to the bureau, while planning, taking, processing, and publishing the results of censuses and surveys still requires the work of thousands of people, advances over the years have been made in the speed of collection, analysis, and publication of data through the development of mechanical and electronic tools. For nearly 100 years, census data were tabulated by clerks who made tally marks or added columns of figures with a pen or a pencil. As the nation grew and there were more people, items, and characteristics to count, speedier tabulation methods had to be invented or the results of one census would not be processed before it was time for the next one. In 1880, the bureau used a “tabulating machine”—a wooden box in which a roll of paper was threaded past an opening where a clerk marked the tallies in various columns and then added up the marks when the roll was full—that made tabulating at least twice as fast as the previous manual process. By 1950, mechanical tabulating improved; its speed had increased to 2,000 items per minute. In 1951, the first large-scale electronic computer, UNIVAC I, was designed and built specifically for the Census Bureau. This machine was able to tabulate 4,000 items per minute. From 1970 on, the bureau took advantage of new high-speed composers that converted the data on computer tape directly to words and numbers on off-set negative film used in publishing. Beginning in the mid-1980s, some statistics were made available on diskettes for use in microcomputers and users began to obtain statistics online. In the later 1980s, the bureau began testing CD-ROM (compact disk/read-only memory) laser disks as a medium for releasing data. The 2000 Census demonstrated probably the biggest leap forward in the use of technology for collecting and disseminating data. According to the bureau, its previous response scanning system (which dated to the 1950s) was replaced with optical character recognition technology, allowing the bureau to design a respondent-friendly (instead of machine- friendly) questionnaire in which write-in responses could also be captured electronically. In addition, the bureau’s previous online data system from the 1990s evolved into online data available through the Census Bureau’s website. Further technological advances were made in the 2010 census through the use of handheld computers for certain parts of Census operations and integration of Global Positioning System information into Census Bureau maps. Although specific technical decisions for the 2020 Census remain to be made, both ongoing Census operations and the next decennial census will be highly reliant on the effective use of information technology. The 2010 Decennial Census cost $13 billion and was the costliest U.S. census in history. One reason for the high cost was the increased use of paper-based processing over what was originally intended due to performance issues with key IT systems, which increased the cost of the census by up to $3 billion. The total cost of the census was 56 percent more than the $8.1 billion 2000 Decennial Census (in constant 2010 dollars). Based on past trends, if the growth rate continues unchecked, For 2020, the the census could cost approximately $25 billion in 2020.bureau intends to focus on several measures to reduce costs, including better use of IT, but still is planning to spend roughly $12 to $18 billion to conduct the census. To support its IT operations for all of its activities, including those related to decennial censuses, the Census Bureau reported that it plans to spend $384 million on major IT investments in fiscal year 2012. Of this, $130 million is to be spent on systems managed by the IT Directorate and $254 million is to be spent on systems managed in other directorates. To support these efforts, a bureau official from the Human Resource Division reported that as of July 2012, the bureau employed 1,148 IT staff among its approximately 14,000 employees. IT staff are spread throughout the bureau: the IT Directorate has 256 staff, Economic Programs has 262 staff, the Decennial Census has 156 staff, Field Operations has 185 staff, and Demographic Programs has 123 staff. GAO’s Information Technology Investment Management (ITIM) framework can be used by agencies to improve their organizational A central tenet of processes and measure progress in attaining them.this framework is the select/control/evaluate model. Figure 2 illustrates the central components of this model. During the select phase the organization (1) identifies and analyzes each project’s risks and returns before committing significant funds to any project and (2) selects those IT projects that will best support its mission needs. This process should be repeated each time funds are allocated to projects, reselecting even ongoing investments as described below. During the control phase the organization ensures that, as projects develop and investment expenditures continue, the project continues to meet mission needs at the expected levels of cost and risk. If the project is not meeting expectations or if problems have arisen, steps are quickly taken to address the deficiencies. If mission needs have changed, the organization is able to adjust its objectives for the project and appropriately modify expected project outcomes. During the evaluate phase, actual versus expected results are compared after a project has been fully implemented. This is done to (1) assess the project’s impact on mission performance, (2) identify any changes or modifications to the project that may be needed, and (3) revise the investment management process based on lessons learned. The ITIM framework consists of five progressive stages of maturity that an agency can achieve in its investment management capabilities. The maturity stages are cumulative; that is, in order to attain a higher stage, an agency must institutionalize all of the critical processes at the lower stages, in addition to the higher stage critical processes. The framework’s five maturity stages (see fig. 3) represent steps toward achieving stable and mature processes for managing IT investments. The successful attainment of each stage leads to improvement in the organization’s ability to manage its investments. With the exception of the first stage, each maturity stage is composed of critical processes that must be implemented and institutionalized. These critical processes are further broken down into key practices that describe the types of activities that an organization should be performing to successfully implement each critical process. It is not unusual for an organization to be performing key practices from more than one maturity stage at the same time. However, our research shows that agency efforts to improve investment management capabilities should focus on implementing all the lower- stage practices before addressing the higher-stage practices. Stage 2 critical processes lay the foundation by establishing successful, predictable, and repeatable investment control processes at the project level. Stage 3 is where the agency moves from project-centric processes to portfolio-based processes and evaluates potential investments according to how well they support the agency’s missions, strategies, and goals. Organizations implementing these Stage 2 and 3 practices have in place selection, control, and evaluation processes that are consistent with the Clinger-Cohen Act of 1996.evaluation techniques to continuously improve both investment processes and portfolios in order to achieve strategic outcomes. Stages 4 and 5 require the use of The ITIM framework can be used to assess the maturity of an agency’s investment management processes and as a tool for organizational improvement. The overriding purpose of the framework is to encourage investment processes that promote business value and mission performance, reduce risk, and increase accountability and transparency in the decision-making process. We have used the framework in several of our evaluations and a number of agencies have adopted it.agencies have used ITIM for purposes ranging from self-assessment to redesign of their IT investment management processes. Effective management of federal IT investments remains an ongoing challenge. In December 2010, the White House released a plan to reform federal IT management that includes greater attention to several of the management processes described in ITIM. The plan includes efforts to increase accountability for IT investments, strengthen IT program management, increase the authority of agency chief information officers, and strengthen the ability of agency investment review boards to oversee agency IT investments. The decision to invest in IT often leads to the acquisition or development of IT systems. To manage that development, organizations often employ a system development methodology. There are several different methodologies that can be used to develop IT systems, which range from the traditional waterfall model to the spiral model and to iterative models such as the Agile model. The waterfall model begins with requirements development and continues sequentially through other phases—design, build, and test—using the output of one phase as the input to the next to develop a finished product at the end. This model allows the status of a development project to be easily identified and tracked based on the current phase of the project. The spiral model uses a risk-based approach to incrementally build a system by cycling through the four development phases. Using this model, each spiral, or incremental cycle, typically starts by determining the development objectives and scope for the increment. Next, alternative solutions are evaluated and risk management techniques are employed to identify and reduce risks. Then, a product for the increment (such as a prototype) is developed. Finally, the product is evaluated to determine whether the increment’s initial objectives have been met. The Agile model focuses on short-duration, small-scope development phases that produce segments of a functional product. This model operates with similar phases to the traditional waterfall model—requirements, design, build, and test—but uses a shorter development cycle to achieve multiple iterations in similar time frames. Recently, several agencies have tried Agile, as it calls for producing software in small, short increments. Shorter, more incremental approaches to IT development have been identified as having the potential to improve the way in which the federal government develops and implements IT. In a recent report, we identified 32 practices and approaches as effective for applying Agile software development methods to IT projects. Officials who have used Agile methods on federal projects generally agreed that these practices are effective. In addition, the Office of Management and Budget recently issued guidance that advocates the use of shorter delivery time frames, an approach consistent with Agile. See figure 4 for a comparison of the Agile and waterfall development methods. According to the Software Engineering Institute (SEI) Capability Maturity Model Integration (CMMI) for Development, a noted reference for best practices in system life-cycle development processes, when establishing an organizational process, the organization should establish and maintain criteria and guidelines that can be tailored for a particular project based on the development model chosen, and other issues, such as customer needs, cost, schedule, and technical difficulty. Also according to SEI, within a given system development model, a number of specific development activities should be addressed. These include requirements development and requirements management. Requirements development includes activities such as identifying desirable functionality and quality attributes through an analysis of scenarios with relevant stakeholders; analyzing and qualifying functionality required by end users; and partitioning requirements into groups based on established criteria such as similar functionality to facilitate and focus the requirements analysis. Requirements management provides management of the business and system requirements, and identification of inconsistencies among requirements and the project’s plans and work products. A strategic approach to human capital management includes viewing personnel as assets whose value can be enhanced by investing in them. Such an approach enables an organization to use their people effectively and to determine how well they integrate human capital considerations into daily decision making and planning for mission results. It also helps organizations to remain aware of and be prepared for current and future needs as an organization, and ensure that personnel have the knowledge, skills, and abilities needed to pursue the mission of the organization. In 2003, we identified a set of key practices for effective strategic human capital management, including workforce planning.based on our reports and testimonies, reviews of studies by leading workforce planning organizations, and interviews with officials from the Office of Personnel Management and other federal agencies. Strategic workforce planning addresses two critical needs: (1) aligning an organization’s human capital program with its current and emerging mission and programmatic goals and (2) developing long-term strategies These practices are for acquiring, developing, and retaining staff to achieve programmatic goals. While agency approaches to workforce planning will vary, we and the Office of Personnel Management have identified key practices in effective strategic workforce planning, six of which are: Align workforce planning with strategic planning and budget formulation. Involve top management, employees, and other stakeholders in developing, communicating, and implementing the strategic workforce plan. Identify the critical skills and competencies that will be needed to achieve current and future programmatic results. Develop strategies that are tailored to address gaps in number, deployment, and alignment of human capital approaches for enabling and sustaining the contributions of all critical skills and competencies. Build the capability needed to address administrative, educational, and other requirements important to support workforce planning strategies. Monitor and evaluate the agency’s progress toward its human capital goals and the contribution that human capital results have made toward achieving programmatic results. We have previously reported on the challenges associated with implementing a new IT governance framework, such as the Census Bureau is trying to do. Implementing a new governance framework and system development methodology are challenging tasks that can be aided by having robust implementation plans. Such a plan is instrumental in helping agencies coordinate and guide improvement efforts. As we have previously reported, several steps are important for successfully implementing new organizational governance processes related to For example, investment management and system development.organizations should: Have a commitment from agency leadership to putting the process in place. Buy-in of key stakeholders should be obtained to ensure that their perspectives are considered and to facilitate adoption. This includes obtaining top management support and creating forums for involving business representatives. Select an implementation team and develop a detailed implementation plan that lays out a roadmap for implementing the new process. An effective implementation team should include key stakeholders from both business and IT components. An implementation plan should build on existing strengths and weaknesses; specify measurable goals, objectives, and milestones; specify needed resources; assign responsibility and accountability for accomplishing tasks; and be approved by senior-level management. On the other end, measures to assess progress in meeting the objectives of the implementation efforts should be developed and should include lessons learned. Perform pilot testing of the new process to evaluate the process and identify potential problems. Pilot testing is an effective—and usually necessary—tool for moving the agency successfully to full implementation. Pilot testing allows the agency to (1) evaluate the soundness of the proposed process in actual practice, (2) identify and correct problems with the new design, and (3) refine performance measures. Also, successful pilot testing will help strengthen support for full-scale implementation from employees, outside stakeholders, Congress, and the public, and help secure the funding needed for a smooth rollout. Develop a formal evaluation process to determine the effectiveness of the new process in meeting the agency’s goals. The team should develop a formal evaluation process to determine the efficiency and effectiveness of the new process, both during pilot tests and full implementation, in meeting the agency’s performance goals. The process should also allow the agency to pinpoint trouble spots, so that corrective actions can be developed quickly. Our prior work has identified the importance of having sound management processes in place to help the bureau as it manages multimillion dollar investments needed for its decennial census. For the last decennial, we issued multiple reports and testimonies from 2005 through 2010 on weaknesses in the Census Bureau’s management and testing of key 2010 Decennial Census IT systems. For example, in June 2005, we found that while the Census Bureau had initiated key practices in areas such as providing investment oversight, project planning, requirements management, and risk management, they were not fully and consistently performed across the bureau. Accordingly, we made recommendations to the Census Bureau to develop procedures to ensure consistent investment management and decision-making practices and to institutionalize a process improvement initiative, such as the CMMI framework, to strengthen bureau-wide system development and management processes. We noted that unless these recommendations were implemented, the bureau would face increased risk that cost overruns, schedule slippages, and performance shortfalls would occur and it would not be able to effectively manage its multimillion dollar investments in IT. As development of the IT systems progressed, these problems were realized. In 2007, we reviewed the status of four key IT acquisitions needed for the 2010 Decennial Census. The bureau was still in the process of addressing our 2005 recommendations and our review found that there were increases in cost estimates and projected cost overruns of at least $51 million for the Field Data Collection Automation program due to changes in requirements. There were also schedule slippages with two other projects. Furthermore, these four projects were not consistently implementing key risk management practices. We concluded that unless the bureau addressed our recommendations to strengthen system testing and risk management activities, there would be an increased probability that decennial systems would not be delivered on schedule and within budget or perform as expected. Subsequently, in March 2008, we added the 2010 Decennial Census to our list of high-risk programs in part because of long-standing weaknesses in the Census Bureau’s IT acquisition and contract management function, difficulties in developing reliable life-cycle cost estimates, and key operations that were not tested under operational conditions. We also testified on significant risks facing the 2010 census. In particular, we testified in March 2008 that the Field Data Collection Automation program was experiencing significant problems, including schedule delays and cost increases from changes in requirements, which required additional work and staffing. In April 2008, the Census Bureau dropped the use of handheld devices developed as part of this program for nonresponse follow-up and reverted to a paper-based operation, requiring the development of a Paper-Based Operations Control System to manage the operation. Dropping the use of handhelds for nonresponse follow-up and replacing it with the paper-based system increased the cost of the 2010 Decennial Census by up to $3 billion. In March 2009, we reported that the bureau continued to face a number of problems related to testing of key IT systems, such as the Paper- Based Operations Control Systems, that included weaknesses in test plans and schedules, and a lack of executive-level oversight and guidance. We recommended that the bureau complete key system- testing activities and improve testing oversight and guidance or the Census Bureau would face the risk that systems were not thoroughly tested and or would perform as planned. Later that year, we reported in November 2009 that the bureau had not finalized detailed requirements for releases of the Paper-Based Operations Control System, which put the system at risk for cost increases, schedule delays, or performance shortfalls. Although the bureau worked aggressively to improve the Paper-Based Operations Control System, we reported in December 2010 that the system had experienced significant issues when it was put in operation. The bureau attributed these issues, in part, due to a compressed development and testing schedule, as well as inadequate performance and interface testing. At a cost of about $13 billion, 2010 was the costliest decennial census in history. While the 2010 census was removed from GAO’s high-risk list in February 2011, we reported in April 2011 that the bureau needed to continue to improve key practices for managing IT and strengthen its ability to develop reliable life-cycle cost estimates. GAO, 2020 Census: Additional Steps Are Needed to Build on Early Planning, GAO-12-626 (Washington, D.C.: May 17, 2012). organizational transformation, long-term project planning, and strategic workforce planning, but we did identify opportunities for improvement. In addition, the Department of Commerce Office of the Inspector General recently identified several management challenges the Census Bureau faces as it prepares for the 2020 Decennial Census. Office of the Inspector General noted that the bureau needed to implement improved project planning and management techniques early in the decade to address the weaknesses in project management, cost estimation, and risk management. Officials from the Census Bureau stated that those recommendations were consistent with their current plans. U.S. Department of Commerce Office of Inspector General, Top Management Challenges Face the Department of Commerce, OIG-11-015 (Washington, D.C.: Dec. 20, 2010). developing systems necessary for the 2020 Decennial Census to help avoid a repeat of the cost and performance issues that occurred during the 2010 Decennial Census. The bureau has developed a new investment management plan, called the Enterprise Investment Management Plan, which is to apply to all investments, including IT investments. The draft plan outlines a portfolio management process that is to operate in two interdependent cycles, one to align current and planned investments to ensure the right investments are selected to support the bureau’s mission, and one to monitor the development, deployment, and operation of approved investments in order to ensure new projects are developed as planned and ongoing systems are regularly evaluated for their impact on and relevancy to the bureau’s mission. The plan outlines key investment management roles and responsibilities for various groups within the bureau. The groups include the Operating Committee, which is comprised of the bureau’s senior executive team, including the Deputy Director, who chairs the committee, and associate directors for all nine of the bureau’s directorates, one of whom is also the Chief Information Officer of the bureau. The Operating Committee has ultimate responsibility for directing the bureau’s resource allocations and overseeing program performance. It also has overall responsibility for all IT investments costing more than $10 million that are high priority and medium or high priority investments that cost more than $50 million. Office of Risk Management and Program Evaluation, which is to manage the bureau’s enterprise investment portfolio, review business cases for major investments and all other projects and portfolio investments within the bureau, regardless of cost or priority, and track project, program, and portfolio performance information. The office began operating in January 2011. Directorate, division, and program-level investment review boards, which are to assess, review, and prioritize all existing and proposed investments at the appropriate directorate, division, or program level, and escalate investment issues to a higher-level board when required. Directorate-level review boards have overall responsibility for investments that are high priority and cost less than $10 million, medium-priority investments between $10 million and $50 million, and low-priority investments costing more than $50 million. Division and program-level boards have responsibility for medium-priority investments of less than $10 million and low-priority investments that cost less than $50 million. As shown in the following table, the bureau’s new investment management plan is consistent with key practices outlined in the ITIM framework for Stage 2, including having documented policies and procedures in place for identifying IT projects that support business needs and selecting investments for funding. However, other policies within the plan only partially address the ITIM framework. In particular, the plan does not include guidelines for the membership of investment review boards, the frequency of board meetings, and the thresholds for escalating issues to higher-level boards, as these decisions are left up to individual directorates to determine. Table 1 summarizes our assessment of the policies contained in the bureau’s draft plan against relevant practices in Stage 2 of the ITIM framework. In addition to lacking key guidelines for investment review board operations and the enterprise portfolio management tool, the plan is still a draft. The Chief of the Office of Risk Management and Program Evaluation stated that the plan would be finalized in late September 2012. According to the official, it has taken the bureau time to finalize the plan due to its review process with stakeholders, which included holding desktop exercises with key staff in various directorates to walk through the new governance processes and obtain feedback, and the naming of a new Deputy Director for the bureau. While development of a draft investment management plan is a useful first step toward more rigorous investment management, until the Office of Risk Management and Program Evaluation establishes guidelines for the frequency and membership of the investment review boards, thresholds for escalating cost or schedule variance issues, and time frames for project managers to make periodic updates of investment information in its enterprise portfolio management tool, the bureau is likely to face inconsistent application of its investment management plan. In February 2012, the bureau’s IT and 2020 Census Directorates, with the assistance of a contractor, developed a new system development life- cycle methodology to improve the bureau’s ability to develop IT systems and to address our prior 2005 recommendation to strengthen bureau- wide system development and management processes. The main elements of the bureau’s new methodology include: Ten defined life-cycle phases, including initiation, concept development, planning, requirements analysis, design, development, integration and test, deployment, operations and maintenance, and disposition, along with corresponding activities and work products that must be completed. Five development process models, including waterfall, prototyping, incremental, iterative,when developing new systems or modifying or adding functionality to existing systems. and spiral, that project managers can use A tool that helps project managers choose the appropriate development process model. An appendix that helps project managers identify the work products to complete for each phase of the life-cycle based on the project’s life- cycle cost and priority. Although the methodology lays out a foundation for system development activities at the bureau, it has critical gaps. In particular, SEI’s CMMI for Development, a noted reference for best practices in system life-cycle development processes, recommends that an organization establish and maintain criteria and guidelines that can be tailored to suit changing situations. However, the bureau’s methodology is based on a waterfall development model and work products identified in the guide are only tied to categories of projects assigned according to each project’s life-cycle cost and priority. The guide does not have guidance on how to adapt the process and related work products to alternate development models. Specifically, since other life-cycle models do not follow the waterfall model in terms of phases, types of activities, and work products for each phase, the methodology should explain how it can be adapted to alternate software development models, including identifying mandatory work products for other non-waterfall development models and phases. For example, one project manager for a pilot project of the new guide that is using an iterative process development model confirmed that he had difficulty in using the guide and had to deviate from it as he was developing work products. The current Chief Information Officer stated that the bureau’s process does not currently include alternate development models because the methodology is in its first iteration and he wanted to evaluate the new process with pilots before making changes or additions. Census Bureau officials also acknowledged that the system development life-cycle methodology will not be as useful with other life-cycle models, such as an iterative model, and that they intend to develop additional guidance for non-waterfall models. However, they could not provide dates for when development of this guidance would be started or finalized. Both private and public-sector organizations are making increasing use of non-waterfall development models as a means of reducing development Until the bureau specifies times and reducing risk for software projects.how to adapt the new system development life-cycle development methodology to non-waterfall models, the methodology will be of limited use for managing system development and acquisition efforts. SEI states that a disciplined process for developing and managing requirements can help reduce the risks of developing or acquiring a system. The practices underlying requirements development and management include eliciting, documenting, verifying and validating, and managing requirements through a system’s life cycle. This set of activities translates customer needs from statements of high-level business requirements into validated, testable system requirements. A well-defined and managed requirements baseline can, in addition, improve understanding among stakeholders and increase stakeholder buy-in and acceptance of the resulting system. Both the IT Directorate and the 2020 Census Directorate have drafted new requirements development and management processes, though only the IT Directorate’s guidance has been finalized. In particular, the IT Directorate has developed a new process, the Application Services Division’s Requirements Elicitation, Analysis, and Documentation Process, for working with customers to develop requirements for projects during the requirements phase. This includes activities for creating a requirements work plan, identifying high-level and detailed project requirements, as well as assessing the feasibility and managing the risks associated with these requirements. The 2020 Census Directorate has developed a draft Requirements Engineering Management Plan that establishes processes for developing both enterprise-level mission requirements for the 2020 Decennial Census and specific project-level business, capability, and solution requirements. The process includes four stages for developing and managing these sets of requirements including discovery, analysis, agreement, and solution acceptance, and outlines roles and responsibilities for stakeholders. While both the IT and 2020 Census Directorates have established new requirements development and management processes, which are to be used in the requirements analysis phase of the bureau’s new system development methodology, the bureau has not established a consistent process bureau-wide as we have previously recommended. In 2005 we found that individual project teams within the bureau had not consistently implemented key practices for requirements management and we recommended that a consistent approach be established bureau-wide. These weaknesses in the bureau’s processes for requirements management were not sufficiently addressed and we reported in 2007, 2008, and 2009 that these issues contributed to increases in life-cycle cost estimates and cost overruns of hundreds of millions of dollars for key investments necessary for the 2010 Decennial Census. Furthermore, the bureau had developed a handheld device for the 2010 census that did not operate as intended because of the lack of a robust requirements process. Instead, the bureau had to rely on a paper-based system to replace the handheld devices for key aspects of the census, which increased the cost of the 2010 census by up to $3 billion. Nevertheless, both the Chief Information Officer, who heads the IT Directorate and the Associate Director of the 2020 Census Directorate, as well as the Chief of the Office of Risk Management and Program Evaluation, stated that there are no plans to standardize a requirements development and management process across the bureau. Currently, for future investments, bureau officials will decide which directorate requirements process to use, depending on which directorate has responsibility for developing the system. For example, the 2020 Census and IT Directorates are currently working together to develop a new electronic document management system Decennial Census. For this project, only the IT Directorate’s requirements process is being used because the IT Directorate has overall responsibility for developing the system. The Electronic Document Management System will be used to streamline the American Community Service Office and 2020 Census program processes for developing, reviewing, and approving documents at the program and project levels. future in preparation for the 2020 Decennial Census, but did not specify when this would occur. By utilizing overlapping requirements development and management processes without a specified time frame for when these processes will be integrated, the bureau is increasing the risk that IT investments, particularly those intended for the 2020 Decennial Census, will face cost overruns, schedule slippages, and performance shortfalls. Until the bureau establishes and implements a consistent requirements development and management process across the bureau that has clear guidance for developing requirements at the strategic mission, business, and project levels and is integrated with its new system development methodology, it will not have assurance that requirements for IT systems intended for the 2020 Decennial Census will be effectively developed or managed. While the bureau has drafted a new investment management plan, and system development methodology, including requirements development and management processes, key activities for effectively implementing these processes across the bureau remain to be undertaken. In particular, while the bureau’s leadership has made a commitment to putting the new investment plan in place across the bureau, no specific plans have been made to implement the system methodology bureau- wide. In addition, detailed implementation plans for putting these processes in place, including having sufficient pilot testing and formal evaluations to determine the effectiveness of the new processes remain to be developed. Table 2 shows our assessment of the bureau’s implementation efforts based on our prior work on implementing new processes within an organization. With respect to the investment management plan, the Chief of the Office of Risk Management and Program Evaluation said that the bureau had not finalized a plan for implementing the new investment management structure because the office was still in the process of incorporating feedback on the plan. For the system development methodology, the Chief Information Officer stated that an implementation plan had not been finalized because more work was needed to refine the methodology. The methodology would be implemented across the bureau once it had been refined and all issues were resolved. As we noted in 2005, the bureau’s lack of a consistent bureau-wide approach for IT investment management contributed to the bureau not effectively and efficiently managing multimillion dollar investments, including taking consistent and appropriate action when cost, schedule, or performance expectations were not being met. In addition, a lack of a consistent approach for system development and management, including requirements development and management, led to project teams managing systems in an ad hoc manner and increased the risk that cost overruns, schedule slippages, and performance shortfalls would, and did, occur, as we reported in 2007 and 2009. According to the bureau’s timeline for 2020 Decennial Census planning, it will begin operational development and system testing starting in fiscal year 2015. While the exact design for 2020 information systems is not yet defined, it is likely to be complex, involve multiple directorates, and use both contractors and bureau staff based on the prior decennial census and the bureau’s initial plans for 2020. Unless the investment management plan and system development life- cycle methodology, including a requirements development and management process, are fully implemented by this time, the Census Bureau will face increased risk that similar challenges that occurred in the 2010 Decennial Census will occur for the 2020 Decennial Census’s multimillion dollar investments. In addition, although only full implementation can identify all the potential problems with the new investment management plan and system methodology, until the bureau conducts additional pilot testing, including various software development models and projects of the scope and complexity of those needed for the 2020 Decennial Census, there is increased risk of not identifying potential problems with the investment management plan and system development life-cycle methodology. Moreover, while feedback sessions on issues with implementing processes can be useful, until the Office of Risk Management and Program Evaluation and the Application Services Division establish a documented evaluation process to assess the effectiveness of the new processes, the bureau will lack assurance as to whether these processes are effective in meeting the bureau’s goals. Lastly, while any significant change cannot be accomplished overnight, clear leadership and deadlines are essential to implement changes. Failure to address these issues in a timely manner puts the bureau at risk of the same cost overrun, schedule slippage, and performance shortfall issues that affected the previous census. Over the past year, the Census Bureau has taken limited steps to develop IT human capital practices, including identifying critical IT occupations and select competencies and conducting an inventory of these competencies among its IT staff in June 2011. However, many key practices remain to be implemented. In particular, the Census Bureau has not developed a bureau-wide IT workforce plan, identified gaps in mission-critical IT occupations, skills, and competencies, or developed strategies to address gaps. Table 3 summarizes our assessment of the bureau’s efforts against key principles for effective workforce planning. According to officials in the Human Resources Division, the bureau has not yet begun key workforce planning activities because it first needs to complete an initial bureau-wide competency assessment. In planning for this assessment, the bureau conducted a pilot assessment of IT competencies in June 2011. Officials stated that the pilot assessment provided several lessons that they intend to use for the bureau-wide competency assessment. For instance, while managers in the directorates with IT staff found that the information from the pilot assessment was useful, those managers were more interested in identifying the current skills of their IT staff than the competency information that was gathered. The bureau’s Human Resources Division therefore collected additional information for managers in May 2012. The bureau is to conduct the bureau-wide competency assessment, including a reassessment of IT competencies, in late 2012. Once this assessment is completed, the bureau’s directorates are to conduct additional workforce planning activities. For example, bureau officials stated that individual directorates plan to conduct gap analyses for mission-critical skills and competencies. According to the bureau’s Human Resources Division, once the gap analysis is completed, the bureau is to begin refining existing strategies and its capacity to address workforce gaps. The bureau provided a document with high-level goals to incorporate results of its competency assessment into individual directorate workforce plans by July 2013. However, it did not provide time frames for when specific activities would be completed for its IT workforce, such as a gap analysis for occupations, skills, or competencies of IT staff, nor did it provide plans to integrate these activities bureau- wide. The Chief of the Human Resources Division stated that the Census Bureau has traditionally been decentralized in its IT workforce planning efforts because its IT staff is located in several directorates. The bureau has also faced budget constraints in conducting workforce planning specifically for its IT staff but had recently begun to undertake efforts in this area within the IT Directorate after a new division chief was hired. Effective IT workforce planning efforts are critical to ensuring the bureau has the appropriate workforce in place to achieve its mission and strategic goals, particularly in regards to the 2020 Decennial Census. While the bureau’s Human Resources Division plans to undertake a thorough assessment of the competencies of its workforce this year, unless the division establishes a repeatable process for performing skills assessments and gap analysis that can be implemented in a timely manner, managers may not be able to make decisions to address any skills gaps in preparation for the 2020 Decennial Census. In addition, until the Human Resources Division establishes a process for directorates to coordinate on IT workforce planning in line with key principles for effective workforce planning, the bureau may not have sufficient assurance that it has the appropriate IT workforce needed for 2020 Decennial Census activities. While the Census Bureau has begun to make improvements to investment management and system development processes, including requirements development and management, more work remains to be done to refine these processes and implement them across the bureau. As we have previously reported, a lack of robust processes in these areas contributed to the cost overruns, schedule slippages, and performance shortfalls in key IT investments that were needed for the 2010 Decennial Census, which increased its cost by up to $3 billion. However, the bureau has not established key guidelines and thresholds within its investment management plan, nor has it developed guidance to tailor the bureau’s new system development methodology to alternate development models, or established plans to implement these new processes across the bureau. Until the bureau takes action in these key areas, there is the risk that similar issues will arise for the 2020 Decennial Census. Furthermore, having an IT workforce that has the appropriate mission- critical skills and competencies will be necessary to help the bureau effectively develop and manage its multimillion dollar investments in information systems and technology. While the bureau has begun to improve its IT human capital practices including conducting an inventory of select IT competencies, many key workforce planning practices remain to be put in place, including conducting gap analyses and integrating IT workforce planning bureau-wide. Having effective IT workforce planning practices will help ensure the bureau can achieve its mission and strategic goals for the 2020 Decennial Census. To strengthen and improve the bureau’s new investment management, system development, and IT workforce management processes, we recommend that the Acting Secretary of Commerce direct the Under Secretary for Economic Affairs who oversees the Economics and Statistics Administration, as well as the Acting Director of the U.S. Census Bureau, take eight actions to address weaknesses in the following IT management areas: Establish guidelines for the frequency and membership of bureau investment review boards and thresholds for these boards to escalate cost or schedule variance issues to higher-level boards. Establish time frames for project managers to provide periodic updates of investment information in the enterprise investment management tool. Adapt the bureau’s new system development life-cycle methodology, including the mandatory work products, activities, and phases of the project, to the additional software development models beyond the waterfall model that are specified in the methodology. Establish and implement a consistent requirements development and management process across the bureau that is integrated with its new system development life-cycle methodology and includes guidance for developing requirements at the strategic mission, business, and project levels. Finalize a plan for implementing the Enterprise Investment Management Plan, including time frames for implementation by fiscal year 2015, pilot testing of the new process, and a documented evaluation process. Establish a plan for implementing the new system development life- cycle methodology, including requirements development and management processes, across the bureau, to include time frames for implementation by fiscal year 2015, additional pilots of the methodology prior to full implementation, and a documented evaluation process. Establish a repeatable process for performing IT skills assessments and gap analysis that can be implemented in a timely manner. Establish a process for directorates to coordinate on IT workforce planning, including: (1) aligning IT workforce planning with strategic planning and budget formulation; (2) involving appropriate stakeholders and staff from each directorate; (3) identifying critical occupations, skills, and competencies, and analyzing workforce gaps; (4) developing strategies to address IT workforce gaps; (5) building capacity to address workforce gaps; and (6) monitoring and evaluating IT workforce planning efforts across the bureau, and ensure this process is implemented across the bureau. We received comments from the Acting Secretary of Commerce on a draft of this report. The comments are included in appendix II. In its comments, the department stated that the Census Bureau concurred with our eight recommendations and outlined steps it was taking to implement the recommendations. The bureau acknowledged that the Enterprise Investment Management Plan was in draft, but indicated it had deployed components of the plan, such as initiating governing boards in three directorates. The bureau also noted that its enterprise portfolio management tool had been placed into production in July and that the bureau was working to migrate to the new tool. Regarding the system development life-cycle methodology, the bureau stated that the methodology was one of several initiatives to improve the bureau’s delivery of IT services. The bureau said that later iterations of the methodology would include more iterative models such as Agile that were applicable to its business needs. The bureau also indicated it was planning to include feedback from its pilot projects in the revised methodology and to provide additional guidance on required documentation. For its requirements management processes, the bureau stated it was planning to integrate the bureau’s different requirements management processes and emphasized that joint commitment of the 2020 Decennial Census and IT Directorates was critical to the success of a requirements management process for the 2020 Decennial Census. The bureau also indicated that it has provided extensive training and education for its IT workforce even though it lacked an integrated plan based on best practices. The bureau plans to develop a workforce plan to incorporate strategies for hiring, developing, and contracting to meet its identified requirements. It noted, however, that this could be affected by potential budget cuts. The bureau stated its bureau-wide assessment and competency gap analysis would be completed by fall 2012. We are sending copies of this report to the Acting Secretary of Commerce, the Senior Advisor to the Acting Director and the Deputy Director of the U.S. Census Bureau, and interested congressional committees. The report also is available at no charge on GAO’s website at http://www.gao.gov. If you or your staffs have any questions on the matters discussed in this report, please contact me at (202) 512-9286 or [email protected]. 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 major contributions to this report are listed in appendix III. Our objectives were to evaluate the (1) effectiveness of the Census Bureau’s policies, procedures, and processes for managing information technology (IT) investments and system development and (2) the Census Bureau’s development of effective practices for acquiring and maintaining IT human capital skills. To address our first objective, we reviewed the effectiveness of policies and procedures in two areas—investment management and system development and management. We compared the bureau’s new IT investment management policies and procedures in its draft Enterprise Investment Management Plan to the criteria for policies and procedures associated with maturity stage 2 of the Information Technology Investment Management (ITIM) framework. The ITIM framework consists of five progressive stages of maturity that an agency can achieve in its investment management capabilities. The maturity stages are cumulative; that is, in order to attain a higher stage, an agency must first institutionalize all of the critical processes at the lower stages. To determine whether the bureau satisfied the criteria for maturity stage 2 we compared the bureau’s policies and procedures to the critical processes outlined in stage 2. We did not evaluate the bureau at maturity stage 1 because our prior review in 2005 determined that it had passed that stage. We did not evaluate the Census Bureau at maturity stages 3, 4, or 5 because our prior work has shown that an agency should focus on implementing all practices associated with a lower phase before addressing the higher-stage practices. We also interviewed officials from the Office of Risk Management and Program Evaluation regarding the development and implementation of the plan across the bureau. To assess the effectiveness of the bureau’s processes for managing system development, including requirements development and management, we reviewed the bureau’s System Development Life Cycle Users’ Guide and project templates, Requirements Engineering Management Plan, and the Application Services Division’s Requirements Elicitation, Analysis, and Documentation Process, and compared these documents with Software Engineering Institute’s (SEI) Capability Maturity Model Integration for Development criteria in two areas: establishing organizational processes, and requirements management and development. Although SEI specifies criteria in numerous areas, we focused on establishing organizational processes because the bureau’s system development methodology is newly developed. We focused on requirements development and management because of the bureau’s challenges in managing requirements for the 2010 Decennial Census. For each of the two areas, we analyzed bureau plans and procedures to determine if the practices described were consistent with those in the SEI criteria. In addition, we interviewed officials from the IT Directorate and 2020 Census Directorate regarding development and implementation of the guide and the requirements management and development processes. To assess the Census Bureau’s efforts to effectively implement these new investment management and system development processes across the bureau, we interviewed officials from the Office of Risk Management and Program Evaluation, IT Directorate, and 2020 Census Directorate regarding implementation efforts and reviewed related documentation, which we compared to our reported best practices for implementing new organizational governance processes. We evaluated whether these efforts satisfied each of the components of each key activity from the best practices and assigned ratings of “implemented”, “partially implemented”, or “not implemented” based on that assessment. A rating of “partially implemented” was given if the bureau’s activities satisfied at least one component of the key activity. To address our second objective, we reviewed bureau workforce planning documents, including the Human Capital Management Plan (FY 2011- 2016 ), IT Directorate’s 2011-2016 Strategic Information Technology Plan, and the IT Directorate’s workforce plan, and other bureau documentation related to the bureau’s pilot workforce competency assessment and compared these to the six leading principles for workforce planning that we and the Office of Personnel Management have identified to determine whether the bureau’s practices were consistent with these principles. We evaluated whether the bureau’s activities satisfied each of the detailed practices in a principle and assigned ratings of “implemented”, “partially implemented”, or “not implemented” based on that assessment. A rating of “partially implemented” was assessed if the bureau’s activities satisfied at least one of the detailed practices in the principle. We also interviewed officials from the Human Resources Division and IT Directorate to obtain information about the pilot assessment and the bureau’s workforce planning efforts. We performed our work from March 2012 through September 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 audit objectives. In addition to the contact listed above, the following staff made key contributions to this report: Vijay D’Souza (Assistant Director); Justin Booth; Nancy Glover; Valerie Hopkins; Paul Middleton; Tarunkant Mithani; and Karl Seifert. | The 2010 Decennial Census, at a cost of approximately $13 billion, was the most expensive headcount in our nations history. Prior to the 2010 Decennial Census, the Census Bureau experienced significant challenges in managing its information systems leading to cost overruns and performance shortfalls which increased the cost of the 2010 census by almost $3 billion. Given the bureaus extensive use of IT in collecting, analyzing, and distributing information, GAO was asked to determine to what extent the bureau has developed (1) effective policies, procedures, and processes for managing IT investments and system development; and (2) effective practices for acquiring and maintaining IT human capital skills. To address these objectives, GAO identified leading practices in these areas, reviewed bureau policies and procedures to determine whether they followed these practices, and interviewed bureau officials. The U.S. Census Bureau (Census Bureau) has drafted a new investment management plan, system development methodology, and requirements development and management processes to improve its ability to manage information technology (IT) investments and system development, but additional work is needed to ensure these processes are effective and successfully implemented across the bureau. GAO and others have identified the importance of implementing critical processes within an agency to allow it to select, control, and evaluate its IT investments and effectively manage system development. The bureau has developed a new draft investment management plan which contains policies and guidance for managing IT projects; however, the plan does not explain when investments with cost or schedule variances should be escalated to higher-level boards for review, or when managers should provide updated investment information to a planned bureau-wide tracking tool. The bureau has also developed a new system development methodology guide, but the guide has critical gaps. For example, although there are five development process models allowed, including the traditional sequential approach and newer more iterative approaches, the guide does not explain how to adapt processes and related work products for newer iterative approaches. Furthermore, while the bureau has developed new draft requirements development and management processes for system development within individual bureau directorates, it has not established a consistent process bureau-wide as GAO recommended in 2005. Lack of a consistent bureau-wide process contributed to significant cost and performance issues in the 2010 Decennial Census. Although the bureau plans to begin operational development for the 2020 Decennial Census in fiscal year 2015, it has not finalized plans for implementing its new investment management and system development processes across the bureau. Until the bureau takes additional action to finalize and implement consistent, bureau-wide processes, it faces the risk that IT governance issues that adversely affected the 2010 Decennial Census will also impact the 2020 Decennial Census. The bureau has begun to take steps to improve its IT workforce planning; however, many key practices consistent with principles for effective workforce planning remain to be put in place. In particular, there is no bureau-wide coordination of these workforce planning efforts. Each directorate is responsible for its own IT workforce planning and the bureau has not established any efforts to coordinate activities among directorates. While the bureau identified mission critical IT occupations and began an assessment of select mission critical competencies in June 2011, it does not plan to perform a bureau-wide IT competency assessment until the fall of 2012. Until bureau-wide IT workforce planning processes are established and the bureau develops specific plans to conduct an IT skills inventory and gap analysis, the bureau faces the risk that the appropriate IT workforce will not be in place to effectively develop and manage multimillion dollar investments in information systems and technology that will be needed for the 2020 Decennial Census. To strengthen and improve the Census Bureaus management of IT, GAO recommends that the Acting Secretary of Commerce take eight actions, including improvements to guidance for its planned IT investment process, a consistent requirements development and management process, an implementation plan and time frames for its investment management process and system development methodology, and coordination of IT workforce planning efforts. In written comments, the Acting Secretary concurred with our recommendations and described steps the bureau was taking to implement them. |
While NARA has continued to make progress on the ERA system, that progress cannot be fully quantified because NARA’s expenditure plan does not clearly identify what functions have already been delivered, how much was spent to provide each function, or how much is required to maintain the delivered increments. NARA’s current plan similarly lacks details on the functions to be provided in future increments and the costs associated with them, including development efforts scheduled to take place in the remainder of this year. In addition, although NARA has been using Earned Value Management to track program cost, schedule, and performance, weaknesses in its EVM data limit NARA’s ability to accurately report on the project’s progress. Without more specific and accurate information on the immediate and long-term goals of the program and the outcomes expected from its resulting efforts, NARA will be hindered in effectively monitoring and reporting on the cost, schedule, and performance of the ERA system, and congressional appropriators will lack information necessary to evaluate the agency’s requests for funds. Although NARA certified that the EOP portion of the ERA system had achieved initial operating capability as planned in December 2008, the system has been of limited use because of delays in ingesting electronic records into the system. Further, even though it has obligated nearly $40 million on EOP, NARA has instead answered requests for Bush electronic records by using existing systems or replicating White House systems that cost less than $600,000. Under its current schedule, the Bush Administration records will not be fully ingested into the system until October 2009. However, even when the data are fully ingested, the system’s lack of a complete, fully tested contingency plan increases the risk that a system failure or disruption will result in the system being unavailable for several days or more. We recommend that the Archivist of the United States take the following actions: Report to Congress on the specific outcomes to be achieved by ERA program funding for the remainder of fiscal year 2009. Provide detailed information in future expenditure plans on what was spent and delivered for deployed increments of the ERA system and cost and functional delivery plans for future increments. Strengthen the earned value process so that it follows the practices described in GAO’s guide and more reliable cost, schedule, and performance information can be included in future expenditure plans and monthly reports. Include in NARA’s next expenditure plan an analysis of the costs and benefits of using the EOP system to respond to presidential records requests compared to other existing systems currently being used to respond to such requests. Develop and implement a system contingency plan for ERA that follows contingency guidance for federal systems. In written comments on a draft of this report, which are reprinted in appendix II, the Acting Archivist of the United States stated that she appreciated the insight into the expenditure plan observations addressed in the report. She stated that she was pleased to note our recognition that the Fiscal Year 2009 ERA Expenditure Plan met the legislative conditions. In addition, the Acting Archivist summarized actions taken or planned in response to four of our five recommendations. Specifically, she stated that NARA provided a briefing to Congress on the specific outcomes to be achieved by the ERA program on April 27, 2009, and that further detail will be added to the next expenditure plan to address costs and functions delivered to date and what is planned for future increments. She further stated that NARA is in the process of upgrading its EVM system and will strive to comply with all 13 best practices. Finally, the Acting Archivist stated that an ERA Contingency Plan has been developed and is in final review. The Acting Archivist disagreed with our observation that the EOP system is not currently fulfilling its intended purpose. She stated that this observation failed to differentiate between what the system is capable of doing and the work currently being done on the system. She added that the system does provide required functionality—including searching any records ingested in the system—and that all the remaining data from the Bush Administration will be ingested by the end of the fiscal year. The Acting Archivist also stated that the problem was with the copies of the records that NARA received from the White House, not with the EOP system, and that the data issues have been resolved. We disagree with the Acting Archivist’s statements because the EOP system still lacks the capability to search and retrieve all Bush Administration records in NARA’s possession. Specifically, as we reported in our briefing, NARA used the EOP system to satisfy one request for presidential records during the first 3 months of the transition, but used the less expensive replicated systems to answer another 24 requests. In addition, before the transition, NARA estimated that it would not complete ingesting data until May 2009, limiting the capability of the system in the transition’s early months regardless of the replication errors that ultimately occurred. Finally, the Acting Archivist’s estimate that the Bush data will not be fully ingested until the end of the fiscal year further highlights the fact that NARA still possesses Bush Administration electronic records that cannot be searched using EOP. Until all the Bush Administration records are ingested, the EOP system will not be performing its stated function. Regarding our recommendation that NARA include in its next expenditure plan an analysis of the costs and benefits of using the EOP system to respond to presidential records requests compared to the systems currently being used, the Acting Archivist stated that it did not seem cost- effective to conduct a retrospective analysis as to whether there might have been technology solutions for systems that have already been retired. However, NARA has not yet provided evidence that the mitigation plan systems have been retired. In addition, we are not recommending a study of past alternatives, but a study of the ongoing costs and benefits of using the EOP system compared with the technology used under NARA’s risk mitigation plan. This would provide the agency with useful information in planning future spending, given that NARA was able to respond to requests for Bush Administration records using systems costing significantly less than what has been spent to date on the EOP system. Such an analysis could also inform the contingency plan the Acting Archivist said is being finalized in response to our recommendation. We are sending copies of this report to the Archivist of the United States. The report will also be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions concerning this report, please contact me at (202) 512-9286 or by e-mail at [email protected]. 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 III. Since 2001, the National Archives and Records Administration (NARA or the Archives) has been working to develop a modern Electronic Records Archive (ERA). This major information system is estimated to cost more than $550 million and is intended to preserve and provide access to massive volumes of all types and formats of electronic records, including presidential records, independent of their original hardware or software. NARA plans for the system to manage the entire life cycle of electronic records, from their ingestion through preservation and dissemination to customers. It is to consist of infrastructure elements, including hardware and operating systems; business applications that will support the transfer, preservation, dissemination, and management of all types of records; and a means for public access via the Internet. Because of the system’s complexity, NARA awarded a contract to Lockheed Martin to develop ERA in phases, or increments, the first of which was originally scheduled to achieve initial operating capability (IOC) in September 2007. However, the contractor did not meet the original cost and schedule milestones due, in part, to productivity issues with its initial development team. In response, NARA and Lockheed Martin agreed to a revised schedule and strategy, consisting of a two-pronged development approach. First, they agreed to continue development of the original system but delayed capabilities to later increments. According to NARA, IOC for this system, now referred to as the “base” ERA system, was achieved in June 2008 as planned under the revised schedule. Second, NARA conducted parallel development of a separate system dedicated initially to receiving electronic records from the outgoing Bush Administration in January 2009. This system, referred to as the Executive Office of the President (EOP) system, uses a different architecture from that of the ERA base: it was built on a commercial product that was to provide the basic requirements for processing presidential electronic records, such as rapid ingestion of records and the ability to search content. NARA believed that if it could not ingest the Bush records in a way that supported search and retrieval immediately after the transition, it risked not being able to effectively respond to requests from Congress, the new administration, and the courts for these records—a critical agency mission. NARA certified the EOP system for IOC in December 2008. As mandated by the Omnibus Appropriations Act, NARA is required to submit an expenditure plan before obligating multiyear funds for the ERA program. As in the previous year, the plan must satisfy the following legislative conditions: meet the capital planning and investment control review requirements established by the Office of Management and Budget (OMB), including Circular A-11; comply with the agency’s enterprise architecture; conform to the agency’s enterprise life-cycle methodology; comply with the acquisition rules, requirements, guidelines, and system acquisition management practices of the federal government; be approved by the agency and OMB; and be reviewed by GAO. tion Act, 2009, Pub. L. No. 111-8, div. D, title V, 123 St. 524, 667 (Mr. 11, 2009). On March 6, 2009, the agency finalized the 2009 expenditure plan that was submitted to the House and Senate appropriations committees to support its request for $67 million in ERA funding for fiscal year 2009, which is comprised of $45.8 million in multi-year funds and $21.2 million in single-year funds. fil yer 2009 budget authority totled $67.6 million which inclde $0.6 million crried over from mlti-yer fnd pproprited in previous ye. Objectives, Scope, and Methodology determine whether NARA’s fiscal year 2009 expenditure plan satisfies the provide an update on NARA’s progress in implementing our prior expenditure plan provide any other observations about the expenditure plan and the ERA acquisition. To assess compliance with the legislative conditions, we reviewed NARA’s fiscal year 2009 exhibit 300 submissionto OMB to determine the extent to which the agency has complied with OMB’s capital planning and investment control requirements; obtained and reviewed data on NARA’s enterprise architecture to determine the status of the agency’s enterprise architecture efforts; reviewed NARA’s enterprise systems development life cycle methodology that includes processes for managing system investments, configuration management, and risks, and reviewed related documentation concerning how these processes were implemented for the ERA project, such as minutes of oversight boards and the risk management plan; reviewed internal assessments of ERA; obtained and reviewed OMB’s approval of the expenditure plan; and reviewed and analyzed the fiscal year 2009 expenditure plan submitted by the agency in March 2009. develop n exhiit 300, o known as the Cpitl Asset Plnd Business CasSummry, to justify ech reqt for jor informtion technology invetment. OMB et forth reqirement for the exhiit 300 in Circr A-11, Prt 7, Plnning, Bdgeting, Acqition, nd Mgement of Cpitl Asset. Objectives, Scope, and Methodology To determine the status of our two prior recommendations, we obtained and reviewed monthly congressional reports and the EOP mitigation plan. We reviewed these documents to determine whether NARA (1) developed a risk mitigation plan to ensure indexing and searching of records from the Bush Administration in the event that the EOP system was not complete in time for the January 2009 presidential transition and (2) included earned value data in its monthly reports to Congress. Objectives, Scope, and Methodology To develop observations on the ERA expenditure plan and acquisition, we analyzed the cost and schedule information contained in the expenditure plan, reviewed agency and contractor documents such as EOP test results—including acceptance tests and security and risk assessments—and cost and schedule reports, and performed analysis of Earned Value Management (EVM) data and key processes used in NARA’s EVM system. We also reviewed federal requirements for contingency planning and NARA plans for corrective action on issues identified. In addition, we interviewed NARA officials. We did not evaluate the controls over the procedures used to transfer records from the White House to NARA or controls over processes used to determine which records were presidential records. project mgement tool tht integrte the techniccope of work with chedle nd cot element for invetment plnning nd control. It compre the ve of work ccomplihed in given period with the ve of the work expected in tht period. Difference in expecttion re measured in oth cond chedle vrince. OMB reqire gencie to use EVM in their performnce-based mgement tem for the prt of n invetment in which development effort i reqired or tem improvement re nder wy. Objectives, Scope, and Methodology To assess the reliability of the cost and schedule information contained in the expenditure plan, we interviewed NARA officials in order to gain an understanding of the data and discuss our use of the data in this briefing. In addition, we compared schedule information in the fiscal year 2009 plan with information in the fiscal year 2008 plan and the ERA integrated schedule. We did not, however, assess the accuracy and reliability of the information reported in these documents. We conducted this performance audit from March 2009 to May 2009 at NARA’s College Park, Maryland, location 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. NARA’s fiscal year 2009 plan satisfies the six legislative conditions contained in the 2009 Omnibus Appropriations Act. NARA implemented one of the recommendations we made last year, and partially implemented the other: We recommended that NARA develop a risk mitigation plan to ensure indexing and searching of records from the Bush Administration in the event that the EOP system was not complete in time for the January 2009 presidential transition. NARA finalized its plan in November 2008. It stated that, in the event that records could not be ingested into EOP in a timely manner, NARA intended to acquire hardware and software to replicate the systems containing the data and use them to retrieve requested records. We recommended that, to improve the utility of information provided to Congress, NARA include summary measures of project performance against ERA cost and schedule estimates in its monthly reports. In July 2008, NARA began including an Earned Value Summary as an appendix to its monthly reports to Congress. However, after reviewing NARA’s earned value data, we found methodological weaknesses that could limit NARA’s ability to accurately report on program cost, schedule, and performance (these weaknesses are discussed further below). We have four observations related to the ERA program and fiscal year 2009 expenditure plan: Cost, schedule, and performance data in the expenditure plan do not provide a clear picture of ERA system progress. The plan does not specifically identify whether completed increments included all previously planned functionality or what functionality will be provided in future increments. For example, the plan does not specify what outcomes NARA expects to achieve with the remainder of its fiscal year 2009 funding. NARA officials attributed the plan’s lack of specificity to ongoing negotiations with its contractor. Until NARA fully describes the outcomes expected for the remainder of the year, congressional appropriators will lack information important for evaluating the agency’s request for ERA funds. NARA’s expenditure plan states that it relies on Earned Value Management (EVM), an important tool for project management and control that is intended to provide, among other things, objective reports of program status. However, NARA is fully addressing only 5 of the 13 practices required to effectively implement EVM, which limits the reliability of its progress reports. NARA officials attributed these weaknesses, in part, to documentation that did not accurately reflect the program’s current status. Without consistently following these best practices, NARA will be hindered in accurately monitoring and reporting on the cost, schedule, and performance of the ERA system. Although NARA certified initial operating capability for the EOP system in December 2008, the system is not currently fulfilling its intended purpose. Less than 3 percent of the Bush Administration electronic records NARA received have been successfully ingested into the system. NARA officials estimate that the records will not be fully ingested until October 2009. Agency officials attributed delays in part to unexpected difficulties, such as data not being extracted in expected formats and incomplete replication of one type of data. In the interim, NARA is primarily supporting search, processing, and retrieval of presidential records using the replicated systems described in the risk mitigation plan we recommended the agency develop last year, which cost less than $600,000 to put in place, compared to nearly $40 million it has obligated for EOP. Until NARA completely and accurately ingests the Bush Administration presidential records into EOP, it will be unable to use the system for its intended purpose and will incur additional costs maintaining the systems it is now using to support requests for these records. NARA lacks a contingency plan for the ERA system in the event of a system failure or disruption. While NARA identified 11 security weaknesses related to contingency planning during acceptance testing and listed actions planned to address them, NARA has completed only one of the 11 planned actions. Further, NARA does not have a fully functional backup and restore process for the ERA system, a key component of planning for system availability in the event of a failure or disruption. According to NARA officials, a full system contingency plan is under development. However, until such a plan is tested and implemented, NARA risks prolonged unavailability of the ERA system in the event of a failure or disruption. We are recommending that the Archivist of the United States take the following actions: Report to Congress on the specific outcomes to be achieved by ERA program funding for the remainder of fiscal year 2009. Provide detailed information in future expenditure plans on what was spent and delivered for deployed increments of the ERA system and cost and functional delivery plans for future increments. Strengthen the earned value process so that it follows the practices described in GAO’s guide and more reliable cost, schedule, and performance information can be included in future expenditure plans and monthly reports. Include in NARA’s next expenditure plan an analysis of the costs and benefits of using the EOP system to respond to presidential records requests compared to other existing systems currently being used to respond to such requests. Develop and implement a system contingency plan for ERA that follows contingency guidance for federal systems. In written comments on a draft of this briefing, the Acting Archivist of the United States agreed with 4 of our 5 recommendations. Regarding our recommendation that NARA report on the costs and benefits of using the EOP system to answer requests for presidential records compared to other systems, the Acting archivist stated that such a comparison would not be valid because of the differing capabilities of the systems and that the EOP system has accomplished enormous amounts of work. We disagree that a comparison of the costs and benefits of EOP and other systems would be invalid, because a valid analysis should account for the differences in capabilities. In addition, we noted that the replicated systems currently used to answer requests include nearly half of the records transferred to NARA and have been used to answer most of the requests received to date. The ability to find, organize, use, share, appropriately dispose of, and save records—the essence of records management—is vital for the effective functioning of the federal government. In the wake of the transition from paper-based to electronic processes, records are increasingly electronic, and the volumes of electronic records produced by federal agencies are vast and rapidly growing, providing challenges to NARA as the nation’s record keeper and archivist. Besides sheer volume, other factors contributing to the challenge of electronic records include their complexity and their dependence on software and hardware. Specifically, the computer operating systems and the hardware and software that are used to create electronic documents can become obsolete. If they do, they may leave behind records that cannot be read without the original hardware and software. Further, the storage media for these records are affected by both obsolescence and decay. Media may be fragile, have limited shelf life, and become obsolete in a few years. For example, few computers today have disk drives that can read information stored on 8- or 5¼-inch diskettes, even if the diskettes themselves remain readable. Another challenge is the growth in electronic presidential records. The Presidential Records Act gives the Archivist of the United States responsibility for the custody, control, and preservation of presidential records upon the conclusion of a President’s term of office. The act states that the Archivist has an affirmative duty to make such records available to the public as rapidly and completely as possible consistent with the provisions of the act. In response to widely recognized challenges, the Archives began a research and development program to develop a modern archive for electronic records. In 2001, NARA hired a contractor to develop policies and plans to guide the overall acquisition of an electronic records system. In December 2003, the agency released a request for proposals for the design of ERA. In August 2004, NARA awarded two firm-fixed-price contracts for the design phase, totaling about $20 million—one to Harris Corporation and the other to Lockheed Martin Corporation. On September 8, 2005, NARA announced the selection of Lockheed Martin Corporation to build the ERA system. l Acqition Regtion, firm-fixed-price contrct provide for price tht i not subject to ny djustment on the bas of the contrctor’ cot experience in performing the contrct. The total value of the cost plus award fee contract with Lockheed through 2012 is about $317 million. As of fiscal year 2008, NARA has paid Lockheed $111.9 million for system development. t plus rd fee contrct i cot reimbuement contrct tht provide for fee conting of basmont fixed t inception of the contrct plus rd mont tht me given based pon dgmentl evuation y the government of contrct performnce. The purpose of ERA is to ensure that the records of the federal government are preserved for as long as needed, independent of the original hardware or software that created them. ERA is to provide the technology to ensure that anyone, anywhere, anytime can access NARA’s electronic records holdings with the current technology that will be in use. The system is to enable the general public, federal agencies, and NARA staff to search and access information about all types of federal records, whether in NARA custody or not, as well as to search for and access electronic records stored in the system. Using various search engines, the system is to provide the ability to create and execute searches, view search results, and select assets for output or presentation. Figure 1 provides a simplified depiction of the system’s business concept. As currently planned, the ERA system is to consist of six major components. Ingest will enable the transfer of electronic records from federal agencies. Archival Storage will enable stored records to be managed in a way that guarantees their integrity and availability. Dissemination will enable users to search descriptions and business data about all types of records, and to search the content of electronic records and retrieve them. Records Management will support scheduling, appraisal, description, and requests to transfer custody of all types of records, as well as ingesting and managing electronic records, including the capture of selected records data (such as origination date, format, and disposition). Preservation will enable secure and reliable storage of files in formats in which they were received, as well as creating backup copies for off-site storage. Local Services & Control will regulate how the ERA components communicate with each other, manage internal security, and enable telecommunications and system network management. chedle i docment tht decri gency record, eablihe period for their retention y the gency, nd providendtory intrction for wht to do with them when they re no longer needed for crrent government business. pprsal i the process of determining the vnd the finl dipoition of record, mking them either temporry or permnent. NARA currently plans to deliver these components in five separate increments: Increment 1 was deployed in two releases. Release 1 established the ERA base system—the hardware, software, and communications needed to deploy the system. Release 2 enabled functional archives with the ability to preserve electronic data in their original format, enable disposition agreements and scheduling, and receive unclassified and sensitive data from four federal agencies; according to NARA officials, this increment was completed in June 2008. Increment 2 includes the EOP system, which was designed to handle records from the Executive Office of the President. The EOP system uses an architecture based on a commercial off-the-shelf product that supplies basic requirements, including rapid ingest of records and immediate and flexible search of content. Increment 2 includes basic case management for special access requests. This release was certified for initial operating capability (IOC) in December 2008. The second release of Increment 2 and Increments 3 through 5 are to provide additional ERA functionality, such as public access. originl EOP pl inclded NtionSecrity Stem. NARA subseqently deferred the cability to inget classified ntionecrity d, ting tht the volme to e trferred from the Bush Adminitrtion did not support the eablihment of ll le classified EOP tem as plnned. Inted, NARA migrted the classified d from the Bush Adminitrtion to n exiting classified NARA preidentil liry tem. re req NARA receive from the crrent nd former dminitrtion, Congress, nd the cort for ccess to preidentil record. Figure 2 shows the current incremental timetable for deploying ERA and the functionality planned for each increment. Since 2002, we have issued several reports on ERA and its development. In May 2008, we testified that the development of the ERA base was proceeding according to the revised schedule, although it faced challenges in meeting several testing deadlines. We also testified that the timely completion of the EOP system was uncertain, in part, due to ongoing negotiations between NARA and Lockheed Martin on system capabilities, tim frames, and limited information about the nature of the records to be delivered. ne 17, 2002). Records Management: Planning for the Electronic Records Archives Has Improved, GAO-04-927 (Washington, D.C.: Sept. 23, 2004); Information Management: Acquisition of the Electronic Records Archives Is Progressing, GAO-05-802 (Washington, D.C.; Jly 15, 2005); Electronic Records Archives: The National Archives and Records Administration’s Fiscal Year 2006 Expenditure Plan, GAO-06-906 (Washington, D.C.: Ag. 18, 2006); nd Information Management: The National Archives and Records Administration’s Fiscal Year 2007 Expenditure Plan, GAO-07-987 (Washington, D.C.: Jly 27, 2007). y 14, 2008). In September 2008 we reported that NARA did not fully comply with its enterprise life- cycle methodology because it had not yet developed a mitigation plan to process the outgoing administration’s records into the ERA system at the time of the January 2009 presidential transition. NARA intended to develop a mitigation plan at the end of 2008, when it expected to know more about the types and volume of the presidential records that it would receive. We reported that this proposed schedule would leave NARA little time to prepare for and implement the plan. As of April 2009, the life-cycle cost for ERA through March 2012 was estimated at $551.4 million; the total life-cycle cost includes not only the development contract costs, but also program management, research and development, and program office support, among other things. Table 1 shows the amount spent for ERA in fiscal year 2008. Table 2 shows the reported spending from the program’s inception to the end of fiscal year 2008. In March 2009, NARA submitted a fiscal year 2009 expenditure plan as required to obtain the release of multiyear funds for ERA. The Omnibus Appropriations Act states that the agency could not obligate these funds until the appropriations committees reviewed and approved the expenditure plan. As of March 31, 2009, the appropriations committees have released $28.5 million of fiscal year 2009 multi-year funds with $17.3 million remaining to be released. Single-year funds appropriated for fiscal year 2009 totaled $21.2 million. NARA’s estimated ERA obligations for fiscal year 2009, including both single-year and multi-year funds, are $67.6 million. NARA plans to spend $11.1 million of this amount on EOP, and the remainder on the ERA base system and ERA program. As of March 31, 2009, NARA had obligated $23.9 million. Table 3 shows how NARA planned to distribute funds across the ERA program in fiscal year 2009. Objective 1: NARA’s expenditure plan satisfies the fiscal year 2009 legislative conditions. Objective 2: NARA has partially implemented our previous recommendations In July 2008, we made two recommendations to NARA—developing a mitigation plan and enhancing ERA project oversight. NARA implemented one of our recommendations and partially implemented the other. Objective 3: Observations about NARA’s ERA Acquisition and Expenditure Plan Observation 1: Cost, schedule, and performance data in the expenditure plan do not provide a clear picture of system progress. NARA’s expenditure plan should include a sufficient level and scope of information for Congress to understand what system capabilities and benefits are to be delivered, by when, and at what costs, and what progress is being made against the commitments that were made in prior expenditure plans. However, NARA’s plan does not clearly show what functions have been delivered to date or what functions will be included in future increments and at what cost. As of fiscal year 2008, NARA has spent $237.4 million for ERA, or about 43 percent of the program’s estimated life-cycle costs through 2012. NARA’s expenditure plan describes the results achieved with ERA funding at a high level. For example, as described in the plan, Increment 1, also known as the ERA base, includes the system hardware and software as well as some capability to preserve electronic data in their original format. Also, according to the plan, Increment 2, the EOP system, includes the capability to perform content searching and basic case management for presidential records. However, the plan does not provide a complete picture of what capabilities were delivered in these increments. In addition, even though NARA reported that planned functionality in both of these increments had been deferred to future increments, the plan does not provide cost estimates for the deferred functionality. As a result, it is not possible to fully identify what functionality has been delivered to date and at what cost. Additionally, NARA states it will spend $21.3 million to continue development of Increment 3, including implementing a common architecture, extending storage capabilities, and providing public access and preservation capabilities. However, NARA’s fiscal year 2009 plan lacks specifics about the scope of these improvements. For example, it does not quantify by how much it will extend storage capacity. Also, NARA’s plan does not specify when these functions will be completed or how much will be spent on each one. Finally, while NARA’s plan reports that fiscal year 2009 funds will be used to support operations and maintenance of the completed base and EOP increments, it does not specify how much will be needed to address issues deferred when the systems were accepted. For example, the plan does not specify the funding required during the fiscal year to address issues in the EOP system that were identified but deferred when the system was certified for initial operating capability in December 2008. NARA officials subsequently estimated that such efforts will cost $1.1 million. NARA officials attributed the plan’s lack of specificity to ongoing negotiations with Lockheed Martin. NARA provided broad descriptions of tasks for future development to Lockheed and is currently working with the contractor to refine them, and expects Lockheed to provide a proposal for accomplishing these tasks in May 2009. It is also in negotiations over the costs of addressing issues that were deferred at IOC. Without more specific information on what functionality has been and will be delivered and the costs associated with those functions, NARA and other interested parties will have limited abilities to measure overall program progress. In addition, until NARA specifies how it will use funds requested for the remainder of the year, congressional appropriators will lack information important for evaluating NARA’s request. Observation 2: NARA is not consistently following best practices in Earned Value Management NARA’s expenditure plan states that, in managing ERA, the agency uses Earned Value Management (EVM) tools and requires the same of its contractors. EVM, if implemented appropriately, can provide objective reports of project status, produce early warning signs of impending schedule delays and cost overruns, and provide unbiased estimates of a program’s total costs. We recently published a set of best practices on cost estimation that addresses the use of EVM. Comparing NARA’s EVM data to those practices, we determined that NARA fully addressed only 5 of the 13 practices. For example, we found weaknesses within the EVM performance reports, including contractor reports of funds spent without work scheduled or completed, and work completed and funds spent where no work was planned. rch, 2009). In addition, the program has not recently performed an integrated cost-schedule risk analysis. This type of analysis provides an estimate of the how much the program will cost upon completion and can be compared to the estimate derived from EVM data to determine if it is likely to be sound. NARA officials attributed these weaknesses, in part, to documentation that did not accurately reflect the program’s current status. By not consistently adhering to identified best practices, NARA’s program management data may be unreliable, likely hindering NARA’s ability to accurately monitor and report on program costs, schedule, and performance. Further detail on these best practices and our assessment can be found in attachment 1. Observation 3: Although NARA certified initial operating capability for EOP, the system is not currently fulfilling its intended purpose. NARA designed and developed the EOP system to support the transfer of electronic records at the end of the George W. Bush Administration as required by the Presidential Records Act. In fiscal year 2008, NARA obligated $27.9 million for the planning and development of EOP in order for the system to be ready for the presidential transition. The system was to ingest the electronic records and to support search, processing, and retrieval of records—particularly for “special access” requests for the ongoing business of Congress and the next administration—immediately after the presidential transition on January 20, 2009. Responding to special access requests from the current administration, Congress, and the courts is a critical part of NARA’s mission and one of the major capabilities intended for the EOP system. re req NARA receive from the crrent nd former dminitrtion, Congress, nd the cort for ccess to preidentil record. The prioritie re determined y NARA’ Office of Preidentil Lirie based on experience with the record of previous dminitrtion. In December 2008, NARA certified IOC for the EOP system, based on successful completion of acceptance and security testing. In January 2009, NARA took custody of approximately 78.4 terabytes of unclassified Bush Administration electronic records, which agency officials characterized as all such records. Before the transition, NARA had estimated that it was going to receive almost 124 terabytes of presidential records. According to NARA officials, the difference between the estimated volume of records and the actual records received is due to inaccurate information provided by the previous administration. NARA copied the records data to large storage arrays, which were initially stored in the Washington, D.C. area, then moved to the ERA facility in West Virginia, where ingestion of records into EOP takes place. As of April 27, only 2.3 terabytes of data have been fully ingested from the first storage array into the EOP system, where they are available for search and retrieval. This constitutes about 3 percent of all Bush Administration unclassified electronic records. NARA currently estimates that ingest of all 78.4 terabytes of unclassified records will not be complete until October 2009. Before the transition, NARA has estimated that ingest would be completed by May 2009. abt one trillion yte or abt 1,000 gigabyte. NARA officials attributed delays, in part, to unexpected difficulties. For example, according to NARA officials, once they started using the EOP system, they discovered that records from certain White House systems were not being extracted in the expected format. As a result, it had to develop additional software tools to facilitate the full extraction of data from White House systems prior to ingest into EOP. In addition, in April 2009, NARA discovered that 31 terabytes of priority data that had been partially ingested between December 2008 and January 2009 was neither complete nor accurate because it was taken from an incomplete copy of the source system. NARA has started to re-copy data from what it believes to be a complete version of the source data. Because the records had not been ingested into the EOP system, NARA had to use other systems to respond to requests for presidential records. As of April 24, 2009, NARA had received 43 special access requests for information on the Bush Administration. Only one of these requests used EOP for search, and no responsive records were found. To respond to 24 of these requests, NARA used the replicated White House systems described in its risk mitigation plan, which called for acquiring the software and related hardware used by the White House to manage a records management system and an image database. According to NARA officials, these replicated systems cost $570,000 to put into service. The sources used to respond to the 42 requests that did not use EOP are listed in table 6 below. Observation 4: NARA lacks a contingency plan for ensuring continuity of the ERA system. Contingency planning is a critical component of information protection. If normal operations are interrupted, network managers must be able to detect, mitigate, and recover from service disruptions while preserving access to vital information. Therefore, a contingency plan details emergency response, backup operations, and disaster recovery for information systems. It is important that these plans be clearly documented, communicated to potentially affected staff, updated to reflect current operations, and regularly tested. The Federal Information Security Management Act (FISMA) requires each agency to develop, document, and implement an information security program that includes plans and procedures to ensure continuity of operations for information systems that support the agency’s operations and assets. The National Institute of Standards and Technology (NIST) requires that agencies’ systems have contingency plans and that the plans address, at a minimum, identification and notification of key personnel, plan activation, system recovery, and system reconstitution. Specifically, NIST identifies 10 security control activities related to contingency planning, including developing a formal contingency plan, training employees on their contingency roles and responsibilities, and identifying a geographically separate alternative processing site to support critical business functions in the event of a system failure or disruption. tionl Intitte of Sndrd nd Technology, Recommended Security Controls for Federal Information Systems, Specil Publiction 800-53 Reviion 1 (Githersburg, MD: Decemer 2006). NARA has not developed a contingency plan for the ERA system to ensure availability in the event of a system failure or disruption. In December 2008, NARA issued an assessment that detailed the results of an evaluation of the security features associated with the ERA system. This assessment identified weaknesses related to all 10 of the contingency planning control activities, which were attributed to the system not having the required contingency plans. OMB guidancerequires that when an agency identifies security weaknesses, it must also develop a plan of action to address the identified weaknesses, including the resources required to fix the weaknesses, the scheduled completion date of each fix, and the current status of the mitigation. Accordingly, NARA developed a plan of action and milestone document which was to detail all the primary risk elements present in the system and the corresponding plan of actions to mitigate or correct identified deficiencies before the ERA system reached IOC. However, while the initial plan of action and milestones discussed fixes for eight contingency planning control activities, it did not address two others—contingency planning policies and procedures and telecommunications services. For those eight control activities mentioned in the document, no timetable was provided for completion to address the identified issues. A subsequent planning document was developed that provided further detail on the identified risks. gement nd Bdget, “Gidnce for Prepring nd Submitting Secrity Pl of Action nd Miletone,” Memorndm for the He of Exective Deprtment nd Agencie, Mitchell E. Dniel, Jr., Director, M-02-01, Octoer 17, 2001. The revised plan of action and milestones document provided the scheduled dates of completion as well as the current status of the mitigation activities. However, this version did not mention the various risk categories (i.e., “low,” “medium,” “high”) and used a variety of terms to describe the status of each weakness (e.g., “pending,” “planned,” “ongoing”) without providing clear definitions of their meaning. Further, 10 of 11 items in the plan of action to address contingency planning weaknesses remain open as of April 2009. In addition, NIST standards require that agencies back up information contained within a system and employ a mechanism that would restore the system after a disruption or failure. Following product acceptance tests for EOP, NARA reported that the backup and restore functions for the commercial off-the-shelf archiving product used at the ERA facility in West Virginia tested successfully, but there were concerns about the amount of time required to execute the process. In lab tests, the restore process took about 56 hours for 11 million files. This is significant because, while the backup is being performed, the replication of data must be stopped; otherwise it could bring the system to a halt. Subsequently, NARA officials stated that they have conducted two successful backups, but the restore process had not been fully tested to ensure that the combined backup and restore capability can be successfully implemented. The most recent backup, conducted at Rocket Center on March 20, 2009, took 95 hours and 38 minutes for 11.25 terabytes of data, but NARA could not provide any documentation to substantiate the success of the backups or information on the length of time needed to perform the restore function. timte tht it has received more thn 300 million file from the Bush Adminitrtion. NARA considered the initial backup and restore test a success because it met the requirements set for the contractor. According to NARA’s requirements documentation, among other things, the Backup and Recovery service was supposed to “provide the capability to recover EOP ERA records as required to re-establish the system,” and “provide the capability to recover application files to re-establish the EOP ERA system.” However, as in the examples cited, none of the backup/restore requirements specified how long the backup and restore process should take. According to NARA officials, a full system contingency plan is currently under development. Without a complete and successfully tested contingency plan, there is an increased risk that, in the event of a major system failure or disruption, NARA would not be able to effectively restore its information and ensure system availability. Such a significant risk severely limits the reliability of the system. While NARA has continued to make progress on the ERA system, that progress cannot be fully quantified because NARA’s expenditure plan does not clearly identify what functions have already been delivered, how much was spent to provide each function, or how much is required to maintain the delivered increments. NARA’s current plan similarly lacks details on the functions to be provided in future increments and the costs associated with them, including development efforts scheduled to take place in the remainder of this year. In addition, although NARA has been using Earned Value Management to track program cost, schedule, and performance, weaknesses in its EVM data limit NARA’s ability to accurately report on the project’s progress. Without more specific and accurate information on the immediate and long-term goals of the program and the outcomes expected from its resulting efforts, NARA will be hindered in effectively monitoring and reporting on the cost, schedule, and performance of the ERA system and congressional appropriators will lack information necessary to evaluate the agency’s requests for funds. Although NARA certified that the EOP portion of the ERA system had achieved initial operating capability as planned in December 2008, the system has been of limited use because of delays in ingesting electronic records into the system. Further, even though it has obligated nearly $40 million on EOP, NARA has instead answered requests for Bush electronic records using existing systems or replicated White House systems that cost less than $600,000. Under its current schedule, the Bush Administration records will not be fully ingested into the system until October 2009. However, even when the data are fully ingested, the system’s lack of a complete, fully tested contingency plan increases the risk that a system failure or disruption will result in the system being unavailable for several days or more. We recommend that the Archivist of the United States take the following actions: Report to Congress on the specific outcomes to be achieved by ERA program funding for the remainder of fiscal year 2009. Provide detailed information in future expenditure plans on what was spent and delivered for deployed increments of the ERA system and cost and functional delivery plans for future increments. Strengthen the earned value process so that it follows the practices described in GAO’s guide and more reliable cost, schedule, and performance information can be included in future expenditure plans and monthly reports. Include in NARA’s next expenditure plan an analysis of the costs and benefits of using the EOP system to respond to presidential records requests compared to other existing systems currently being used to respond to such requests. Develop and implement a system contingency plan for ERA that follows contingency guidance for federal systems. Agency Comments and Our Evaluation In written comments on a draft of this briefing, the Acting Archivist of the United States agreed with 4 of our 5 recommendations. Specifically, in response to our recommendation that NARA report to Congress on the specific outcomes to be achieved during the remainder of the year, she indicated that a briefing on that subject was provided on April 27, 2009. In addition, she agreed to: ensure that future expenditure plans include more details on the costs and functions of future increments, strive to comply with EVM best practices, and complete the ERA system contingency plan. Agency Comments and Our Evaluation Regarding our recommendation that NARA report on the costs and benefits of using the EOP system to answer requests for presidential records compared to other systems, the Acting Archivist raised several points. First she wrote that the EOP system is accomplishing an enormous amount of work at exceptional speed, and that the system has the capability to transfer and ingest records as they became available. However, as indicated in our briefing, the EOP system has been of limited use to answering the requests received to date. Further, the ingest of presidential records into the system required the use of additional software tools and is now scheduled to take 5 months longer than NARA estimated before the transition, even though NARA received a significantly lower volume of records than anticipated. The Acting Archivist also wrote that EOP supports functions other than the search of presidential records, such as the lifecycle management of presidential records, and that comparisons between the replicated systems and EOP are not valid. While we acknowledge that EOP was designed to perform functions other than search, we disagree that a comparison between EOP and other systems would not be valid. Instead, we believe that an appropriate analysis of the costs and benefits of using the various systems should account for the need to satisfy non-search requirements, such as lifecycle management of records, using systems other than EOP. Agency Comments and Our Evaluation Finally, the Acting Archivist wrote that the replicated systems were being used for a small subset of records. However, these systems include nearly half of the records NARA received, by volume. In addition, these same records have been the subject of most of the requests received to date. We also addressed the Acting Archivist’s technical comments, as appropriate. In addition to the individual named above, key contributions to this report were made by James R. Sweetman, Jr., Assistant Director; Monica Perez Anatalio; Nabajyoti Barkakati; Carol Cha; Barbara Collier; Tisha Derricotte; Jennifer Echard; Pamlutricia Greenleaf; Kush Malhotra; Lee McCracken; and Tarunkant Mithani. | Since 2001, the National Archives and Records Administration (NARA) has been developing an Electronic Records Archive (ERA) to preserve and provide access to massive volumes of electronic records independent of their original hardware and software. The ERA system is to include a base system for federal records and a separate system for presidential records, known as the Executive Office of the President (EOP) system. The 2009 Omnibus Appropriations Act requires NARA to submit an expenditure plan for ERA to congressional appropriation committees. GAO's objectives were to (1) determine whether NARA's fiscal year 2009 plan meets the legislative conditions set forth in the 2009 Omnibus Appropriations Act, (2) provide an update on NARA's progress in implementing recommendations made in GAO's review of NARA's 2008 expenditure plan, and (3) provide any other observations about the expenditure plan and the ERA acquisition. To do this, GAO reviewed the expenditure plan, interviewed NARA officials, and reviewed program data and documentation. NARA's fiscal year 2009 expenditure plan satisfies the six legislative conditions in the 2009 Omnibus Appropriations Act. NARA implemented one of GAO's prior recommendations and partially implemented the other. Specifically, NARA developed a risk mitigation plan for the EOP system in the event that it was not ready in time for the presidential transition in January 2009. In addition, NARA began including summaries of performance against ERA cost and schedule estimates in its monthly reports to Congress. However, during its review, GAO found methodological weaknesses that could limit NARA's ability to accurately report on program cost, schedule, and performance. GAO made four observations on NARA's expenditure plan and the ERA acquisition: (1) The expenditure plan does not specifically identify whether completed system increments include all planned functionality or what functionality will be included in future increments, including the outcomes NARA expects from the remainder of its fiscal year 2009 funding. Until NARA fully describes the outcomes expected from this funding, Congress will lack important information for evaluating the agency's requests for funds. (2) The expenditure plan states that it relies on Earned Value Management (EVM), a tool for project management intended to provide objective reports of program status. However, NARA is not fully implementing practices necessary to make effective use of EVM, limiting the reliability of its progress reports. Without consistently following these best practices, NARA will be hindered in accurately monitoring and reporting on the cost, schedule, and performance of the ERA system. (3) Although NARA certified initial operating capability for the EOP system in December 2008, less than 3 percent of the electronic records from the Bush Administration had been ingested into the system at the time of GAO's review, and NARA did not expect the remainder to be ingested until October 2009. In the interim, NARA is using systems developed in accordance with its risk mitigation plan to support the search, processing, and retrieval of presidential records. These systems cost less than $600,000, compared with the $40 million NARA has obligated for the EOP system. Until NARA completely ingests the Bush Administration records into EOP, it will be unable to use the system for its intended purpose. (4) NARA lacks a contingency plan for the ERA system in the event of a failure or disruption. While NARA identified 11 security weaknesses related to contingency planning during system testing and planned actions to address them, it has completed only 1 of the 11 planned actions. Further, NARA does not have a fully functional backup and restore process for ERA, a key component for ensuring system availability. Until NARA fully develops and tests a contingency plan, it risks prolonged unavailability of the ERA system in the event of a failure or disruption. |
Beginning January 1, 2014, PPACA required most citizens and legal residents of the United States to maintain health insurance that qualifies as minimum essential coverage for themselves and their dependents or pay a tax penalty. Individuals are exempt from this requirement if they would have to pay more than 8 percent of their household income for the lowest-cost self-only health plan that is available to the individual. Beginning October 1, 2013, individuals were able to shop for private health insurance coverage that qualifies as minimum essential coverage through marketplaces, also referred to as exchanges, which offer choices of qualified health plans. In 34 states, the federal government operated the individual exchanges, known as federally facilitated exchanges, while 17 states operated state-based exchanges in 2014.purchase self-only plans, or they can purchase family plans for themselves, their spouses, and their dependents. Individuals can Qualified health plans on the exchanges may provide minimum essential coverage at one of four levels of coverage that reflect out-of-pocket costs that may be incurred by an enrollee. The four levels of coverage correspond to a plan’s actuarial value—the percentage of the total average costs of allowed benefits paid by a health plan—and are designated by metal tiers: 60 percent (bronze), 70 percent (silver), 80 percent (gold), and 90 percent (platinum). For example, a gold plan with an 80 percent actuarial value would be expected to pay, on average, 80 percent of a standard population’s expected medical expenses for the essential health benefits. The individuals covered by the plan would be expected to pay, on average, the remaining 20 percent of the expected cost-sharing expenses in the form of deductibles, copayments, and coinsurance. Under PPACA, issuers are allowed to adjust premium rates within specified limits for plans, based on the number of people covered under a particular policy and the covered individuals’ age, tobacco use, and area of residence. Each state must divide its state into one or more rating areas that all issuers must use in setting premium rates. The rating area is the lowest geographic level by which issuers can vary premiums. Individuals obtaining insurance through the exchanges may be eligible for the APTC under PPACA if they meet applicable income requirements and are not be eligible for coverage under another qualifying plan or program, such as ESI or Medicaid. To meet the APTC’s income requirements, individuals must have household incomes between 100 and 400 percent of the FPL (see table 1). The amount of the APTC is calculated based on an eligible individual’s household income relative to the cost of premiums for the “reference plan,” even if the individual chooses to enroll in a different plan. The reference plan is the second-lowest-cost silver plan available. The APTC in effect caps the maximum amount of income that an individual would be required to contribute to the premiums for the reference plan. The capped amount varies depending on the enrollee’s household income relative to the FPL and is less for enrollees with lower household income. Table 2 shows the maximum percentage of household income a qualifying enrollee would have to pay if they enrolled in the reference plan. If the enrollee chooses a more expensive plan, such as a gold or platinum plan, they would pay a higher percentage of their income. If the enrollee chooses a less expensive plan, such as a bronze plan, they would pay less. The amount of the APTC is determined based on an enrollee’s family size and anticipated household income for the year, which is subject to adjustment—or reconciliation—the following year. Specifically, the final amount of the credit is determined when the enrollee files an income tax return for the taxable year, which may result in a tax liability or refund if the enrollee’s actual, reported household income amount is greater or less than the anticipated income on which the amount of APTC was based. To further improve access to care, certain low-income individuals may also be eligible for an additional type of income-based subsidy established by PPACA, known as cost-sharing subsidies, which reduce out-of-pocket costs for such things as copayments for physician visits or prescription drugs. To be eligible for these cost-sharing subsidies, individuals must have household incomes between 100 and 250 percent of the FPL, not be eligible for coverage under another qualifying plan or program such as Medicaid or ESI, and be enrolled in a silver plan through an exchange.of the silver plan. Cost-sharing subsidies effectively raise the actuarial value As a practical matter, because individuals eligible for Medicaid are not eligible for the APTC, the minimum income level for these subsidies differs between states that chose to expand Medicaid under PPACA and those that did not. In states that chose to expand Medicaid under PPACA, nonelderly adults are eligible for Medicaid when their household income is less than 138 percent of the FPL. Because those eligible for Medicaid are not eligible for the APTC, the minimum income level for the APTC in Medicaid expansion states is effectively 138 percent of the FPL. In states that chose not to expand Medicaid, the minimum income level for individuals to qualify for APTC and cost-sharing subsidies is 100 percent of the FPL, as specified in PPACA, assuming the state’s As of January Medicaid eligibility threshold is at or below this level.2015, 27 states and the District of Columbia opted to expand Medicaid under PPACA. Under PPACA, employers that meet certain conditions must offer health insurance to some employees. Employers with at least 50 full-time equivalent employees—which includes employees whose hours average at least 30-hours per week—must offer qualifying health insurance to their full time employees or face tax penalties if at least one full-time employee receives the APTC. In contrast to PPACA’s affordability threshold of 8 percent of household income for the purpose of assessing penalties for failure to maintain minimum essential coverage, PPACA requires ESI to meet two different affordability tests for the purposes of determining eligibility for the APTC. First, the employee’s share of the ESI premiums covering an individual, also referred to as a self-only plan, must not exceed 9.5 percent of the employee’s household income. Second, the insurance offered must cover 60 percent of the actuarial value of health care for the average person to qualify as affordable for purposes of the APTC. Employees who are offered ESI that meets both of these tests are not eligible for the APTC. Some employees may be offered qualifying ESI that costs between 8 and 9.5 percent of household income. If these individuals do not have access to insurance on an individual exchange that costs less than 8 percent of household income, they are exempt from the individual mandate and will not have to pay a tax penalty if they forgo coverage. However, these individuals are not eligible for the APTC. Because small employers are not required to offer health insurance and have been less likely to offer health insurance than large employers, PPACA established a small employer tax credit as an incentive for them to provide insurance by making it more affordable.available to certain employers—small business and tax-exempt entities— with employees earning low wages and that pay at least half of their employees’ health insurance premiums. To qualify for the credit, employers must employ fewer than 25 full-time equivalent employees (excluding certain employees, such as business owners and their family The credit is members), and pay average annual wages per employee of less than $50,800 per year in 2014. The amount of the credit depends on several factors, such as the number of full-time equivalent employees and their total annual wages. In addition, the amount of the credit is limited if the premiums paid by an employer are more than the state’s average small group market premiums, as determined by HHS. Employers may claim the small employer tax credit for up to 6 years—the initial 4 years from 2010 through 2013 and, starting in 2014, any 2 consecutive years if they buy insurance through the Small Business Health Option Programs (SHOP). PPACA required the establishment of SHOPs in each state by January 1, 2014, to allow small employers to compare available health insurance options in their states and facilitate the enrollment of their employees in coverage. In states electing not to establish and operate a state-based SHOP, PPACA required the federal government to establish and operate a federally facilitated SHOP in the state. Starting in 2014, employers that wanted to claim the small employer tax credit had to enroll their employees through the SHOP exchanges. Early evidence suggests that the APTC likely contributed to an expansion of health insurance coverage because it significantly reduced the cost of premiums for those eligible, though there are limitations to measuring the effects of the APTC using currently available data. In contrast, few employers claimed the small employer tax credit, limiting its effect on health insurance coverage. Early evidence suggests that the APTC likely contributed to an expansion in health insurance coverage. We identified three surveys that estimated the uninsured rate by household income. Although limitations exist in measuring the direct, causal effects of the APTC on health insurance coverage using currently available data, these surveys can be used to make early observations about changes in the rate of uninsured. They found that the uninsured rate declined among households with incomes between 139 and 400 percent of the FPL—that is, households financially eligible for the APTC in all states (see table 3). For example, one study found that the rate of uninsured among individuals with household incomes between 139 and 400 percent of the FPL fell 9 percentage points between January 1, 2012, and June 30, 2014, in Medicaid expansion states. Further, the results from this survey found that gains in insurance coverage were statistically significant for individuals in this income bracket regardless of the states’ Medicaid expansion decisions. This expansion in health insurance coverage is likely partially a result of the APTC having reduced the cost of health insurance premiums for those deemed eligible. As of April 19, 2014, HHS initially estimated that 8 million individuals (including dependents) had selected a health plan through either a state-based exchange or a federally facilitated exchange, and most of them (85 percent) were deemed eligible for the APTC at the time that they selected a health plan. Among those who selected a plan through 1 of the 34 federally facilitated exchanges or the 2 state-based exchanges that used the federal website for enrollment in 2014 and were deemed eligible for the APTC (4.7 million individuals), the APTC reduced premiums by 76 percent, on average (see table 4). For those who selected a silver plan through these 36 exchanges and were deemed eligible for the APTC, the APTC reduced premiums the most—an 80 percent reduction. Overall, most individuals who selected a plan through these 36 exchanges and received the APTC (69 percent) saw their premiums reduced to $100 per month or less ($1,200 annually or less), and nearly half (46 percent) had their monthly premiums reduced to $50 or less ($600 annually or less). However, results from an early survey and experts we interviewed suggested that the APTC may have been less effective in expanding health insurance coverage for individuals financially eligible for a smaller APTC amount and ineligible for cost- sharing reduction subsidies than for individuals eligible for a larger APTC amount as well as for cost-sharing reduction subsidies. As of January 2015, data were not available on the extent to which the APTC reduced 2015 premiums for enrollees. Studies that examined changes in premiums between 2014 and 2015 found that, on average, premiums changed modestly. For example, HHS reported that premiums for the reference plan (before applying the APTC) increased by 2 percent, on average, between 2014 and 2015, and premiums for the lowest-cost silver plan increased by an average of 5 percent. However, studies found variation across rating areas, and some rating areas had significant increases or decreases in average premiums. Further, premiums are likely to continue to change in future years as issuers gain more data about enrollees in the exchanges and how they compare to enrollees previously purchasing individual insurance or ESI. In addition, while the APTC helps protect eligible individuals from large increases in premiums by capping the amount of household income individuals have to pay for the reference plan, some who reenrolled in their health plan in 2015, rather than shopping for and switching to a lower cost plan, may find that their premiums, after accounting for the APTC, increased substantially. HHS estimated that more than 7 in 10 current exchange enrollees could find a lower-cost plan within the same metal level as they selected in 2014 if they selected the new lowest-cost plan in 2015, rather than reenroll in their same 2014 plan, but the extent to which this occurred was not yet known as of January 2015. According to results from four early surveys of nonelderly adults and one group of experts we interviewed, lack of awareness of the APTC may have limited take-up of health insurance coverage among some individuals likely eligible for the APTC. Three of the four surveys estimated that, of those who remained uninsured in 2014, between 59 and 60 percent cited affordability or the cost of premiums as the reason for not purchasing health insurance coverage. However, less than half—between 38 and 47 percent—of the uninsured surveyed were aware of the availability of financial assistance to purchase insurance through the individual exchanges. When interpreting data on the effect of the APTC on changes in health insurance coverage, there are several limitations to consider: Large-scale, rigorous survey data are needed to more accurately measure the direct, causal effect of the APTC on changes in health insurance coverage. While early survey data provide some indications of the effect of the APTC on coverage, these surveys generally have lower response rates and smaller sample sizes, which could cause large margins of error when examining changes in health insurance coverage by subgroups, such as by household income. However, results from larger, more rigorous surveys are not expected to be available until the summer of 2015 at the earliest. Available summary data from HHS on those who received the APTC are limited and subject to change because the data: Did not account for effectuated enrollment—that is, whether those who initially selected a health plan paid their premium—nor did it account for individuals who did not submit required documentation to verify their eligibility for the exchanges or the APTC, or those who may have selected a plan after open enrollment ended. Did not include the amount of APTC that individuals in 15 state- based exchanges received. reported to HHS’s Centers for Medicare & Medicaid Services (CMS) the number of individuals who were deemed eligible for the APTC at the time that they selected a plan, CMS officials we spoke with stated that voluntary reporting on the amount of APTC individuals received was limited and variable across states. Did not account for adjustments to the amount of APTC that may occur when the amount of APTC received is reconciled against enrollees’ actual income reported in their 2014 income tax returns, which will begin to occur when individuals start to file their income tax returns in 2015. HHS included data from 2 of the 17 state-based exchanges—Idaho and New Mexico— in its summary data on the amount of APTC received by individuals who selected a health plan and were deemed eligible for the APTC. These two state-based exchanges used the federal website, http://www.healthcare.gov, for their 2014 exchange enrollment. Take-up of the small employer tax credit has continued to be lower than anticipated, limiting the effect of the credit on expanding health insurance coverage. About 167,600 employers claimed the credit in 2012 (the most recent year for which data were available), slightly fewer than the 170,300 employers that claimed the credit in 2010 (see fig. 1). These figures are low compared to the number of employers eligible for the credit. In 2012, we found that selected estimates of the number of employers eligible ranged from about 1.4 million to 4 million. Although about the same number of small employers claimed the credit in 2012 as in 2010, these employers paid all or some of the premiums for more employees in 2012 (900,800 employees) than in 2010 (770,000 employees). As we found in 2012, experts we interviewed for this report generally told us that features of the small employer tax credit did not provide a strong enough incentive to employers to begin to offer or to continue offering health insurance. First, experts explained that the maximum amount of the credit is targeted to very small employers, most of which do not offer health insurance, and experts told us the size of the credit is not large enough to be an incentive to employers to offer or maintain insurance. The maximum amount of the small employer tax credit is available to for- profit employers with ten or fewer full-time equivalent employees that pay an average of $25,400 or less in wages. Such an employer could be eligible for a credit worth up to 50 percent of the employer contributions to premiums in 2014. The credit amount “phases out” to zero as employers employ up to 25 full-time equivalent employees at higher wages—up to an average of $50,000. For example, employers with 24 full-time equivalent employees are only eligible for the credit if they paid wages that averaged $25,400 or less; such employers may be eligible for a credit worth up to 2.2 percent of employer contributions to premiums. Second, the limited availability of the credit—employers can claim it for only two consecutive years after 2013—further detracts from any potential incentive for small employers that do not offer coverage to begin offering coverage. Experts we interviewed told us that employers are reluctant to provide a benefit to employees that would be at risk of being taken away later when the credit is no longer available. Finally, experts told us that the complexity of applying for the credit outweighed its benefit. According to tax preparers and other stakeholders we interviewed for this and our previous report, the complexity of the paperwork required to claim the credit was significant, and small employers likely did not view the credit as a sufficient incentive to begin offering health insurance, given the time required to claim it. The trend in low take-up of the small employer tax credit is likely to continue given the low enrollment in SHOPs, and thus it is unlikely that its effects on coverage will change in the near future. This is because employers were required to offer health insurance coverage through SHOP exchanges to be eligible for the small employer tax credit beginning in 2014. We previously found that 2014 enrollment in SHOP was significantly below expectations. Specifically, we found that as of June 2014, the 18 state-based SHOP exchanges had enrolled about 76,000 employees through nearly 12,000 small employers, although not all of these employers were eligible for the credit. Enrollment in states with federally facilitated SHOPs was not known as of January 2015, although CMS officials said they did not have reason to expect significant differences in enrollment trends for 2014 between the state-based SHOPs and the federally facilitated SHOPs. In comparison, the Congressional Budget Office (CBO) had estimated that, in 2014, 2 million employees would enroll in coverage through either state-based or federally facilitated SHOP exchanges. Most nonelderly adults had access to affordable minimum essential coverage through their employer, Medicaid, the exchanges, or other sources, although about 16 percent of nonelderly adults remained uninsured as of March 2014. While there are many reasons people remain uninsured, some—including certain families or individuals not eligible for the APTC—may not have access to affordable coverage. The affordability of health insurance coverage obtained through the exchanges varied depending on one’s age, household size, income, and place of residence. Regardless of the affordability of premiums, some may face challenges in maintaining their insurance. Most nonelderly adults had access to affordable minimum essential coverage through their employer, Medicaid, the exchanges, or other sources. While specific data on individuals’ access to affordable coverage is not available, estimates of the number of nonelderly adults who are insured through various types of coverage indicate that most have access to coverage that would be considered affordable under PPACA. For example, one survey estimated that, as of March 2014, 59 percent of nonelderly adults had obtained coverage through an employer. For most individuals with ESI, the coverage would be considered affordable under PPACA—that is, premiums for the self-only ESI plan offered cost less than 9.5 percent of their household income. Individuals who are offered ESI that does not meet this affordability threshold may be eligible, depending on their household income, to receive the APTC to instead purchase an affordable exchange plan. As of March 2014, an estimated 2 percent of nonelderly adults purchased coverage through an exchange—an estimated 85 percent of whom received the APTC. An additional 9 percent of nonelderly adults were enrolled in Medicaid coverage, which requires either no or minimal premiums. Finally, an estimated 14 percent of nonelderly adults had other sources of coverage, such as TRICARE for certain members of the armed forces, or health plans sold off the exchanges. An estimated 16 percent of nonelderly adults (31.4 million) were uninsured as of March 2014, according to one early survey. CBO estimated that, in 2016, most of those who will remain uninsured—at least 77 percent—will likely be exempt from the requirement to maintain minimum essential coverage because, for example, they are undocumented immigrants or lack access to health insurance coverage that is considered affordable under PPACA. While there are many reasons people remain uninsured, some individuals may not have access to affordable health insurance coverage. For example, some may be low-income and live in a Medicaid nonexpansion state or they may lack access to affordable ESI yet are also ineligible for the APTC to instead purchase affordable coverage through the individual exchanges. Some states permit certain nonelderly adults with incomes greater than 100 percent of the FPL to enroll in Medicaid, such as those who are pregnant or disabled. the individual exchanges was likely unaffordable for these uninsured individuals. For example, an individual age 27 with household income at 99 percent of the FPL in a Medicaid nonexpansion state would have had to spend between 10 and 32 percent of their household income on the lowest-cost bronze plan, depending on their place of residence. One study estimated that roughly 4 million nonelderly adults with household incomes below 100 percent of the FPL living in a Medicaid nonexpansion state were uninsured in 2014. Although some families have access to ESI that is considered affordable under PPACA, they may have to spend more than 9.5 percent of their household income on such coverage. The ESI affordability threshold is based on the cost of a self-only plan even though premiums for a family plan are typically more expensive, requiring them to spend more than they would on a self-only plan. Because the family would be considered to have access to affordable ESI under PPACA based on the self-only plan, it would not be eligible to receive financial assistance through the APTC to purchase a family plan through the individual exchanges. This has created a situation that some have referred to as “the family glitch,” where families offered ESI may find that coverage to be unaffordable yet they are ineligible for the APTC. The Agency for Healthcare Research and Quality (AHRQ) recently estimated that 10.5 million adults and children may be in this situation. Some nonelderly adults who lack access to affordable coverage elsewhere, such as through an employer, and instead shop for health insurance coverage on the individual exchanges may find this insurance unaffordable without financial assistance from the APTC—those with household incomes greater than 400 percent of the FPL. Results from one early survey suggest that about 6 percent of nonelderly adults were uninsured in 2014 and had household income greater than 400 percent of the FPL. In addition, based on nine household scenarios we examined, the affordability of the lowest-cost bronze plans available in the individual exchanges for such individuals varied by age, household size, income, and location in 2014. For example, in most rating areas in 2014 the lowest-cost bronze plan available would have been considered unaffordable to older individuals with household income between, for example, 401 and 500 percent of the FPL. However, in nearly all rating areas such coverage was likely affordable for younger individuals regardless of their household income. The affordability of the lowest- cost bronze plans also varied by location and income for a family of four with two parents aged 40 years old and two children under 21 years of age. (See fig 2. For a more detailed version of the maps included in fig. 2, see appendix III.) Based on nine household scenarios we examined, the affordability of the lowest-cost bronze plans available varied across different demographic subsets in the United States, for example: Individual age 60-years-old: A 60-year-old individual with household income at 450 percent of the FPL would have had to spend greater than 8 percent of their household income for the lowest-cost bronze plan in most (84 percent) of the 501 rating areas in the United States. Specifically, in 17 percent of rating areas such an individual would have had to spend greater than 12 percent of their household income, in nearly two-thirds (67 percent) of rating areas they would have had to spend greater than 8 through 12 percent, and in 16 percent of all rating areas they would have had to spend from 4 through 8 percent of their household income on the lowest-cost bronze plan. Even with somewhat higher household income at 500 percent of the FPL, the lowest-cost bronze plan would be considered unaffordable for older individuals in most rating areas (72 percent). Moreover, in the most expensive rating area for a 60-year-old individual (counties near Albany, GA), the lowest-cost bronze plan had an annual premium of $9,487. Among those with income too high to receive the APTC, this plan would have been considered unaffordable for a 60-year-old individual if they earned between $46,797 (401 percent of the FPL) and $118,588 (1,016 percent of the FPL) in that rating area. Individual age 27-years-old: The lowest-cost bronze plan would have been considered affordable in all but one rating area for a 27-year-old with income too high to receive the APTC. In nearly half (47 percent) of all rating areas, such individuals with household income at 450 percent of the FPL, for example, would have had to spend from 4 through 8 percent of their income on the lowest-cost bronze plan, and in 53 percent of rating areas they would have had to spend less than 4 percent of their income. There is only one rating area where 27-year-olds with household income greater than 400 percent of the FPL would have had to spend greater than 8 percent of their household income on the lowest-cost bronze plan. In the most expensive rating area for a 27-year-old (the state of Vermont), the lowest-cost bronze plan had an annual premium of $4,032. Among those with income too high to receive the APTC, this plan would have been considered unaffordable for a 27-year-old individual if they earned between $46,797 (401 percent of the FPL) and $50,400 (432 percent of the FPL) in that rating area. Married couple age 40-years-old with two children under 21-years-old: In 75 percent of all rating areas such a family with household income at 450 percent of the FPL would have had to spend from 4 through 8 percent of its household income on the lowest-cost bronze plan, and in 25 percent of all rating areas it would have had to spend greater than 8 through 12 percent of its household income. In one rating area such a family would have had to spend greater than 12 percent of its household income. In the most expensive rating area for a married couple aged 40 with two children and household income too high to receive the APTC (counties near Albany, GA), the lowest- cost bronze plan had an annual premium of $13,374, which would have been considered unaffordable for such a family if it earned between $95,639 (401 percent of the FPL) and $167,176 (701 percent of the FPL) in that rating area. Changes in premiums for plans offered on the individual exchanges between 2014 and 2015 likely affected variation in the affordability of lowest-cost bronze plans by rating area in 2015. Studies have estimated that, while the average cost of premiums for the reference or lowest-cost plans have changed only modestly between 2014 and 2015, average premiums increased significantly in some rating areas and decreased significantly in others. Regardless of the affordability of premiums, some may face challenges in maintaining minimum essential coverage, and for those who retain insurance, obtaining health care may be costly. For example, among those eligible for the APTC, some may experience changes in their income that affect their eligibility, which may lead to coverage gaps or discontinuity in coverage. It is too soon to know how many people became ineligible for the APTC in 2014, but experts we interviewed and studies of past years’ data indicate that income changes are fairly common, particularly among those with lower incomes. Changes in employment status and family composition can change enrollees’ eligibility for certain types of insurance, which could lead to challenges maintaining health insurance. For example, a change in employment status can affect eligibility for ESI, the most common form of insurance for the nonelderly. One survey found that among nonelderly adults who reported having had a gap in ESI coverage in 2011, 67 percent reported that it was due to a change in employment status.Changes in family composition can also cause challenges for people seeking to maintain health insurance. For example, divorce can cause one spouse to lose access to the other’s ESI, or may change household income such that eligibility changes for federal subsidies or Medicaid. Even if individuals are able to maintain health insurance that meets the criteria for minimum essential coverage, obtaining medical care may be costly. When enrollees receive health care services, they are often responsible for cost-sharing payments such as copayments or coinsurance. Enrollees’ cost-sharing responsibilities for silver, gold, and platinum plans are lower than for bronze plans, but out-of-pocket costs for all plans can be considerable depending on an enrollee’s health care needs and the structure of one’s health plan. Insurers can structure plans to charge more or less for certain services or medications, as long as the out-of-pocket costs are limited to no more than $6,350 per year for in- network goods and services for single coverage of those with incomes above 250 percent of FPL. of FPL ($28,725), $6,350 represents about 22 percent of their annual income. This limit does not include premiums, balance billing amounts for non-network providers and other out-of-network cost-sharing, or spending for non-essential health benefits that are not covered by the plan. required to contribute toward a plan’s deductible, and are ineligible for federal cost-sharing subsidies. Furthermore, experts told us that some insurers have limited the networks of providers covered by the plans offered on the exchanges. Experts explained that restricting networks allows insurers to reduce premiums by limiting the number of provider choices, but increases the possibility that a provider sought by an enrollee will be out-of-network. This report provides an early look at the effect of the tax credits and affordability of health insurance under PPACA, finding that evidence suggests that the APTC likely contributed to an expansion of health insurance coverage because it significantly reduced the cost of premiums for those eligible. However, the effects of the APTC and the affordability of health insurance in 2014 and beyond is uncertain for several reasons. First, complete data on the number of people who claimed the APTC in 2014 and the amount of the APTC claimed are not yet available because of the limited data reported from most state-based exchanges as well as the lag time during which enrollees file taxes and IRS completes reconciliation. Second, insurers will likely adjust premiums in exchange plans as more data become available about enrollees in the exchanges, including how the health profiles of exchange enrollees compares to that of enrollees previously purchasing individual insurance or ESI. Thus, trends for premiums in exchange plans may not stabilize for several years, although PPACA established certain requirements intended to reduce variation. Third, health insurance premiums are in large part driven by the underlying costs of health care. While the rate of growth of health care costs has slowed in recent years, there is no guarantee that such a trend will continue. As a result, it is important to note that our findings about the first year of the exchanges cannot be generalized to future years. We received technical comments on a draft of this report from HHS and IRS and incorporated them as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of the Department of Health and Human Services, the Commissioner of the Internal Revenue Service, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or [email protected]. 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 IV. In addition to the two objectives we addressed in this report, PPACA mandated that GAO review what is known about the potential effects of lowering the employer-sponsored insurance (ESI) affordability threshold.Under the 2014 income threshold, “affordable” means that employees’ premium contribution for a self-only plan must cost no more than 9.5 percent of their household income. Our literature review found no peer-reviewed studies that have examined the effects of lowering the ESI affordability threshold below 9.5 percent of household income. mixed potential effects. Lowering the ESI affordability threshold would shift more of the cost of premiums onto employers—that is, employers would have to increase their contribution towards employees’ premiums. Some experts stated that such a shift could encourage some employers to discontinue offering health insurance. In particular, experts told us that employers most likely to discontinue are those that employ a low-wage workforce. These employers face less competition in attracting lower-paid workers than higher-paid workers, so they have less incentive to offer health insurance coverage to attract workers. Employers with more than 50 full-time equivalent employees that do not provide health insurance coverage would be subject to the tax penalty on employers if any of their employees obtain health insurance coverage through the exchanges with assistance from the advance premium tax credit (APTC). One expert commented that employers that cease offering health insurance may also choose to compensate employees for the loss of health insurance by increasing wages. Alternatively, one expert told us that employers that choose to continue offering health insurance might adjust employees’ compensation packages to account for an increase in the employer contribution to health insurance premiums. These employers would avoid the tax penalty on employers that fail to offer affordable health insurance to employees. See appendix II for details on our search for studies. such an increase is unclear. Federal costs would increase if employers stop offering health insurance and employees that subsequently seek exchange coverage are eligible for and claim the APTC and cost-sharing subsidies. At the same time, federal tax revenue may also increase if employers dropping health insurance raised taxable wages and paid employer penalties because of their failure to offer health insurance. However, experts told us this increase in tax revenue would likely not be high enough to offset the increase in federal costs from employees’ APTC and cost-sharing subsidy claims. Because studies have estimated that relatively few people have an offer from their employer of self-only health insurance coverage that exceeds the affordability threshold of 9.5 percent of household income, relatively few are likely to be affected if the threshold were lowered. Three studies varied in their estimates, with the highest estimating up to 1 million people In comparison, the Congressional Budget Office may have such an offer.(CBO) estimates that in 2014, 156 million nonelderly people received ESI coverage. The three studies found: The Agency for Healthcare Research and Quality (AHRQ) estimated that about one million people with household incomes between 139 to 400 percent of the federal poverty level (FPL) have an unaffordable offer. CBO estimated that between 0 and 500,000 people had an unaffordable offer in 2014 and sought coverage on an exchange. Congressional Budget Office, Updated Estimates of the Effects of the Insurance Coverage Provisions of the Affordable Care Act (Washington, D.C.: Congressional Budget Office, April 2014). Another study combined different data sets to generate estimates of the number of households that had an unaffordable ESI offer.study found that if employers keep employee contributions at the national average (which the study authors calculated as 20 percent for self-only coverage in 2009), no employees’ contribution would have exceeded the ESI affordability threshold in 2009. These studies estimated that a relatively low number of people are offered ESI coverage that exceed 9.5 percent of their income because generally, employee contributions for self-only ESI coverage are small compared to income. The average ESI premiums in 2014 were $6,025 per year for single coverage, and employees contributed about $1,081, Employees with household income of more than $11,380 on average.would be considered to have affordable premiums. To describe what is known about the effects of the Advance Premium Tax Credit (APTC) and the small employer tax credit on health insurance coverage, as well as what is known about the potential effects of changing the employer-sponsored insurance (ESI) affordability threshold, we conducted a structured literature search for studies. To conduct this review, we searched over 30 bibliographic databases, including ABI/INFORM Global, MEDLINE, and WorldCat, for studies on these topics published between January 1, 2010, and November 12, 2014. Two analysts independently reviewed each of the results for relevance and then reconciled differences. We determined that a study was directly relevant to our objectives if it: (1) included empirical analysis related to the effects of the APTC or the small employer tax credit on the provision of health insurance or maintenance of health insurance; or (2) analyzed the effects of changing the ESI affordability threshold on the actions of employers, employees, or the federal budget. To supplement our search of reference databases, we: searched the Internet using Google.com and terms such as “APTC maintain health insurance” and “surveys insurance Patient Protection and Affordable Care Act (PPACA)”; searched the websites of health policy research organizations such as the Henry J. Kaiser Family Foundation (KFF), the Urban Institute, and the American Enterprise Institute; and asked the experts we interviewed to recommend sources of literature that would address our objectives. Through all of these literature searches, we identified 23 studies that were useful for the objectives of our report. Among these studies, we identified summary results from three surveys that estimated the change in the rate of uninsured nonelderly adults between 2013 and 2014 by household income amounts comparable to APTC eligibility limits. These surveys generally had low response rates and small sample sizes, which can introduce potential errors in estimating individuals’ health insurance status, especially by population subgroups, such as by individuals’ household income or type of health insurance coverage. Table 5 provides a summary of the response rate, sample size, and margin of error for these three surveys. To improve the reliability of estimates produced from the survey results, the studies’ authors used certain sampling methodologies, such as stratified sampling to over-sample populations commonly underrepresented in such surveys (e.g., low-income populations), and weighted regression models. In addition, the authors validated their estimates against prior estimates from larger, more rigorous surveys, such as the American Community Survey, and found their estimates to be generally comparable, though with small differences in some cases. Because of these approaches to improve reliability, we determined the studies were sufficiently reliable for our purposes. We also reviewed laws, regulations, and guidance related to PPACA’s individual mandate, the APTC, the small employer tax credit, individual exchange regulation, and the ESI affordability threshold. We also reviewed the legislative history of the ESI affordability threshold. We interviewed a range of experts to explore what is known about the effects of the APTC and the small employer tax credit on health insurance coverage and what is known about the extent to which health benefit plans are available and individuals are able to maintain minimum essential coverage, as well as what is known about the potential effects of changing the ESI affordability threshold. We asked experts at 11 research and industry organizations, in addition to officials at the Department of Health and Human Services (HHS) and the Internal Revenue Service (IRS), about their work related to the potential effect of tax credits on health insurance coverage, the types of individuals that may have more or less difficulty maintaining minimum essential coverage, and the potential effects on employers, employees, and federal costs of changing the ESI affordability threshold (we did not ask every question of every expert). We chose these experts based on relevance of their published or other work to our objectives. To further analyze what is known about the effects of the small employer tax credit on health insurance coverage, we requested summary data from the IRS on small employer tax credit claims, the number of employee premiums covered, and the total cost of the credit that IRS provided for tax years 2011 and 2012. Data on tax year 2013 and 2014 were not available at the time of our analysis. To assess the reliability of the data, we reviewed the data and supporting documentation for obvious errors, as well as IRS’s internal controls for producing the data. found the data to be sufficiently reliable for our purposes. To supplement these data, we also incorporated summary data from our previous report on this topic. Internal control is a process effected by an entity’s oversight body, management, and other personnel that provides reasonable assurance that the objectives of an entity will be achieved. premiums for all health plans offered in the individual health insurance exchanges by rating area, excluding New York. KFF compiled the data using HHS’s Centers for Medicare & Medicaid Services’ Landscape file, which, for 2014, captured data on premiums for plans participating in the 34 federally facilitated exchanges and 2 state-based exchanges that used the federal website, http://www.healthcare.gov, for enrollment. KFF supplemented the Landscape file data with data on premiums for plans offered in the other 15 state-based exchanges, which it acquired by reviewing health insurance companies’ rate filings in each state and validating these data through state exchange websites when possible. We assessed the reliability of these data by: interviewing KFF officials about how they compiled and validated the data as well as their internal controls, testing the data for duplicate data and outliers, and comparing the publicly available Landscape data on federally facilitated exchanges to the KFF data. Second, from the state of New York, we obtained premium data for plans offered through the state’s individual exchange during the initial open enrollment period (October 1, 2013, through March 31, 2014). To assess these data for reliability, we checked the data for outliers and validated selected data through the New York state exchange website. We found both the KFF data and the New York data to be sufficiently reliable for our purposes. We used the 2013 federal poverty level because 2014 eligibility for APTC and Medicaid was based on the 2013 level. individual or household would need in order to pay 8 percent of household income for the lowest-cost bronze plan available by rating area. We conducted this performance audit from July 2014 through March 2015 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. John E. Dicken, (202) 512-7114 or [email protected]. In addition to the contact named above, Kristi Peterson (Assistant Director), Anna Bonelli, Christine Davis, Leia Dickerson, Giselle Hicks, Katherine Mack, James R. McTigue, Jr., Yesook Merrill, Laurie Pachter, Vikki Porter, and Jennifer Whitworth made key contributions to this report. | The number of uninsured individuals and the rising cost of health insurance have been long-standing issues. PPACA mandated that most individuals have health insurance that provides minimum essential coverage or pay a tax penalty. To make health insurance more affordable and expand access, PPACA created the APTC to subsidize the cost of exchange plans' premiums for those eligible. PPACA used two standards for defining affordability of health insurance: 8 percent of household income for the purposes of minimum essential coverage and 9.5 percent for APTC eligibility for individuals offered employer-sponsored plans. PPACA mandated that GAO review the affordability of health insurance coverage. GAO examined (1) what is known about the effects of the APTC and (2) the extent to which affordable health benefits plans are available and individuals are able to maintain minimum essential coverage. GAO conducted a structured literature search to identify studies on the rate of uninsured individuals, among other topics, and interviewed experts from HHS, the Internal Revenue Service (IRS), and 11 research and industry organizations to understand factors affecting affordability. GAO also analyzed the variation in the affordability of exchange plan premiums nationwide using 2014 data—the most recent data available at the time of GAO's analysis. GAO received technical comments on a draft of this report from HHS and IRS and incorporated them as appropriate. Early evidence suggests that the advance premium tax credit (APTC)—the refundable tax credit that can be paid on an advance basis—likely contributed to an expansion of health insurance coverage in 2014 because it significantly reduced the cost of exchange plans' premiums for those eligible. Although there are limitations to measuring the effects of the APTC using currently available data, surveys GAO identified estimated that the uninsured rate declined significantly among households with incomes eligible for the APTC. For example, one survey found that the rate of uninsured among individuals with household incomes that make them financially eligible for the APTC fell 5.2 percentage points between September 2013 and September 2014.This expansion in health insurance coverage is likely partially a result of the APTC having reduced the cost of health insurance premiums for those eligible. Among those eligible for the APTC who the Department of Health and Human Services (HHS) initially reported selected a plan through a federally facilitated exchange or one of two state-based exchanges, the APTC reduced premiums by 76 percent, on average. As of January 2015, data were not yet available on the extent to which the APTC reduced 2015 premiums, although studies have found that, on average, premiums (before applying the APTC) changed only modestly from 2014 to 2015, though some areas saw significant increases or decreases. Most nonelderly adults had access to affordable health benefits plans—as defined by the Patient Protection and Affordable Care Act (PPACA)—but some may face challenges maintaining coverage. Most nonelderly adults had access to affordable plans through their employer, Medicaid, the exchanges, or other sources as of March 2014, although about 16 percent of nonelderly adults remained uninsured. While there are many reasons people remain uninsured, some people may not have access to affordable coverage, including (1) low-income nonelderly adults—those with household income below 100 percent of the federal poverty level—who live in one of the 23 states that chose not to expand Medicaid and (2) some nonelderly adults who do not have affordable employer-sponsored insurance and who were not eligible for the APTC. For those with incomes too high to qualify for the APTC, the affordability of health insurance coverage available in the individual exchanges in 2014 varied by age, household size, income, and location. For example, a 60-year-old with an income of 450 percent of the federal poverty level would have had to spend more than 8 percent of their household income for the lowest-cost plan in 84 percent of all health insurance rating areas in the United States, but a 27-year-old had access to an affordable plan in all but one. Regardless of the affordability of premiums, some may face challenges in maintaining coverage that qualifies under PPACA as minimum essential coverage; for example, changes in income can result in changes in APTC eligibility. This report provides an early look at the effect of the APTC and the affordability of health insurance under PPACA. However, it is important to note that these findings about the first year of the exchanges cannot be generalized to future years. Numerous factors, including additional data and changes in trends in health care costs, could affect the affordability of health insurance going forward. |
Under the U. S. Housing Act of 1937, as amended, Congress created the federal public housing program to provide decent and safe rental housing for eligible low-income families, the elderly, and persons with disabilities. HUD administers the program with PHAs, typically local agencies created under state law that manage housing for low-income residents at rents they can afford. Agencies that participate in the program contract with HUD to provide housing to eligible low-income households and, in return, receive financial assistance from HUD. Public housing comes in all sizes and types, from scattered single-family houses to high-rise apartments. In 1992, Congress established the HOPE VI program, which is administered by HUD. The program provides grants to PHAs to rehabilitate or rebuild severely distressed public housing and improve the lives of public housing residents through supportive services. In 2003, Congress expanded the statutory definition of “severely distressed public housing” for the purpose of HOPE VI to include indicators of social distress, such as a lack of supportive services and economic opportunities. Between fiscal years 1993 and 2005, Congress appropriated $6.8 billion for the HOPE VI program. In addition to managing public housing, some PHAs administer other HUD programs that provide housing assistance for low-income households. Under the Housing Choice Voucher Program, about 2,500 participating PHAs enter into contracts with HUD and receive funds to provide rent subsidies to the owners of private housing on behalf of assisted low- income households. In addition, PHAs assist in administering HUD’s project-based rental assistance programs, through which HUD pays subsidies to private owners of multifamily housing that help make this housing affordable for lower income households. Traditionally, HUD has provided funding to local PHAs to manage the public housing system, as well as for the revitalization of severely distressed public housing. HUD’s role has also included providing PHAs with guidance and overseeing their performance, including providing technical assistance. HUD provides funding to housing agencies through two formula grant programs: the Operating Fund and the Capital Fund. The Operating Fund provides annual subsidies to housing agencies to make up the difference between the amount they collect in rent and the cost of operating the units. The Capital Fund provides grants to PHAs for the major repair and modernization of the units. In addition, HUD has provided selected agencies with grants under the HOPE VI program to help housing agencies replace and revitalize severely distressed public housing with physical and community and supportive service improvements. As shown in table 1, this HUD funding has totaled about $31.5 billion over the past 5 fiscal years. In exchange for capital and operating funding, PHAs enter into annual contributions contracts. According to this written contract, HUD agrees to make payments to the PHA and the PHA agrees to administer the housing program in accordance with HUD regulations and requirements. HUD provides guidance to PHAs to supplement its regulations, and explicitly convey required program policies and procedures. Some of our past work has shown a need for HUD to improve the clarity and/or timeliness of its guidance to housing authorities. For example: For our 2002 review of HUD’s and housing agencies’ experiences in preparing annual plans required by the Quality Housing and Work Responsibility Act of 1998 (QHWRA), we surveyed HUD field offices and interviewed eight PHAs to gain insight into their experiences. Respondents reported that HUD-provided guidance on the planning process was less than adequate. One respondent reported that headquarters guidance was delayed in getting to field locations, while another reported that changing rules made it difficult to know what the PHAs should do and what the field locations should look for in reviewing plans. However, some PHAs balanced their comments with positive remarks; for example, one large agency told us that HUD had improved the template for fiscal year 2001. HUD provided a desk guide to assist housing agencies and field locations in fiscal year 2001, in an effort to improve the planning process. In surveying the directors of PHAs on their experiences with a number of QHWRA housing reforms, we again found late and unclear guidance from HUD. Public housing directors reported having to spend more administrative time in implementing reforms, partially due to a lack of clear guidance from HUD. In reviewing HUD’s management of the HOPE VI program, we found that the department’s guidance on the role of field offices was unclear, and, as a result, some field offices did not seem to understand their role in HOPE VI oversight. For example, some officials stated that they had not performed annual reviews of HOPE VI projects because they did not think they had the authority to monitor grants. Based upon these findings, we recommended that the Secretary of HUD clarify the role of HUD field offices in HOPE VI oversight and ensure that the offices conduct required annual reviews of HOPE VI grants. HUD agreed with this recommendation and published new guidance in March 2004 that clarified the role of the HUD field offices and changed the annual review requirements. HUD is responsible for overseeing PHAs’ overall performance and for helping agencies improve their performance (see fig. 1). In 1997, as a part of its 2020 Management Reform Plan, HUD instituted a new approach for evaluating PHAs’ performance. The approach includes “scoring” each of several categories of performance, assigning each housing agency to a risk category, designating agencies as “troubled” if their scores are substandard and, in some cases, appointing receivers to actively manage the agencies. Also as a part of its oversight, HUD identifies housing agencies that need technical assistance. HUD’s technical assistance involves activities such as training housing agency staff on how to use HUD systems or comply with reporting requirements. HUD uses the Public Housing Assessment System (PHAS) to evaluate public housing agencies’ performance, while its Public and Indian Housing Information Center (PIC) risk assessment uses the PHAS score and information about funding and compliance issues to classify housing authorities as high, moderate, or low risk. PHAS is designed to evaluate housing agencies’ overall performance in managing rental units, including the physical condition of units, soundness of agencies’ financial operations, the effectiveness of their management operations, and the level of resident satisfaction with the services and living conditions. HUD designed the PIC system to facilitate a Web-based exchange of data between PHAs and local HUD offices. PIC contains a detailed inventory of public housing units and information about them, including the number of developments and units, age of the development, and the extent to which apartment units are accessible for persons with disabilities. The system also tracks tenant (household) information, such as age, disability status, and income. Our past work has identified opportunities for HUD to improve its oversight of housing agencies and it provision of technical assistance. For example: In 2002, we reported that the results of the PHAS and PIC systems were inconsistent. Specifically, in comparing information in the two systems, we found that 12 of the agencies that HUD—using PHAS scores—had determined were “troubled” were classified in the PIC system as “low” risk. Accordingly, we recommended that HUD classify all troubled housing authorities as high risk to better ensure that they receive sufficient monitoring. HUD agreed with our recommendation and incorporated it into its risk-assessment system. In preparing a 2002 report on HUD’s human capital management, directors of several HUD field offices told us that they lacked the staff to provide the level of oversight and technical assistance that the housing authorities need. In light of this and other findings, we recommended that the Secretary of HUD develop a comprehensive strategic workforce plan. HUD subsequently hired a contractor to develop a Strategic Workforce Plan, which it completed in 2004. The plan includes analysis of current and future demand for staff and an analysis of the skills and competencies needed to accomplish tasks. In our October 2003 report, we noted that small agencies are more likely to require assistance with the day-to-day management of HUD programs and that HUD does not maintain centralized, detailed information on the types of assistance PHAs require or request from them. HUD reported that it was developing a system that would allow it to collect such information in the future. In 2005, we reported on HUD’s efforts to assess PHAs’ compliance with its policies for determining rent subsidies. We found that HUD had undertaken special reviews that, while useful, had suffered from a lack of clear policies and procedures and that the training and guidance HUD provided to PHAs on its policies for determining rent subsidies were not consistently adequate or timely. We recommended that the HUD Secretary (1) make regular monitoring of PHAs’ compliance with HUD’s policies for determining rent subsidies a permanent part of HUD’s oversight activities and (2) collect complete and consistent information from these monitoring efforts and use it to help focus corrective actions where needed. HUD concurred with the recommendations but has not yet fully implemented them. HUD can take enforcement actions against PHAs that it identifies, through PHAS, as being “troubled.” For such agencies, HUD assigns a recovery team and develops a plan to remedy the problems. Initially, HUD may offer technical assistance and training, but it may also sanction an authority; for example, by withholding funding. Ultimately, HUD may place a PHA under an administrative receivership, in which a receiver replaces the top management of the agency. Additionally, some PHAs may have receivers appointed by judges (these are known as judicial receivers). In February 2003, we reported that under administrative or judicial receivers, nearly all of the 15 agencies under receivership showed improvement during their years of receivership, according to changes in HUD’s assessed scores and/or other evidence. The four PHAs under judicial receiverships generally had continued to demonstrate strong performance. While PHAs under administrative receiverships had also made improvements, some continued to demonstrate a significant problem with housing units being in very poor physical condition. Finally, HUD’s headquarters and field offices are responsible for overseeing PHAs’ use of HOPE VI grants. In 2003, we reported that HUD’s oversight of HOPE VI grants had been inconsistent due to staffing limitations, confusion about the role of field offices, and a lack of formal enforcement policies. Based upon these findings, we recommended that HUD clarify the role of its field offices in HOPE VI oversight; ensure that the offices conduct required annual reviews of HOPE VI grants; and develop a formal, written enforcement policy to hold PHAs accountable for the status of their grants. HUD agreed with these recommendations and clarified the role of HUD field offices, changed the annual review requirements, and developed an enforcement policy, which it shared with grantees in December 2003. Generally, PHAs are responsible for administering the public housing program in accordance with HUD regulations and requirements. Specifically, PHAs must provide decent, safe, and sanitary housing to their residents, manage their financial resources, meet HUD’s standards for management operations, and address residents’ satisfaction. Among other things, PHAs are responsible for ensuring that tenants are eligible for public housing and that tenant subsidies are calculated properly. PHAs are also required to develop both short- and long-term plans outlining their goals and strategies. PHAs that receive HOPE VI grants are subject to additional requirements associated with those grants; for example, the agencies must provide residents of HOPE VI sites with certain types of supportive services. During the 1990s, PHAs gained broader latitude from HUD and the Congress to establish their own policies in areas such as selecting tenants and setting rent levels. The Quality Housing and Work Responsibility Act of 1998 (QHWRA), which extensively amended the U.S. Housing Act of 1937, allowed PHAs to exercise still more discretion over rents and admissions. For example, QHWRA increased managerial flexibility by, among other things, making HUD-provided capital and operating funds more fungible, allowing housing authorities to sell some units to residents, and developing mixed-income housing units in order to bring more working and upwardly mobile families into public housing. QHWRA also established new requirements for housing agencies, including, for example, mandatory reporting requirements in the form of a 5-year plan and annual reporting plans. Five-year plans include long-range goals, while annual plans detail the agency’s objectives and strategies for achieving these goals, as well as the agency’s policies and procedures. For our May 2002 report, we examined PHAs’ experiences in preparing the first of their required plans. We visited eight PHAs in the course of this work, and found that their views differed on the usefulness of the planning process and the level of resources required to prepare the plans, among other things. In June 2003, in response to concerns that some QHWRA reforms were placing an undue burden on small PHAs, HUD issued regulations allowing small PHAs to submit streamlined annual plans. We have not revisited this issue, and therefore cannot say how HUD or the PHAs view the usefulness of the plans today. QHWRA also required PHAs to implement a number of additional reforms that affect the Public Housing Program. For our October 2003 report, we surveyed PHAs to find out their views on 18 key changes brought about by QHWRA and to see if views differed among large, medium, and small agencies. Some agencies in each size category viewed both the 5-year plan and the annual plan requirements as helpful to them in managing and operating their programs, although proportionately fewer small agencies had this view. We also found that agencies of all sizes reported spending more time on HUD-subsidized programs after QHWRA than before the reforms were enacted, in part because of increased reporting requirements, difficulties in submitting data to HUD, and lack of resources for hiring and training. PHAs that receive HOPE VI grants to revitalize public housing must obtain HUD’s approval for their revitalization plans and must report project status information to HUD. The agencies are also required to offer community and supportive services—such as child care, transportation, job training, job placement and retention services, and parenting classes— to all original residents of public housing affected by HOPE VI projects, regardless of their intention to return to the revitalized site. In our November 2002 report on HOPE VI financing, we found that PHAs that had been awarded grants in fiscal years 1993 to 2001 had budgeted a total of about $714 million for community and supportive services. Of this amount, about 59 percent were HOPE VI funds while 41 percent was leveraged from other resources. In our November 2003 report on HOPE VI impacts, we reported that limited HUD data on 165 HOPE VI grantees awarded through fiscal year 2001, and additional information, indicated that supportive services had achieved or contributed to positive outcomes. While we have not reviewed the extent to which capital markets can be used with the public housing system, our reviews of the HOPE VI program have shown that some PHAs use HOPE VI revitalization grants to leverage additional funds from a variety of other public and private sources. HUD encourages PHAs to use their HOPE VI grants to leverage funding from other sources to increase the number of affordable housing units developed at HOPE VI sites. Public funding can come from other federal, state, or local sources. Private sources can include mortgage financing and financial or in-kind contributions from nonprofit organizations. In our November 2002 report on HOPE VI project financing, we found that financial leveraging of projects had shown a general increase over time, and that PHAs expected to leverage—for every dollar received in HOPE VI revitalization grants awarded through fiscal year 2001—an additional $1.85 in funds from other sources. Our report also noted that HUD had not reported annual leveraging and cost information about the HOPE VI program to the Congress, as it had been required to do since 1998. Consequently, we recommended that HUD provide annual reports on the program, including information on the amounts and sources of funding used at HOPE VI sites, to Congress. In response to this recommendation, in December 2002, HUD began issuing annual reports that include funding information. We also found in the November 2002 report that housing agencies with HOPE VI revitalization grants expected to leverage $295 million in additional funds for community and supportive services. In our most recent report concerning public housing (December 2005), we found that PHAs have used HOPE VI revitalization grants to leverage additional funds from a variety of sources, including private loans. In particular, we noted an example of a renovation and the colocation of supportive services that were made possible through coordination of efforts and use of mixed financing—the Allegheny County Housing Authority’s revitalization of the Homestead Apartments outside of Pittsburgh, Pennsylvania. The housing agency built space on-site for two nonprofit elder-care service providers in addition to remodeling the buildings. Approximately 67 percent of the funding for the Homestead renovation was based on Low-Income Housing Tax Credits. Under this program, states are authorized to allocate federal tax credits as an incentive to the private sector to develop rental housing for low-income households. While this represents a way for private capital to be used in conjunction with public housing projects, we noted in our November 2002 report that such funding does entail a federal cost (in the form of taxes foregone). PHAs may utilize community service organizations to provide supportive services to public housing residents. Our recent work has focused on the services that PHAs can provide to elderly and non-elderly persons with disabilities. In a February 2005 report on housing programs that offer assistance for the elderly, we identified programs that public housing agencies can use to assist elderly public housing residents. For example, through the Resident Opportunities and Self Sufficiency (ROSS) grant program, HUD awards grants to PHAs for the purpose of linking residents with supportive services. Also, HUD’s Service Coordinator Program provides funding for PHA managers of public housing designated for the elderly or persons with disabilities to hire coordinators to assist residents in obtaining supportive services from community agencies; and its Congregate Housing Services Program provides grants for the delivery of meals and nonmedical supportive services to residents of public and multifamily housing who are elderly or have disabilities. For our December 2005 report on public housing for the elderly and persons with disabilities, we surveyed the directors of 46 PHAs that manage public housing developments that we identified as both severely distressed and primarily occupied by the elderly and persons with disabilities. This work identified examples of partnerships between PHAs and local organizations such as community-based nonprofits and churches to provide supportive services for the elderly and non-elderly persons with disabilities. In some cases, the local agencies paid for the services, while in others the housing agencies used federal grants. For example: A building manager for one development that we visited said the development partnered with a nearby church, which provided a van to take residents shopping once a week. Local churches also provided food assistance to elderly residents and residents with disabilities who were not able to leave their apartments. At another housing development, a community-based organization provided lunches on a daily basis to residents and assorted grocery items such as bread, fruit, and cereal on a weekly basis. The aforementioned Homestead Apartments—a high-rise, primarily elderly occupied public housing development—was revitalized to provide enhanced supportive services to elderly residents, in particular frail elderly residents. To do so, the housing agency partnered with several non- HUD entities to improve services for the elderly and colocate an assisted living type of facility at the development. To help the most frail elderly residents, the housing agency partnered with a nonprofit organization, which offers complete nursing services, meals, and physical therapy to Homestead residents who are enrolled in the program. For most participants, these comprehensive services permitted them to continue living at home. In a partnership in Seattle, Washington, the housing agency partnered with a community-based organization to provide an on-site community center for the elderly, where residents had access to meals, social activities, and assistance with filling prescriptions. Residents at this development also had access to an on-site health clinic. In summary, Mr. Chairman, over the past few years we have identified several ways for HUD to improve its administration of the public housing program. Our work has also identified challenges faced by the local public housing agencies that play such an essential program delivery role, not only those associated with implementing the reforms provided under QHWRA but also such day-to-day matters as correctly determining tenants’ incomes and rents. We look forward to working with the Subcommittee as it considers the future of the public housing program. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions at this time. For further information on this testimony, please contact David G. Wood at (202) 512-8678. Individuals making key contributions to this testimony included Isidro Gomez, Lisa Moore, David Pittman, Paul Schmidt, and Julie Trinder. Public Housing: Distressed Conditions in Developments for the Elderly and Persons with Disabilities and Strategies Used for Improvement. GAO-06-163. Washington, D.C.: December 9, 2005. Project-Based Rental Assistance: HUD Should Streamline Its Processes to Ensure Timely Housing Assistance Payments. GAO-06-57. Washington, D.C.: November 15, 2005. HUD Rental Assistance: Progress and Challenges in Measuring and Reducing Improper Rent Subsidies. GAO-05-224. Washington, D.C.: February 18, 2005. Elderly Housing: Federal Housing Programs That Offer Assistance for the Elderly. GAO-05-174. Washington, D.C.: February 14, 2005. Public Housing: HOPE VI Resident Issues and Changes in Neighborhoods Surrounding Grant Sites. GAO-04-109. Washington, D.C.: November 21, 2003. Public Housing: Small and Larger Agencies Have Similar Views on Many Recent Housing Reforms. GAO-04-19. Washington, D.C.: October 30, 2003. Public Housing: HUD’s Oversight of HOPE VI Sites Needs to Be More Consistent. GAO-03-555. Washington, D.C.: May 30, 2003. Public Housing: Information on Receiverships at Public Housing Authorities. GAO-03-363. Washington, D.C.: February 14, 2003. Major Management Challenges and Program Risks: Department of Housing and Urban Development. GAO-03-103. Washington, D.C.: January 1, 2003. Public Housing: HOPE VI Leveraging Has Increased, but HUD Has Not Met Annual Reporting Requirement. GAO-03-91. Washington, D.C.: November 15, 2002. HUD Human Capital Management: Comprehensive Strategic Workforce Planning Needed. GAO-02-839. Washington, D.C.: July 24, 2002. Public Housing: HUD and Public Housing Agencies’ Experiences with Fiscal Year 2000 Plan Requirements. GAO-02-572. Washington, D.C.: May 31, 2002. Public Housing: New Assessment System Holds Potential for Evaluating Performance. GAO-02-282. Washington, D.C.: March 15, 2002. 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. | Under the Public Housing Program, the Department of Housing and Urban Development (HUD) and local public housing agencies (PHA) provide housing for low-income residents at rents they can afford. Today, over 3,000 PHAs administer approximately 1.2 million public housing units throughout the nation. First authorized in 1937, the program has undergone changes over the decades. The Quality Housing and Work Responsibility Act of 1998 increased managerial flexibility but also established new requirements for housing agencies. Some observers have questioned the program's ability to provide quality, affordable housing to the nation's neediest families. This testimony, which is based upon a number of reports that GAO has issued related to public housing since 2002, discusses the roles of (1) HUD (2) public housing agencies, (3) capital markets, and (4) community services organizations in the public housing system. Traditionally, HUD's role has been to provide PHAs with funding, guidance, and oversight. HUD provides both capital and operating funding. In addition, HUD has provided selected agencies with grants under the HOPE VI program to demolish and revitalize severely distressed public housing and provide community and supportive services. HUD provides guidance to PHAs to supplement its regulations and explicitly convey required program policies and procedures. Based on past work, GAO has made recommendations to HUD to improve the clarity and timeliness of its guidance to PHAs and to improve its oversight of the program. PHAs are responsible for managing public housing in accordance with HUD regulations and requirements. They are also required to develop and submit plans detailing the agency's goals and strategies for reaching these goals. Further, PHAs that receive HOPE VI grants are required to provide residents with supportive services. GAO's work has identified challenges that the agencies face in carrying out their responsibilities, including difficulty with HUD's data systems and lack of resources for hiring and training staff. GAO has not reviewed the extent to which capital markets can play a role in the public housing system, but its examination of the HOPE VI program and other work has identified examples of leveraging federal funds with funds from a variety of other public and private sources. HUD encourages public housing agencies to use their HOPE VI grants to leverage funding from other sources to increase the number of affordable housing units developed at project sites. The examples GAO has found include private funding for both capital projects and the provision of supportive services. PHAs may utilize community service organizations to assist public housing residents. Work GAO has done on federal housing programs that benefit the elderly, as well as recent work focused on public housing for the elderly and residents with disabilities, identified examples of supportive services being offered or provided to public housing residents. Such services may be provided through HUD grants as well as through partnerships between public housing agencies and community-based nonprofit organizations. |
Supply Chain Integration, an office under the Office of the Assistant Secretary of Defense for Logistics & Materiel Readiness, Under Secretary of Defense for Acquisition, Technology and Logistics, is the department- wide office responsible for leading the development of DOD supply chain policies as well as improving accountability, visibility, and control of all critical assets, including SRC I ammunition. In addition, the Army has a prominent role in managing SRC I ammunition, as the Army procures a majority of the department’s ammunition and provides wholesale storage for the other military services at Army depots. The Army depots ship SRC I ammunition owned by the other military services to their respective locations at their request. Also, Army depots conduct semiannual physical inventories of all SRC I ammunition as required of all installations storing SRC I ammunition. SRC I ammunition may also be located—generally in small quantities—at retail locations, such as military service installations, bases, and ammunition supply points. Each military service has entities responsible for the accountability, physical inventory, and transportation of SRC I ammunition. According to military service ammunition data, the Army, Navy, Marine Corps, and Air Force collectively had approximately 226,000 SRC I missiles and rockets in the continental United States, as of April 30, 2015, as shown in table 1. In addition, USTRANSCOM is designated by DOD Directive as the DOD’s single manager for transportation, other than Service-unique or theater- assigned assets and as the DOD Distribution Process Owner. This designation includes transportation of SRC I ammunition. The Military Surface Deployment and Distribution Command, which falls under USTRANSCOM, tracks the movement of SRC I ammunition. Additionally, according to DOD officials, the Military Surface Deployment and Distribution Command coordinates responses to transportation issues of SRC I ammunition while in transit. Table 2 shows key stakeholders and roles in the transportation of SRC I ammunition. DODM 5100.76, Physical Security of Sensitive Conventional Arms, Ammunition, and Explosives (AA&E) sets forth DOD policy on the physical security of sensitive conventional AA&E. According to DODM 5100.76, continuous program and policy oversight is required to ensure protection of AA&E within DOD, and DOD components are required to track and conduct physical inventories of SRC I ammunition by serial number. Further, DOD policy requires SRC I ammunition to have a higher level of protection and security than that provided for SRC II through SRC IV conventional ammunition. DOD and the military services have policy and guidance on how to account for, safeguard, conduct physical inventories, adjust if necessary, track, and ship SRC I ammunition within and between services and to contractors for repair. Appendix III provides additional detail on DOD policy and military service guidance relevant to the management of SRC I ammunition. The military services have several automated information systems for managing accountability and visibility of SRC I ammunition. These automated information systems also maintain various item-specific data such as serial number, production lot number, DOD identification codes, serviceability, reporting location, ownership, quantity, and shipment information. Figure 1 shows the automated information systems. The department is in the final stages of evaluating various automated information systems, including NLAC, to be designated as the DOD-wide authoritative source of data for conventional ammunition, including SRC I ammunition. DOD’s evaluation to select one authoritative information system for conventional ammunition comes in response to our March 2014 recommendation that the department designate an authoritative source of data on conventional ammunition, which includes SRC I ammunition. Also, the evaluation is in response to a congressional mandate to issue department-wide guidance by September 2015 to designate an authoritative source of data for conventional ammunition. According to OSD officials, the to-be-designated visibility system will serve as a repository of ammunition data collected through regular data feeds from the military services’ automated information systems. Since 1994, we have issued several reports about the management of SRC I ammunition, focusing on serial-number registration, physical inventories, and transportation issues. In 1994, we found that while the Navy and the Marine Corps began controlling missiles by serial number in 1990 and 1992, respectively, the Army was working on obtaining control of SRC I missiles by serial number. Further, we found that the military services were not regularly conducting physical inventories of SRC I missiles and we made recommendations to strengthen inventory accountability, which the department concurred with and implemented. In our September 1997 report, we found the military services had different procedures and requirements for maintaining oversight of SRC I rockets. Specifically, we found that the Marine Corps maintained oversight and visibility of its weapons by serial number, whereas the Army and the Navy managed their SRC I rockets by production lot and quantity. DOD concurred with our recommendation to manage SRC I rockets by serial number and reissued DOD policy in 2000. In our 2000 report, we found internal controls weaknesses at an Army ammunition depot that resulted in a loss of accountability and control over SRC I rockets. For example, serial number control of SRC I rockets was lost at the time of shipment from the contractor because serial numbers listed on receiving reports that accompanied shipments did not correspond to the actual items and quantities of the respective shipments. In March 2014, we reported on DOD’s management of conventional ammunition, and found, among other things, some limitations of the military services’ use of automated information systems that affected their ability to facilitate efficient management of conventional ammunition. We found that NLAC, the department-wide repository of ammunition data, had limitations in providing visibility of ammunition and recommended that the department select an authoritative source of department-wide ammunition data to improve DOD’s ability to provide total asset visibility over conventional ammunition. DOD concurred and stated that it would assess the alternatives and designate the appropriate solution by the fourth quarter of fiscal year 2015. Also, we recommended that DOD identify and implement internal controls, consistent with federal internal control standards, that would provide reasonable assurance that NLAC collects comprehensive, accurate data from other service ammunition systems. DOD concurred and stated in its agency response to our report that the Army updated the performance work statement for NLAC to include analyzing new data sources to identify improved system interfacing that will improve data accuracy, completeness, quality assurance, and auditability. For more details of our findings, recommendations, and the status of actions taken by DOD relating to DOD’s management of SRC I ammunition, see appendix IV. The military services have maintained accountability of SRC I ammunition at 11 sampled locations in the continental United States; however, we identified gaps in some service-level guidance and procedures for how SRC I ammunition is accounted for across locations. We found that the Air Force does not track SRC I ammunition by serial number but has plans to revise its guidance. Also, we found Air Force procedures have not maintained accountability for items owned by other services and stored at Air Force locations. Further, the military services generally recorded shipment and receipt in their accountability systems, but the receipt was not always recorded in a timely manner. Finally, we found that Army processes and information systems do not provide full accountability for in-transit items. We found that the military services have maintained accountability in their automated information systems of SRC I ammunition at the 11 sampled locations we reviewed. DOD policy calls for continuous program and policy oversight to ensure protection of AA&E, to include SRC I ammunition, within DOD. Likewise, military service guidance details accountability of AA&E, including maintenance of records. We found that, for our sample of 616 SRC I ammunition items, 612 of the 616 records matched the military services’ automated information systems and the remaining 4, although not recorded as required, were accounted for by service officials. Additionally, as part of our sample, we observed SRC I ammunition that was being readied for rapid deployment, as shown in figure 2, and documented the serial number and other identifying information, and verified the information in the Army’s systems. Additionally, we found that, in accordance with DOD policy and military service guidance and at required frequencies, the military services conducted physical inventories of SRC I ammunition to ensure accountability at 22 selected military service locations in the continental United States. We analyzed inventory memorandums from all Army depots storing SRC I ammunition, as well as selected military service locations, and found that the physical inventories were recorded as being conducted. Inventory personnel stated there were no delays or challenges in completing the physical inventories of SRC I ammunition because of sequestration or other budgetary concerns. Further, during our review, we identified instances in which the Navy and Army had taken actions to enhance the accountability of their physical inventories. First, we found that the Army, Marine Corps, and Air Force certify completion of the physical inventory of SRC I ammunition through a signed memorandum. According to Navy officials, Navy policy does not require certification through a signed memorandum. Rather, the Navy OIS system captures a Date of Last Inventory; however, Navy officials acknowledged they did not have a business process to use this data point. After we identified this, Navy officials took action to begin developing a business process to identify late inventories. Second, according to Navy officials, in an effort to better align with DOD policy, the Navy revised guidance in April 2015 to align with requirements in DODM 5100.76 so it would reflect specific intervals for completing physical inventories: monthly for unit levels and semiannually for non-unit level. Third, we examined the physical inventory process at a contractor location. We found the contractor had completed physical inventories of SRC I missiles in its custody, although the contract did not specify the frequency or approach for conducting physical inventories. When we asked Army officials to provide documentation from the contractor verifying that physical inventories were completed, the officials acknowledged they do not receive verification from the contractor upon completion of physical inventories, but stated they have taken action and are evaluating methodology to ensure they receive documentation to verify that the contractor has completed physical inventories in the future. We found that the military services, except the Air Force, track SRC I ammunition by serial number in their respective accountability systems, and the Air Force has plans to revise its guidance regarding tracking. The Air Force tracks SRC I ammunition in its accountability system, CAS, by quantities within production lot numbers. CAS does not have the capability to track SRC I ammunition by serial number because CAS does not have a field to enter serial numbers. With this limitation, the Air Force also cannot conduct physical inventories of SRC I ammunition by serial number. We found in September 1997 that the military services did not uniformly track SRC I rockets by serial number and recommended that the services manage SRC I rockets by serial number to have total visibility over the numbers and locations of rockets. The department concurred and reissued policy in 2000 to require DOD components to track and conduct physical inventories of SRC I ammunition by serial number. However, Air Force guidance reissued in June 2015 recognizes that CAS cannot track SRC I ammunition by serial number and will instead track by quantities within production lot numbers. Air Force officials have recognized that they are not meeting DOD requirements for tracking SRC I ammunition by serial number, but are in the process of modernizing CAS to track by serial number. According to Air Force officials, the Air Force previously focused on the development of another enterprise information system to track, among other things, ammunition; however, the Air Force cancelled the system and is now in the process of upgrading CAS. The Air Force provided supporting documentation to confirm plans for CAS modernization by 2017. According to Air Force officials, this upgrade will modernize the system through technological upgrades that also includes provisions to improve auditability of CAS. Upon upgrading CAS to track SRC I ammunition by serial number, Air Force officials plan to reissue Air Force guidance to ensure that the Air Force tracks and conducts physical inventories of SRC I ammunition by serial number. If the Air Force does not modify CAS to include serial numbers, the Air Force will continue to lack serial number traceability of SRC I ammunition and will not meet DOD requirements. By tracking SRC I ammunition by quantities within production lot numbers, the Air Force will not have detailed information to support life-cycle traceability requirements, such as a transactional history including inventory, maintenance, repair, service records and/or supply, for each serial number, which may affect their ability to investigate instances of lost or stolen SRC I ammunition. Air Force policy does not require accountability in its system of record for items owned by other services and stored at Air Force locations. We identified 55 SRC I ammunition items owned by the Army or Marine Corps that were in the physical custody of the Air Force, but the Air Force did not maintain accountability of these items in its system of record— CAS. DOD policy requires that the DOD component that has physical custody of materiel in storage maintain accountability for that materiel in the component’s system of record, regardless of which DOD component owns the materiel. However, we found that Air Force guidance does not require personnel to maintain accountability in its system of record for SRC I ammunition items owned by other services but in the physical custody of the Air Force, and instead allows ammunition owned by other services to be tracked in a “non-accountable” program within CAS. This non-accountable program tracks information such as net explosive weight and asset visibility; however, according to Air Force officials, the non- accountable program does not maintain an audit trail or history that would document receipt and provide a record of how the SRC I ammunition was managed while at the Air Force location. We found that, consistent with DOD policy, Army, Navy, and Marine Corps guidance generally requires that accountability for ammunition in the physical custody of the service be maintained in the service’s system of record, regardless of which service owns the ammunition. Accountability for the 55 SRC I ammunition items we identified that were owned by the Army or Marine Corps that were shipped to and in the physical custody of the Air Force was not maintained in any service’s system of record while at the Air Force location. These items included: 40 Marine Corps-owned SRC I ammunition items that were stored at an Air Force location for approximately 11 months. Marine Corps officials were able to provide evidence that these items were shipped back to a Marine Corps location after the 11 months of storage at the Air Force location. 5 Army-owned AT4 anti-armor weapons that were shipped to an Air Force installation for Army training purposes. According to Air Force officials, these SRC I ammunition items have been expended, but Army and Air Force officials did not provide us related documentation. 10 additional Army-owned AT4 anti-armor weapons that were shipped to an Air Force installation for Army training purposes. For these 10 items, Army information systems show that the items were expended and turned in 2 and a half months after shipment, but Army and Air Force officials did not provide us documentation of accountability for the assets during the time they were in Air Force custody. Air Force officials stated that these ammunition items were managed on the non-accountable program because the ammunition was Marine Corps or Army property of which the Air Force did not intend to take ownership. According to Air Force officials, the assets had been deleted once the items were removed from the munitions storage area. Air Force officials could not provide us key information about these shipments, such as the date the shipments were accepted into the munitions storage area, to whom the ammunition items were issued, or when the ammunition items were issued because they said that information was no longer available in the non-accountable program. Marine Corps and Army officials told us that the ammunition items would likely have been managed by the unit— for example, by using a separate system or a manual process such as a spreadsheet. However, they did not provide a copy of the document that was used. Air Force officials updated guidance in June 2015 to place more restrictions on the use of the non-accountable program, including for SRC I ammunition items, but the guidance continues to allow the use of the non-accountable record when the Air Force does not intend to take ownership of the ammunition. According to Air Force officials, the decision of whether to maintain accountability for ammunition owned by other services in CAS depends on the operational situation and tactical environment. For example, for 20 additional SRC I ammunition items we reviewed that were owned by the Army but in the physical custody of the Air Force for testing purposes, Air Force officials maintained accountability in CAS and were able to provide transaction history. Officials told us that the Air Force is in the process of updating CAS to facilitate tracking of SRC I ammunition by owner and will move toward having most assets in CAS. However, if the Air Force does not revise guidance to clarify that accountability for all SRC I ammunition items in the Air Force’s custody—regardless of ownership—should be maintained in the Air Force’s system of record, both the Air Force and the owning service will lack a record of receipt and management of the SRC I ammunition while at the Air Force location; also the owning service will not have full assurance that accountability was maintained. We found that the military services generally recorded shipment and receipt of SRC I ammunition in their accountability systems; however, we found that existing Army depot and Marine Corps guidance do not specify a time frame for receipting shipments of SRC I ammunition. Marine Corps officials told us they generally adhere to the Navy’s guidance, which requires receipting of shipments within 1 business day, but Marine Corps installations are not required to follow that guidance. DOD policy emphasizes the need for continuous oversight to ensure protection of sensitive conventional arms, ammunition and explosives given that if these items are left vulnerable they have the potential to jeopardize the safety and security of personnel, activities, missions, and installations worldwide. DOD policy delegates to DOD component heads the responsibility to implement the procedures of DODM 5100.76, Physical Security of Sensitive Conventional Arms, Ammunition, and Explosives (AA&E) (Feb. 28, 2014) and develop supplemental guidance for the protection of arms, ammunition, and explosives in accordance with DODI 5100.76 Safeguarding Conventional Arms, Ammunition, and Explosives (AA&E) (May 20, 2010). However, the military services varied in the extent to which they have developed guidance that addresses the time frame within which SRC I ammunition should be receipted on the accountable record. Air Force guidance specifies SRC I ammunition be receipted on the accountable record immediately; Army guidance for retail locations specifies within 24 hours; and Navy guidance specifies within 1 business day. In contrast, Army, at the depot-level, and the Marine Corps have not finalized guidance that addresses the required time frame for receipting SRC I ammunition. In our review, we found that, generally, for those services with guidance, SRC I ammunition was receipted on the accountable record within specified time frames, while the services without guidance were more likely to receipt SRC I ammunition days after arrival, and in some instances, more than 5 days after arrival. In a non-generalizable sample of 104 shipments that we reviewed, we found the record of shipment in the shipper’s accountability system. For 100 of the 104 shipments, we found a corresponding receipt in the receiver’s accountability system. Of the four shipments for which we did not find a corresponding receipt, two were shipments of Army-owned items to the Air Force locations that the Air Force did not maintain in its accountable system because it did not own the items, and other two were shipments of Navy-owned SRC I items to a contractor for inspection. However, we found that approximately 20 percent of shipments of SRC I ammunition in our non-generalizable sample were not receipted within the time frames stated in military service policy or described as standard practice by military service officials. Of the 104 shipments we reviewed, we were able to compare receipt information to arrival time for 99 shipments, and we found that 21 of these 99 shipments were not receipted on the services’ accountability system within 2 business days after the arrival of the shipment. All of the military services either have documented policy that requires receipting SRC I ammunition on the accountable record within 1 business day or less or told us that they generally adhere to that time frame, but in our analysis, we allowed for 2 business days because military services’ information systems may take an additional business day to record transactions. Table 3 provides additional details of receipting time frames for each service. Air Force locations and Army retail locations are required by service guidance to adhere to established time frames for receipting SRC I ammunition, and all shipments we reviewed at Air Force locations for which we located receipts and all but 2 shipments we reviewed at the Army retail locations were receipted on the accountable record within 2 business days, as shown in table 3 above. In contrast, we found that the Army, at the depot-level, and the Marine Corps have not finalized guidance that addresses the required time frame for receipting SRC I ammunition. As identified in table 3, 12 of 21 shipments to Army depots and 5 of 30 shipments to Marine Corps locations were receipted more than 2 business days after arrival. An Army official told us that depots are required to receipt inbound shipments within 24 hours based on a policy letter issued prior to 2010, and that this requirement has also been in draft guidance since 2013, but that the guidance has not yet been finalized. Similarly, the Marine Corps does not have a receipting timeframe for SRC I ammunition in its guidance. Marine Corps officials told us they generally adhere to the Navy’s guidance, which requires receipting of shipments within 1 business day, but Marine Corps installations are not required to follow that guidance. Marine Corps officials told us that as of October 2015 they were in the process of incorporating a required time frame for receipting SRC I ammunition in Marine Corps guidance but did not provide a specific time frame for revising the guidance. Until the Army, at the depot-level, and the Marine Corps finalize and implement guidance that addresses the required time frame for receipting SRC I ammunition, Army and Marine Corps officials will not have the data they need to help assure accountability for all shipped SRC I ammunition. The Air Force and Navy have policies regarding maintaining in-transit accountability for shipped SRC I ammunition that generally adhere to DOD requirements, and the Marine Corps has planned system updates to adhere to requirements; however, the Army’s policy and processes do not fully adhere. DOD policy requires that the DOD component directing materiel into an in-transit status will retain accountability within the logistics records for that materiel until there is a formal acknowledgment of receipt. The Air Force and Navy maintain in-transit tables in their accountability systems that can be used to track ammunition that has been shipped but not yet receipted. Additionally, the Navy requires all in- transit materiel remain accountable to the issuing activity until properly receipted or resolved, and Air Force policy requires that each receiver acknowledge—orally or in writing or through other automated means— that the shipped SRC I items were received, and the date the assets were received. The Marine Corps has planned system updates to adhere to DOD requirements to maintain accountability for in-transit SRC I ammunition items. According to Marine Corps officials, the Marine Corps tracks Marine Corps-owned assets in transit until formal acknowledgement of receipt in its OIS-MC system, but Marine Corps ammunition supply points do not maintain accountability for SRC I ammunition in transit to another service. Marine Corps officials told us that the system of record used by Marine Corps ammunition supply points is being upgraded in fiscal year 2016 to facilitate compliance with in-transit requirements. The Army does not maintain accountability for all in-transit items within the logistics records for that materiel until there is a formal acknowledgement of receipt. Army regulations require the Joint Munitions Command to track shipments of SRC I ammunition from depot to depot, depot to unit, or unit to depot using DTTS and to monitor shipping documents and receipts to ensure they are closed or posted in a timely manner. However, officials from the Joint Munitions Command told us they do not receive confirmation of receipt from some entities, including other military services and some contractors. The Army’s systems do not maintain in-transit tables that show items that have been shipped out of one location and are due in to another. When the Army ships SRC I ammunition from depots or retail locations, it drops those items from its accountable systems without a requirement to confirm or document that the shipment was received. For SRC I ammunition shipments to other Army locations, the Army retains visibility of shipments by maintaining a record of SRC I ammunition items that have been shipped in its Worldwide Ammunition Reporting System-New Technology (WARS-NT) database, and matches up shipped items and receipted items by serial number to confirm that the items were received. However, for shipments to other military services, Army officials told us that the Army clears shipped items from its WARS-NT records upon receiving confirmation that the items were shipped. Army officials told us that limitations in their depot-level system, called LMP, and in their retail-level system, called the Standard Army Ammunition System, prevent them from maintaining full accountability for in-transit items, and that this deficiency, which affects all classes of supply, has been identified by the Army since 2012 at both the depot and retail level but that a solution has not yet been developed because, in part, of technical complexities. However, Army officials have not evaluated or identified actions that the Army could take to enable it to retain accountability for in-transit items until acknowledgment of receipt. Unless the Army evaluates and identifies actions to retain accountability for in-transit items until acknowledgement of receipt, the Army will not have a path forward to ensure that accountability for in-transit SRC I ammunition was maintained and the ammunition was received, thereby creating a potential gap in accountability and visibility of this ammunition. The military services have not consistently ensured timely, complete, and accurate information to maintain full visibility of SRC I ammunition in the continental United States. We found the Army has not ensured timely and complete information of SRC I ammunition returned to the contractor, but has begun to take action to ensure reporting to WARS-NT to improve visibility. We also found the Army had inaccurately categorized two variants of SRC I rockets, but took immediate action to add the rocket variants to the catalog listing of SRC I ammunition. Further, we identified examples of the military services not entering timely information in the Defense Transportation Tracking System (DTTS) on shipments to aid Military Surface Deployment and Distribution Command tracking by satellite, and of the services entering inaccurate or incomplete data about shipments of SRC I ammunition, which affects visibility of SRC I ammunition in transit. We found that the Army did not have timely, complete, or accurate information of its SRC I ammunition, but has taken action in two areas in order to improve visibility. In one area, we found Army officials had not ensured timely and complete information of SRC I ammunition returned to the contractor for repair, upgrade, maintenance, or testing and had not followed guidance for maintaining visibility of SRC I missiles. While the Army’s WARS-NT system, which is the Army’s official system for tracking SRC I ammunition, provided visibility of SRC I missiles located at the contractor facility, WARS-NT did not have timely or complete records to show visibility of all SRC I missiles at the contractor’s site. In January 2015, we identified an October 2014 shipment of 58 SRC I missiles sent from an Army depot to a contractor facility for repair. Although we confirmed during our site visit that the 58 missiles were located at the contractor’s facility and that the contractor’s automated information system accounted for the missiles, we found that WARS-NT did not have timely or complete data about the shipped 58 SRC I missiles. After we identified the discrepancies in records systems, Army officials acknowledged that while it is an Army requirement for a contractor to report the receipt of these items to the WARS-NT program office, this requirement was not included in the contract. Army officials are taking action and are coordinating a modification to the contract to require the prime contractor to routinely report receipt of shipments to WARS-NT per Army regulation. In the second area, we found that WARS-NT had inaccurately categorized two variants of SRC I rockets. Specifically, we found 55 SRC I ammunition items—variants of the M72 rocket—were not included in the WARS-NT system as SRC I ammunition items. After we noted the omission of the rocket variants in WARS-NT as SRC I ammunition, Army officials took action in August 2015 to add the rocket variants to the catalog listing of SRC I ammunition and in the WARS-NT system as SRC I ammunition. We found that the military services, as required by DOD regulation, used satellite tracking for nearly all of the 104 shipments of SRC I ammunition that we reviewed; however, the services did not always enter timely, accurate, and complete information that is required to aid tracking. The Defense Transportation Regulation requires satellite tracking of shipments of SRC I ammunition via the Defense Transportation Tracking System (DTTS). We found that 103 of 104 shipments of SRC I ammunition in a non-generalizable sample we reviewed were tracked in DTTS using satellite monitoring. DTTS, which is maintained by the Military Surface Deployment and Distribution Command, which falls under the U.S Transportation Command, provides satellite tracking capability of shipments of sensitive conventional arms, ammunition and explosives, including SRC I ammunition items, from the point of departure until the point of arrival. However, we observed problems with the timeliness, accuracy, and completeness of the data provided by the military services in DTTS, which limited the information available to aid the Military Surface Deployment and Distribution Command’s tracking of these shipments and its ability to facilitate responses to any incidents, if necessary. We found that the military services did not always enter timely information in DTTS on SRC I ammunition shipments to aid the Military Surface Deployment and Distribution Command’s tracking of SRC I ammunition by satellite. We observed timeliness problems both at the point of shipment departure and the point of shipment arrival. Shipment departure: The Defense Transportation Regulation specifies that the military services’ shipping offices must enter shipping information in DTTS prior to carrier departure. Data provided by the Military Surface Deployment and Distribution Command showed that information about 93 of 1,008 shipments identified as containing SRC I items between November 1, 2013, and April 30, 2015, were not in DTTS at the time of carrier departure. According to Military Surface Deployment and Distribution Command’s data, information was entered more than 1 hour after carrier departure for 68 of the 93 shipments. On average, information about these 68 shipments was not entered until approximately 8 hours after departure. According to Military Surface Deployment and Distribution Command officials, when information is not entered in the DTTS at the time of carrier departure, the command is still notified that these shipments are on the road when drivers turn on their satellite monitoring devices. However, the command does not have information about the contents of these shipments and therefore DTTS is unable to provide essential information to initiate rapid emergency response to in-transit accidents or incidents to minimize effect. Additionally, if a driver did not turn on the satellite monitoring device, the command would not be alerted to that situation since it would be unaware that a shipment was expected. Shipment arrival: The Defense Transportation Regulation requires entry into DTTS of confirmation of receipt of SRC I shipments within 2 hours of the offloading of each shipment. Data provided by the Military Surface Deployment and Distribution Command for SRC I shipments between November 1, 2013, and April 30, 2015, showed that 572 of 992 shipments to the military services containing SRC I items were not confirmed within the calendar month that they arrived. Further, as of April 30, 2015, Military Surface Deployment and Distribution Command data shows a backlog of 364 SRC I shipments to the military services dating as far back as November 2011 that had not been confirmed. According to Military Surface Deployment and Distribution Command officials, shipments that are not confirmed in DTTS as required hinder their ability to ensure successful transportation of SRC I ammunition because it requires the command to rely solely on the carrier to confirm that SRC I ammunition has been delivered. The Military Surface Deployment and Distribution Command and the military services have taken steps to improve the timeliness of data in DTTS. The Military Surface Deployment and Distribution Command works with designated military service representatives on transportation issues, and provides reports to the military representatives on timeliness of confirmation of individual SRC I shipments and SRC I shipments from prior months that have not been confirmed. Military Surface Deployment and Distribution Command officials also told us that they have been working to try to reduce systemic causes of shipments not being in DTTS at the time of shipment departure, such as system interface delays. Similarly, military service representatives told us that they have also tried to address issues of timeliness of reporting in DTTS. For example, the Army issued guidance in May 2014 reminding transportation offices and ammunition supply points of their responsibilities with regard to entering information in DTTS. However, both Military Surface Deployment and Distribution Command officials and the military service representatives acknowledged their collaboration could be improved to determine what information is needed to improve the military services’ oversight of the timeliness of data entry in DTTS. For example: With regard to shipments not entered in the system in a timely manner, Military Surface Deployment and Distribution Command officials told us that they provided reports to the military service representatives on shipments not in the system at the time of departure; however, they stopped notifying the military service representatives through emails to request assistance because they did not observe a decrease in the number of such shipments. With regard to shipment confirmations, while the Military Surface Deployment and Distribution Command continues to provide reports on SRC I shipments that were not confirmed in a timely manner, military service representatives told us that the information they are provided does not include sufficient detail for them to work with receiving locations to improve compliance with confirmation requirements. For example, the report provided by the Military Surface Deployment and Distribution Command does not identify the office responsible for confirmation, and it provides arrival time rather than offload time, although confirmation requirements in the Defense Transportation Regulation cite time elapsed from offload time. Until the Military Surface Deployment and Distribution Command and the military services collaboratively determine the specific information required for the military services to ensure timely data entry into DTTS, in accordance with the Defense Transportation Regulation, the Military Surface Deployment and Distribution Command will continue to lack full visibility of shipments of SRC I ammunition at certain points during the shipping process and the military services will not be well positioned to improve their oversight of the timeliness of data entry. We identified examples of the military services entering incomplete or inaccurate data in DTTS about shipments of SRC I ammunition. Incomplete information: The transportation control number for 8 of 104 shipments in our sample was not listed in DTTS, which limits the information available to the Military Surface Deployment and Distribution Command about individual shipments being tracked. For example, if one or more transportation control numbers associated with a shipment are not listed in DTTS, the Military Surface Deployment and Distribution Command may not have accurate information about the type, quantity, and security risk category of ammunition being tracked. 164 of 1,008 SRC I shipments from November 1, 2013, through April 30, 2015, which were reported to us by the Military Surface Deployment and Distribution Command, were missing data in the Department of Defense Identification Code field, which provides information about the specific type of ammunition being shipped. Inaccurate information—9 of 104 shipments in our sample had inaccurate controlled inventory items codes and were not identified in DTTS as SRC I shipments, which required us to go back to the Military Surface Deployment and Distribution Command to obtain additional information to confirm the shipment had been tracked by satellite. According to Standards for Internal Control in the Federal Government, agencies should have relevant, reliable, and timely information for decision-making and external reporting purposes. Completeness and accuracy are key characteristics of reliable data and refer to (1) the extent to which relevant records are present and that fields in each record are populated appropriately; (2) recorded data reflect the actual underlying information. Military Surface Deployment and Distribution Command officials told us that they attempted to address completeness and accuracy issues on a shipment-by-shipment basis. According to the officials, when an operator responsible for tracking an individual shipment notices missing or inaccurate information—such as when information in the paperwork given to the driver does not match information in the system—the operator attempts to work with the military service’s shipping office to correct that information for the shipment. However, neither the military services nor the Military Surface Deployment and Distribution Command have conducted an analysis of the problems the Military Surface Deployment and Distribution Command has observed with the completeness and accuracy of data entered by the military services to identify areas for improvement on a broader scale. Until the military services, with the aid of the Military Surface Deployment and Distribution Command, conduct analysis of the completeness and accuracy of data entered into DTTS by shippers on SRC I ammunition shipments, DOD will continue to lack full visibility of shipments of SRC I ammunition and the military services will not be well positioned to improve their oversight of the completeness and accuracy of the data. SRC I ammunition is treated as a higher risk than other conventional ammunition and serves as a potential threat if it were obtained and used by unauthorized individuals or groups. We found that the military services maintained accountability in their automated information systems of SRC I ammunition at 11 sampled locations. However, we found examples of SRC I ammunition items that were in the physical custody of the Air Force but owned by other services and accountability was not maintained on the Air Force’s system of record. If the Air Force does not revise guidance to clarify that accountability of all SRC I ammunition items in the Air Force’s custody—regardless of ownership—is maintained in the Air Force’s system of record, both the Air Force and the owning service will not have full assurance that accountability was maintained. Also, we found that the military services generally recorded shipment and receipt of SRC I ammunition in their accountability systems, but the Army and Marine Corps do not have guidance that required the receipting of SRC I ammunition in a timely manner, in accordance with DOD policy. Until the Army, at the depot-level, and the Marine Corps finalize and implement guidance that addresses the required time frame for receipting SRC I ammunition, Army and Marine Corps officials will not have the data they need to help assure accountability for all shipped SRC I ammunition. Further, the Air Force, Navy, and Marine Corps have policies or plans regarding maintaining in-transit accountability for shipped SRC I ammunition to generally adhere to DOD requirements, but the Army’s policy and processes do not fully adhere. Unless the Army evaluates and identifies actions to retain accountability for in-transit items until acknowledgment of receipt, the Army will not have a path forward to ensure that accountability for in-transit SRC I ammunition was maintained and the ammunition was received, thereby creating a potential gap in accountability and visibility of this ammunition. In addition, we found that the military services have not always entered timely information in DTTS on SRC I ammunition shipments, as specified in the Defense Transportation Regulation, to aid the Military Surface Deployment and Distribution Command’s tracking and visibility of SRC I ammunition by satellite. However, the Military Surface Deployment and Distribution Command and the military services have not agreed on the specific information required for the military services to ensure timely data entry into DTTS, in accordance with the Defense Transportation Regulation. Moreover, we identified examples of the military services entering incomplete or inaccurate data in DTTS about shipments of SRC I ammunition. Until the Military Surface Deployment and Distribution Command and the military services collaboratively determine the specific information required for the military services to ensure timely data entry into DTTS, and the military services, with the aid of the Military Surface Deployment and Distribution Command, conduct analysis of the completeness and accuracy of data entered into DTTS military services’ shipping offices on SRC I ammunition shipments, the Military Surface Deployment and Distribution Command will continue to lack full visibility of shipments of SRC I ammunition and the military services will not be well positioned to improve their oversight of the timeliness, completeness, and accuracy of data entered in DTTS. We are making six recommendations to enhance the department’s policy and procedures and improve the accountability and visibility of SRC I ammunition. To ensure the accountability and protection of SRC I ammunition, in accordance with DOD policy, we recommend the Secretary of Defense direct the Secretary of the Air Force to revise guidance to clarify that accountability for all SRC I ammunition items in the Air Force’s custody— regardless of ownership—should be maintained in the Air Force’s system of record. To ensure the Army and Marine Corps record the receipt of shipped SRC I ammunition in their accountability systems, and in accordance with DOD policy, we recommend the Secretary of Defense direct: the Secretary of the Army to finalize and implement guidance that addresses the required time frame for receipting SRC I ammunition at the depot level. the Commandant of the Marine Corps to finalize and implement guidance that addresses the required time frame for receipting SRC I ammunition at Marine Corps locations. To ensure the Army retains accountability of SRC I ammunition in an in- transit status, consistent with DOD policy, we recommend the Secretary of Defense direct the Secretary of the Army to evaluate and identify actions to enable the Army to retain accountability for in-transit items until acknowledgment of receipt. To help improve visibility and tracking of SRC I ammunition shipments, we recommend the Secretary of Defense direct the Secretaries of the military departments and the Military Surface Deployment and Distribution Command, through the Commander of the U.S. Transportation Command, to collaboratively determine the specific information required for the military services to ensure timely data entry into DTTS, in accordance with the Defense Transportation Regulation. To help improve the completeness and accuracy of data provided by the military services to the Military Surface Deployment and Distribution Command in accordance with federal internal control standards, we recommend the Secretary of Defense direct the Secretaries of the military departments, with the aid of the Military Surface Deployment and Distribution Command, to conduct analysis of the completeness and accuracy of the data entered into DTTS. We provided a draft of this report to DOD for review and comment; the department provided technical comments that we considered and incorporated as appropriate. DOD also provided written comments on our recommendations, which are reprinted in appendix V. In commenting on this draft, DOD concurred with all six of our recommendations. With respect to the first recommendation to ensure the accountability and protection of SRC I ammunition, DOD stated that the Air Force released a memorandum on December 24, 2015, directing Air Force units to account for all SRC I ammunition items in their custody, regardless of ownership, and to maintain them in the Combat Ammunition System. Additionally, DOD stated that such procedures will be included in Air Force guidance by September 30, 2016. With respect to our second and third recommendations to ensure the Army and Marine Corps record the receipt of shipped SRC I ammunition in their accountability systems within the required timeframes, DOD stated that the Army will include procedures on the required time frame for receipting SRC I ammunition at the depot-level in their guidance by September 30, 2016. Further, DOD stated that the Marine Corps has issued interim guidance via a Naval Message in January 2016 to address SRC I ammunition accountability along with required receipt times and that such procedures will be included in their guidance by June 30, 2016. Regarding our fourth recommendation to ensure the Army retains accountability of SRC I ammunition in an in-transit status, DOD stated that the Army will evaluate and identify by June 30, 2016, actions to enable the Army to retain accountability for in-transit items until acknowledgment of receipt. Further, DOD stated the proposed actions will then be prioritized for incorporation into any required follow-on work with Army Class V management systems, such as the Logistics Modernization Program and the Standard Army Ammunition System. Regarding our fifth recommendation to help improve visibility and tracking of SRC I ammunition shipments, DOD stated that the military services and the Military Surface Deployment and Distribution Command will collaboratively determine the specific information the Military Surface Deployment and Distribution Command can provide to the military services to correct data missing in DTTS at the time of shipment, and to complete shipment receipts. Furthermore, to provide greater oversight of the DTTS data, DOD stated the military services and the Military Surface Deployment and Distribution Command will develop the processes required to ensure regular feedback on accuracy and timeliness. Finally, with respect to our sixth recommendation to help improve the completeness and accuracy of data provided by the military services to the Military Surface Deployment and Distribution Command, DOD stated that the military services and the Military Surface Deployment and Distribution Command will complete the necessary analysis of the completeness and accuracy of the data entered into DTTS. 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 [email protected]. 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. Our review of the Department of Defense’s (DOD) management of SRC I ammunition focused on the four military services— Army, Navy, Marine Corps, and Air Force— because each military service owns, stores, and ships SRC I ammunition. To determine the extent to which the military services have maintained accountability of SRC I ammunition in the continental United States, we reviewed DOD policy and military service guidance, including Department of Defense Manual (DODM) 5100.76, Physical Security of Sensitive Conventional Arms, Ammunition, and Explosives (AA&E), (Apr. 17, 2012), among others, detailing: continuous accountability, frequency and process for conducting physical inventories, process for making adjustments to the electronic record if necessary, tracking of SRC I ammunition by serial number, and the shipment of SRC I ammunition in the continental United States. During our review, we visited 11 military locations—including 3 Army depots and 8 military service locations, such as military service installations, bases, and ammunition supply points, with SRC I ammunition—selected based on a number of factors including the size of SRC I inventory, the number of shipments to and from the location, and the variety of SRC I ammunition being stored. We also visited a contractor with a current production contract for SRC I missiles as SRC I ammunition items are in the contractor’s custody while at the contractor’s facility for repair, maintenance, or upgrade. Additionally, we interviewed OSD and military services officials responsible for the management of SRC I ammunition, including inventory personnel and transportation officials, to gain an understanding of the frequency and process for conducting physical inventories and how shipments of SRC I ammunition are coordinated. We compared a non-generalizable sample of over 600 SRC I ammunition items against the records in the military services’ automated information systems to verify accountability. For the Army we used the Logistics Modernization Program (LMP), Standard Army Ammunition System- Modernization (SAAS-MOD), and Worldwide Ammunition Reporting System-New Technology (WARS-NT). For the Navy and Marine Corps we used Ordnance Information System- Wholesale (OIS-W), Ordnance Information System-Retail (OIS-R), and Ordnance Information System- Marine Corps (OIS-MC). For the Air Force we used Combat Ammunition System (CAS). Specifically, during our site visits to 11 military locations and 1 contractor location, we went through storage buildings with SRC I ammunition and selected SRC I ammunition from different pallets to include a range of SRC I items as well as items from recent shipments, and documented identifying information including serial and production lot number. We verified the Army, Navy, and Marine Corps SRC I ammunition items by serial and lot number. Due to the way the Air Force maintains its records, we verified their SRC I ammunition to records based on lot number and quantity. We analyzed DOD policy and military service guidance on frequency and process for conducting physical inventories and reviewed supporting documentation to determine whether the services were maintaining accountability by conducting physical inventories according to requirements. For Army depots, we collected documentation of completed physical inventories for three fiscal years prior to our audit work— 2012, 2013, and 2014 and conducted site visits to three Army depots to observe a walk-through of their physical inventory process. We selected the three Army depots to visit based on a number of factors, including range in quantity and type of SRC I in storage and recent shipments. To supplement our site visits, we also interviewed inventory personnel at the remaining depots regarding the physical inventory process and process for adjusting the electronic record, if necessary. For five military service locations we visited, we requested documentation of the last three completed physical inventories to obtain a variety of physical inventories (e.g., monthly, quarterly, annually, or change in command) and we also observed a walk-through of their physical inventory process. Further, to supplement our site visits, we randomly selected 10 additional Air Force locations and obtained documentation for their last three completed physical inventories. We reviewed the inventories for our non- generalizable sample of 22 selected locations to determine whether physical inventories were being conducted in accordance with DOD policy and military service guidance and at required frequencies. Finally, during our site visit with the contractor, we confirmed the contractor had completed physical inventories of SRC I missiles in its custody as well as discussed with officials how they conduct physical inventories of SRC I ammunition at their location. We also examined the military services’ guidance and procedures for maintaining accountability for items owned by one service but in the physical custody of another service. We analyzed DOD policy and military service guidance on maintaining accountability for ammunition to determine the extent to which military services’ guidance aligned with DOD policy. We also analyzed data and documents obtained from the Air Force, Army, and Marine Corps on 55 SRC I items from 4 shipments of SRC I ammunition in the continental United States that contained ammunition owned by the Army or Marine Corps that was shipped to and held in the physical custody of the Air Force but for which we had found that accountability was not maintained on the Air Force’s system of record. We identified these items because we were unable to locate receipts for certain shipments in the Air Force’s system of record when we reviewed it for our analysis of the timeliness of receipt of shipments of SRC I ammunition described below. Information we report about the number of SRC I items or shipments we identified as being owned by another service but in the physical custody of the Air Force and not maintained on the Air Force’s accountable record is non-generalizable to the overall universe of SRC I items but provides insights on how the Air Force manages items in its physical custody that are owned by another service. Further, we analyzed shipping documents and military service data for a non-generalizable sample of 104 SRC I shipments, and compared receipting time frames for these shipments to military service guidance to analyze how accountability was maintained. When the military services did not have documented guidance on receipting time frames, we obtained information from military service officials about standard procedures followed by the military service. Our sample was comprised of shipments that occurred between November 1, 2013, and April 30, 2015, and that were shipped to or from locations we visited or interviewed. We selected these time frames to provide an 18-month window that provided one prior year’s data and six months that coincided with the period when we were conducting field work. Further, we selected our sample to reflect shipments to or from a variety of military services, locations, and location types. Because our sample of shipments is non-generalizable, results of our analysis cannot be used to make inferences about all SRC I shipments within the continental United States but they provide insights on the military services’ adherence to DOD policy and service-level guidance or standard practice regarding the shipment of SRC I ammunition. For the 104 shipments in our sample, we obtained and reviewed shipping documents and receipt data from the receiving military services’ accountability systems. We compared the receipt data from the receiving military service’s accountability systems to data on shipment arrival time at the receiving location that we obtained from the Defense Transportation Tracking System (DTTS), maintained by the Military Surface Deployment and Distribution Command. For our analysis, we analyzed whether shipments were receipted within 2 business days of the day of arrival of the shipment even though either service guidance or standard practice generally required receipting within 1 business day or less. We allowed for 2 business days because military services’ information systems may take an additional business day to record transactions. Also, we analyzed military service guidance related to providing accountability for in-transit items and compared that guidance to DOD policy to assess whether the military services’ policies and processes for maintaining accountability for in-transit SRC I ammunition items enabled the military services to maintain accountability of SRC I ammunition in the continental United States. When we determined that a military service’s guidance and processes did not align with DOD policy, we requested and reviewed additional documentation, such as analyses of gaps in information system capabilities and documentation of planning of system upgrades, and conducted interviews with military service officials to determine the reasons for the differences. To determine the extent to which DOD has maintained visibility of SRC I ammunition in the continental United States, we reviewed DOD policy and military service guidance, including DODM 5100.76 and the Defense Transportation Regulation, among others, detailing procedures to maintain visibility of SRC I ammunition, including in-transit visibility during shipment, satellite tracking of shipments, and timeframes for entering shipment information into DTTS. In addition, we interviewed relevant officials at the Office of the Secretary of Defense, the military services, U.S. Transportation Command, and the Military Surface Deployment and Distribution Command to gain an understanding of how visibility is maintained in their automated information systems, how shipments of SRC I ammunition are processed for shipping and entered into DTTS, and how visibility is maintained while the shipment is in transit. We obtained SRC I ammunition data from each of the military services’ automated information systems as of April 30, 2015, and analyzed this data for timely, complete and accurate information to maintain full visibility of SRC I ammunition in the continental United States. Specifically, we compared this data, based on a number of elements including type of SRC I ammunition, location in the continental United States, condition of the SRC I ammunition, and military service ownership codes, against information in the department’s National Level Ammunition Capability (NLAC) system, a DOD-wide repository that provides visibility of SRC I ammunition data, to identify inconsistencies across DOD and the military services. We also analyzed DOD requirements for satellite tracking from the Defense Transportation Regulation and obtained and analyzed information from DTTS provided by the Military Surface Deployment and Distribution Command about satellite tracking of shipments of SRC I ammunition in the continental United States from November 1, 2013, through April 30, 2015, to gain an understanding of how visibility is maintained. We analyzed data from November 1, 2013, to April 30, 2015, to correspond to the time frame we used to select our non-generalizable sample of shipments for review. To examine whether the military services used satellite tracking for shipments included in our non-generalizable sample of 104 shipments described above, we compared the transportation control number for each shipment in our sample to transportation control numbers associated with SRC I shipments in DTTS. When we could not locate a shipment in DTTS by transportation control number, we followed up with the Military Surface Deployment and Distribution Command to obtain additional information about the shipment, since in some cases the transportation control number was in DTTS but not in the data provided to us since the data was provided based on a bill-of-lading number. For the shipments that neither we nor the Military Surface Deployment and Distribution Command could locate in DTTS, we requested additional information about the shipment from military service officials to attempt to locate the shipment in DTTS through a means besides the transportation control number. For example, in some cases, the shipper had not identified the shipment in DTTS by transportation control number, and we were able to obtain and search on the bill-of-lading number to confirm that the shipment had been tracked in DTTS. We also examined the extent to which the military services provided timely data in DTTS, in accordance with the Defense Transportation Regulation, to ensure visibility. We analyzed data and reports provided by the Military Surface Deployment and Distribution Command from DTTS to identify the number of SRC I shipments between November 1, 2013, and April 30, 2015, for which information had not been entered into the system at the time of shipment departure and the number of shipments that were not confirmed within the calendar month of arrival. Further, we examined the extent to which the military services provided accurate and complete data in DTTS. We compared values for key data fields in DTTS, such as the DOD Identification Code and transportation control number, to shipping documents for selected shipments from our sample of 104 shipments. We also analyzed the number of missing values for selected data fields in DTTS for the 1,008 SRC I shipments in the continental United States between November 1, 2013, and April 30, 2015, reported to us by the Military Surface Deployment and Distribution Command. While we identified some issues related to the accuracy and completeness of DTTS data that are described in this report and may affect the reliability of the overall number of SRC I shipments during this time frame, we determined that the data were sufficiently reliable for our purposes of analyzing information about individual shipments in our sample and general trends in the timeliness, accuracy, and completeness of data entry in DTTS. To obtain additional information about the timeliness, accuracy, and completeness issues we identified and steps that were being taken to address these issues, we conducted interviews with U.S Transportation Command and Military Surface Deployment and Distribution Command officials, as well as representatives from each of the military services who are assigned to coordinate with the Military Surface Deployment and Distribution Command on transportation issues and reviewed additional documentation provided by the Military Surface Deployment and Distribution Command and the military services, such as reporting provided by the Military Surface Deployment and Distribution Command to the military services. Table 4 lists the offices that we visited or contacted during our review. We conducted this performance audit from September 2014 to February 2016 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. Department of Defense Manual (DODM) 5100.76, Physical Security of Sensitive Conventional Arms, Ammunition, and Explosives (AA&E) sets forth DOD policy on the physical security of sensitive conventional AA&E. According to DODM 5100.76, continuous program and policy oversight is required to ensure protection of AA&E within DOD, and DOD components are required to track and conduct physical inventories of SRC I ammunition by serial number. DOD policy requires SRC I ammunition to be treated as a higher risk than other conventional ammunition which requires a higher level of protection and security. DOD and the military services have policy and guidance on how to account for, safeguard, conduct physical inventories, adjust if necessary, track, and ship SRC I ammunition within and between services and to contractors for repair, as shown in table 5 below. In May 2014, we found that the department has experienced some challenges in implementing hazardous materials (HAZMAT) regulations and other guidance, which can adversely affect the safe, timely, and cost- effective transportation of HAZMAT. For example, we found that at least 44 times during fiscal years 2012 and 2013, DOD installations did not provide commercial carriers with access to secure hold areas for arms, ammunition, and explosives shipments or assist them in finding alternatives, as required by DOD regulations. We made 3 recommendations and all 3 have been closed as implemented. Table 7 summarizes our recommendations and their implementation status. In March 2014, we found that the military services’ automated information systems used to maintain accountability for ammunition inventory have some limitations that affect their ability to facilitate efficient management of conventional ammunition. For example, the systems cannot directly exchange ammunition data because they use different exchange formats that require extra time and resources to ensure data efficiency when exchanging between systems. We also found that Army reports of ammunition inventory data, used in the process for collecting and sharing ammunition data among the military services do not include information on certain missiles. We concluded that without incorporating these items in the Army’s report, DOD may lack full transparency about all available items and may miss opportunities to avoid procurement costs for certain usable items that may already be available in the Army’s stockpile. We made 7 recommendations, of which 2 have been implemented and 5 remain open. Table 8 summarizes our recommendations and their implementation status. In April 2000, we found internal controls weaknesses at an Army ammunition depot that resulted in a loss of accountability and control over SRC I rockets. For example, serial number control of SRC I rockets was lost at the time of shipment from the contractor because serial numbers listed on receiving reports that accompanied shipments did not correspond to the actual items and quantities of the respective shipments. We also noted that these control weaknesses indicate that the depot’s inventory business processes for these sensitive items do not fully comply with federal accounting and systems requirements. We made 10 recommendations, of which 9 have been implemented and 1 has not been implemented. Table 9 summarizes our recommendations and their implementation status. In September 1997, we found oversight weaknesses with SRC I rockets and that the military services have different procedures and requirements for maintaining oversight of the rockets. Further, we found that discrepancies existed between records of the number of missiles and a physical count we conducted. In addition, we identified that some facilities were not fully complying with DOD physical security requirements. We made 5 recommendations, of which all 5 have been closed as implemented. Table 10 summarizes the recommendations and their implementation status. In September 1994, we found discrepancies in the quantities, locations, and serial numbers of SRC I missiles inventories, which we concluded indicated that the services’ oversight and recordkeeping for the missiles is poor. We also noted, among other findings, that the services did not know how many missiles they should have in their possession because they lacked systems to track the missiles by serial number. We made 6 recommendations, all of which have been implemented. Table 11 summarizes the recommendations and their implementation status. In addition to the contact named above, Marilyn Wasleski (Assistant Director), Laura Czohara, Martin de Alteriis, Amie Lesser, Felicia Lopez, Sean Manzano, Anne McDonough-Hughes, Steve Pruitt, and Richard Powelson made key contributions to this report. | DOD manages a stockpile of more than 226,000 SRC I missiles and rockets in the continental United States. SRC I conventional ammunition, which refers to nonnuclear, portable missiles and rockets in a ready-to-fire configuration, is managed as a higher risk than other conventional ammunition and serves as a potential threat if it were obtained by unauthorized individuals or groups. Senate Report 113-176 (2014) included a provision for GAO to review aspects of DOD's management of SRC I ammunition. This report addresses the extent to which the military services have maintained (1) accountability and (2) visibility (i.e., access to accurate information) of SRC I ammunition in the continental United States. GAO reviewed DOD and military service policies, regulations, and guidance on physical inventories and shipping of SRC I ammunition; conducted visits at a non-generalizable sample of 11 military service locations selected based on inventory size and number of shipments of SRC I ammunition; interviewed officials; and analyzed data on SRC I on-hand assets as of April 30, 2015, and on non-generalizable samples of SRC I shipments from November 1, 2013, to April 30, 2015. The military services maintained accountability (i.e., accurate records) of Security Risk Category (SRC) I conventional ammunition at 11 sampled locations within the continental United States; however, GAO identified gaps in some service-level guidance and procedures for how SRC I ammunition is accounted for across locations. GAO identified instances in which the Navy and Army had taken actions to enhance the accountability of the physical inventories of SRC I ammunition, such as the Army evaluating its methodology to ensure contractors with SRC I ammunition in their custody submit documentation to verify completion of inventories. However, GAO identified 55 SRC I ammunition items that were in the physical custody of the Air Force—though owned by the Army or Marine Corps—but accountability was not maintained in any service's system of record while at the Air Force location. Department of Defense (DOD) policy requires that the DOD component having physical custody of materiel maintain accountability in its records regardless of the owner, but the Air Force's guidance requires that ammunition owned by other services be tracked only in a “non-accountable” program. If the Air Force does not revise its guidance to require that accountability be maintained regardless of ownership, the Air Force and the owning service will not have complete records of management of the ammunition and the owning service will not have full assurance that accountability was maintained. GAO found that Army and Marine Corps guidance does not specify a time frame for receipting shipments of SRC I ammunition. Records showed that 12 of 21 shipments to Army depots and 5 of 30 shipments to Marine Corps locations were receipted more than 2 business days after truck arrival. Until Army and Marine Corps officials finalize and implement guidance on required time frames for receipting SRC I ammunition, officials cannot reasonably assure accountability for all shipped SRC I ammunition. The military services have not consistently ensured timely, complete, and accurate information to maintain full visibility of SRC I ammunition in the continental United States. For example, 93 of 1,008 shipments GAO examined were not entered in DOD's Defense Transportation Tracking System (DTTS) at the time of departure. Also, 9 of 104 shipments GAO examined in more detail had inaccurate controlled inventory item codes and were not identified in DTTS as SRC I shipments. The Military Surface Deployment and Distribution Command and the military services have not collaboratively determined the specific information required for the military services to ensure timely data entry into DTTS. Further, the military services, with the aid of the Military Surface Deployment and Distribution Command, have not conducted analysis of the completeness and accuracy of data entered into DTTS by shippers on SRC I ammunition shipments. Until these actions are taken, the Military Surface Deployment and Distribution Command will not have full visibility of shipments of SRC I ammunition and the military services will not be well positioned to improve their oversight of the timeliness, completeness, and accuracy of data entered in DTTS. GAO recommends that DOD revise and finalize guidance and improve the timeliness, completeness, and accuracy of information to maintain full accountability and visibility of SRC I ammunition. DOD concurred with all six recommendations and identified specific steps it has already taken as well as plans to address them. |
International assistance using agricultural commodities, or food aid, has been an important part of U.S. agricultural and foreign policy since 1954. The Agricultural Trade Development and Assistance Act of 1954,commonly known as Public Law (P.L.) 480, established the legal framework for U.S. food aid. The title I program is one of the three food aid programs authorized under P.L. 480 and is administered by the U.S. Department of Agriculture (USDA). Under the title I program, U.S. agricultural commodities are sold on long-term credit terms at below-market-rate interest to developing countries. Numerous acts, including the most recent amendments in the 1990 Food, Agriculture, Conservation, and Trade Act have revised the goals and provisions of P.L. 480. The P.L. 480 legislation and its amendments have always consisted of a composite of multiple and sometimes competing objectives. While the emphasis among the various P.L. 480 program objectives has shifted over time to reflect the changing needs of domestic farm policy and emerging foreign policy developments, the importance of the title I program as a U.S. export program and U.S. food aid program has diminished significantly since the program’s inception in 1954. Title I commodity exports, which once represented a significant share of the total value of U.S. food aid and U.S. agricultural exports, have declined dramatically—representing about 14 percent of the total value of U.S. food aid and less than 1 percent of U.S. agricultural exports in fiscal year 1993. For this review, we assessed the impact of title I assistance on (1) broad-based, sustainable development in recipient countries and (2) long-term market development for U.S. agricultural goods in those countries. In addition, we evaluated the effect of the 1990 act on the interagency coordination of the title I program, the content of development plans included as part of title I agreements with recipient countries, and the process for selecting and funding countries for title I assistance. The P.L. 480 legislation, as amended, authorizes international food assistance under three different programs: government-to-government concessional loans that offer long-term, low-interest-rate credit (title I program); donations (title II program); and grants (title III program). Specifically, the three P.L. 480 programs are intended to provide the following types of assistance: Title I (trade and development assistance) authorizes concessional loans to developing countries that are short of foreign exchange and have difficulty meeting their food needs through commercial channels. The 1990 act gives priority to countries that are experiencing the greatest need for food, are undertaking economic development measures, and have demonstrated a potential to become commercial agricultural markets for U.S. exports. This type of food aid program is unique to the United States: no other country offers a food assistance program using long-term, low-interest concessional loans (i.e., repayment terms of 10 years or more and interest rates below prevailing market rates). Title II (emergency and private assistance programs) authorizes donations of agricultural commodities to provide emergency feeding programs and carry out activities to alleviate the causes of hunger, disease, and death. Title III (food for development) authorizes grants of agricultural commodities to be (1) used for food distribution programs and the development of food reserves or (2) sold and the proceeds used for economic development purposes. The 1990 act targets title III aid for least-developed countries. Before the 1990 legislative changes, the title III program forgave debt incurred under title I if the recipient governments used the local currencies generated from the sale of title I commodities to finance mutually agreed-upon development projects. Under the 1990 act, before an agricultural commodity can be considered for export under any one of the P.L. 480 programs, the domestic supply of that commodity in the United States must be in excess of what is needed to meet domestic consumption requirements, provide adequate surplus for domestic reserves, and meet anticipated export opportunities. Each fiscal year, the Secretary of Agriculture announces a P.L. 480 “docket” that lists the types and amounts of agricultural commodities available for sale or donation under the three P.L. 480 programs. Agricultural commodities typically sold under the title I program are bulk commodities (i.e., wheat, rice, corn, and cotton) and semiprocessed commodities (i.e., vegetable oil, wheat flour, and tallow). Commodities typically donated under title II and III assistance include those exported under the title I program as well as legumes (e.g., beans, peas, and lentils) and soyproducts. According to officials from USDA, several commodities that are regularly on the P.L. 480 docket represent planned production for export rather than an accidental byproduct of U.S. farmers’ overproduction during a year. For example, USDA considers the P.L. 480 programs at the outset of the fiscal year when it sets production goals and establishes acreage reduction programs to remove farm land from production for price-supported crops, such as wheat, corn, rice, and cotton. The total volume of U.S. agricultural goods exported and the total amount of program funds allocated for titles I, II, and III in fiscal year 1993 are presented in table 1.1. Countries are not restricted to receiving one type of U.S. food aid and can participate in more than one food aid program simultaneously. For example, many title I and title III recipients also receive title II assistance. Appendix I lists the countries that participated under each of the P.L. 480 programs and the value of the agricultural commodities exported in fiscal year 1993. In addition to encompassing expenditures for agricultural commodities, the P.L. 480 programs also include expenditures for ocean freight, or the cost of shipping title I commodities to recipient countries. Cargo preference provisions require that at least 75 percent of the P.L. 480 commodity tonnage be shipped on U.S. flag ships rather than on generally less expensive foreign flag vessels. The cost to the U.S. Treasury to ship title I commodities during fiscal year 1993 was $58.3 million (see table 1.1). Ocean freight expenditures are lower under the title I program than the other P.L. 480 programs because the U.S. government reimburses the recipient countries only for the amount by which the cost to ship on U.S. vessels exceeds the cost to carry the same commodities on vessels of other countries. In comparison, the ocean freight expenditures are higher for commodities donated under the title II and III programs because the U.S. government pays for the entire ocean freight costs via U.S. or foreign flag vessels. Although title I assistance is a concessional loan program in which recipients are expected to pay back the amount of the loan plus interest, according to officials at the Office of Management and Budget (OMB), the U.S. government never fully recovers the cost of the loans. In other words, the outlays for the commodities are greater than the present value of the expected returns, which include expected principal payments plus interest. Under the Federal Credit Reform Act of 1990 (P.L. 101-508, 1990), USDA and OMB must estimate the subsidy rate for program loans to determine the total budgetary cost of the title I concessional loans. The composite subsidy rate for all of the individual title I concessional loans in fiscal year 1993 was approximately 64 percent, according to USDA officials. Therefore, even though title I is a loan program, the actual cost of the fiscal year 1993 title I concessional loans to the U.S. Treasury is estimated to be $223 million on the basis of $332.8 million in title I loans made to recipients for commodity purchases during that fiscal year. In other words, OMB expects the U.S. Treasury to get back, on average, $.36 for every $1.00 loaned under the 1993 title I program. As part of its program management responsibilities, USDA directs the selection of title I recipients and the amount of money they receive under the program. In fiscal year 1993, 22 countries imported title I commodities from the United States in amounts ranging from $5 million to $40 million (see table 1.2 for title I allocations for fiscal years 1992 to 1994). In addition, 8 of the 22 title I recipients in fiscal year 1993 also received title II assistance, and 1 country, Sri Lanka, also received title III assistance. Several of the recipients were countries of the former Soviet Union and were first-time participants of the program in fiscal year 1992. While USDA hopes to transform title I recipients into commercial importers, their “graduation” from the program can be a long and uncertain event. For example, 6 of the 22 recipients in fiscal year 1993 have been in the program for 20 years or more. The main impact of the 1990 legislative changes on title I allocations was to shift several former recipients of title I assistance to the newly revised title III program. However, events since the 1990 act have spurred even greater changes in the allocation of title I assistance. Egypt, one of title I’s largest and longest-term recipients, did not use approximately $100 million of its fiscal year 1992 allocation and subsequently dropped out of the program in fiscal year 1993. In 1991, Egypt’s financial picture vastly improved, in large part as the result of U.S. and allied debt forgiveness following the 1991 Gulf War. The unused $100-million program allocation represented about 25 percent of title I’s total program value for that year. At the same time, countries of the former Soviet Union and Eastern Europe had become more important participants in U.S. assistance programs. During fiscal years 1992 and 1993, USDA was able to initiate title I programs in many of these countries using title I funds that may have otherwise been allocated to Egypt. Once a country is selected to participate in the title I program, USDA negotiates title I agreements with recipient government officials to determine the types and quantities of commodities the country will import. Under the title I program, countries purchase commodities selected from the P.L. 480 docket with concessional credit provided by the U.S. government. The concessional terms include a maximum 30-year period for repayment, with a maximum 7-year grace period and interest rates below prevailing market rates. USDA also negotiates with the recipient country to include a statement in the title I agreement describing how the assistance provided will be integrated into the country’s overall development and food security plans (see app. III for development plans for our seven case-study countries in fiscal year 1992 title I agreements). While the emphasis among the various P.L. 480 goals has shifted over time to accommodate changing U.S. farm and foreign policy interests, the domestic and international conditions that engendered the inception of the U.S.’ food aid program in 1954 have altered even more so. An increase in donations of food aid by other countries and the creation of new USDA market development programs designed to expand U.S. exports have significantly reduced the importance of the title I program as a worldwide food aid program as well as its importance as a U.S. agricultural export and surplus disposal program. According to the literature we reviewed on the history of the P.L. 480 legislation, when P.L. 480 was enacted in 1954 its goals were to move large amounts of U.S. surplus agricultural commodities to needy countries and serve U.S. foreign interests as well as develop future markets for U.S. agricultural commodities. At the time, the United States was the primary producer of agricultural commodities worldwide, there was a shortage of international purchasing power after World War II, and there was a great humanitarian need for food aid. Most U.S. food aid was sold to foreign governments through title I loans, but some was donated for disaster relief, economic development, and feeding programs. All countries, except some communist nations, were eligible to participate in the title I program. Although none of the original goals of the P.L. 480 legislation were abandoned, amendments in 1966 reoriented the goals of the P.L. 480 program toward combating world hunger. The 1966 amendments required that recipient countries sign self-help contracts as part of every title I agreement to encourage the countries to improve their domestic agricultural and food production. Amendments in 1968 expanded the use of loan repayments in local currency for self-help contracts and development programs. Title I loan repayments in local currencies were phased down between 1966 and 1971, emphasizing long-term credit sales for dollars and for convertible local currencies. In the early 1970s, agricultural prices soared as worldwide agricultural production stagnated and worldwide demand for agricultural products expanded. Demand increased because of strong economic growth in developing countries and rising commercial imports by the Soviet Union. The amount of U.S. surplus commodities drastically diminished, and Congress did not raise title I program appropriations to cover the increased costs of providing food aid. Amendments to the P.L. 480 legislation in 1973 and 1974 attempted to direct the distribution of P.L. 480 funds, including title I, to serve the most needy countries. Ultimately, the amendments required that 75 percent of the title I concessional sales go to countries designated by the United Nations as most seriously affected by food shortages. Amendments in 1977 shifted the emphasis of the food aid program to promoting the self-sufficiency of recipient countries. Recipient governments were encouraged to use proceeds from local sales of title I commodities for agricultural and rural development projects under a revised title III program. The focus of P.L. 480 shifted again in the 1981 amendment, when social development objectives became paramount. Recipient countries were urged to use local currency proceeds from the sale of title I commodities to support literacy and health programs for the rural poor. These development objectives were retained in the 1985 amendments to P.L. 480. By the late 1980s, both U.S. foreign assistance funds and U.S. farm surpluses to help meet global food aid needs were becoming more scarce. Under the 1990 amendments to P.L. 480, the focus of the food aid programs shifted again. Currently, the goal of P.L. 480, including title I, is to promote U.S. foreign policy by enhancing the food security of developing countries through the use of agricultural commodities and local currencies to (1) combat world hunger and malnutrition and their causes; (2) promote sustainable economic development, including agricultural development; (3) expand international trade; (4) develop and expand export markets for U.S. agricultural commodities; and (5) encourage the growth of private enterprise and democratic participation in developing countries. Food security was defined in the 1990 act as “access by all people at all times to sufficient food and nutrition for a healthy and productive life.” While the 1990 act emphasized food security—an economic development and food assistance issue—it also assigned title I program management responsibilities to USDA, whose international responsibilities are foreign market development for U.S. agricultural goods, rather than to the Agency for International Development (AID), which is an international economic development agency. The 1990 act removed the requirement that 75 percent of title I commodity sales go to countries that were defined as those with the lowest income, allowing USDA more flexibility in selecting title I recipients. In addition, the 1990 act removed the requirement that recipient countries be deemed “friendly” before receiving title I aid. Despite the shifting emphasis of the title I program, the importance of title I, domestically and internationally, has declined significantly since the program’s inception in 1954. Although the United States remains a world leader in providing food assistance, title I’s share of both total world food aid and U.S. agricultural exports has decreased substantially since the inception of the P.L. 480 programs. During the 1950s and 1960s, the United States provided about 90 percent of world food aid, and title I represented around 80 percent of U.S. food aid. As other countries began to increase their food aid donations in the 1970s, the U.S. share of world food aid decreased, to about 50 percent by 1980 and continued to decrease to about 43 percent by 1992. Title I’s share of U.S. aid also declined to about 65 percent in fiscal year 1980 and to 14 percent in fiscal year 1993. The establishment of new USDA credit guarantee programs and commodity price reduction programs in the mid-1980s also decreased the importance of title I food aid as a U.S. export and surplus disposal program. In the late 1950s and mid-1960s, title I shipments accounted for roughly 19 percent of the total value of U.S. agricultural exports (see fig. 1.1 for fiscal year 1960 data). However, this share decreased to around 2 percent in the mid-1970s to late 1980s. In 1993, title I’s portion of U.S. agricultural commodity exports dropped to its lowest level in over 40 years—0.8 percent (see fig. 1.2). Appendix II lists the value of title I exports and total U.S. agricultural exports for fiscal years 1955 to 1994 and presents title I as a percent of total U.S. agricultural exports. The objectives of our review were to assess the impact of title I assistance on (1) broad-based, sustainable development and (2) long-term market development for U.S. agricultural commodities in recipient countries. The 1990 act directed us to evaluate the impact of title I assistance on agricultural development in recipient countries. The three authorizing committees agreed that we would satisfy this requirement by assessing the impact of title I aid on broad-based, sustainable development since agricultural development is included under one of the act’s legislative objectives—“to promote broad-based, equitable, and sustainable development, including agricultural development.” In addition, broad-based, sustainable development includes raising economic and agricultural productivity—factors critical to achieving food security, which is also one of the act’s legislative goals. We also evaluated the effect of the 1990 act on certain elements of title I program management. Specifically, we looked at (1) the interagency coordination of title I assistance in Washington, D.C.; (2) the content of the development statements included in the title I agreements with recipient countries; and (3) USDA’s country selection and title I program fund allocation process. The 1990 act required us to review the title I program and conduct audit work in countries located in three geographic regions of the world that are representative of countries receiving title I assistance. As part of our review, we selected seven case-study countries in four regions of the world to conduct audit work at USDA’s, AID’s, and the State Department’s overseas posts. Our seven-case study countries were: Egypt and Morocco (northern Africa), Sri Lanka and the Philippines (East Asia), El Salvador and Guatemala (Central America), and Jamaica (the Caribbean). We selected these seven case-study countries in four geographic regions because they represented a variety of title I recipients in terms of program size, mix of USDA and AID programs, and length of title I participation. In fiscal year 1992, these seven countries received 51 percent of the total title I program funds. To assess the impact of title I assistance on long-term economic development and market development in our case-study countries as well as other recipient countries, we conducted interviews with and obtained documents from officials with USDA and its Economic Research Service (ERS), AID, OMB, the State Department, the World Bank, and U.S. commodity groups in Washington, D.C. In each country we visited, we interviewed U.S. and host government officials; representatives from U.S. commodity groups; and other parties, such as foreign food aid donors, importers, and exporters. We also reviewed literature that evaluated title I’s long-term impact on economic development, agricultural development, and commercial trade in recipient countries. To estimate the maximum foreign exchange savings made possible when a country imports title I commodities and to estimate the relative importance of these foreign exchange savings to broad-based, sustainable economic development, we calculated title I aid as a percentage of a recipient’s total imports for the 15 title I recipients in fiscal year 1991—the most recent year for which complete international financial statistics were available. We reported this information for each country, arranged by group according to their foreign exchange shortage. To measure foreign exchange shortage, we used a country’s international nongold reservesexpressed in number of weeks of imports these reserves would cover. We also calculated title I aid as a percentage of a country’s total food imports to determine the size of title I’s contribution to a country’s food import needs. In addition, we reviewed past and current development statements contained in title I agreements and discussed them with USDA, AID, and recipient government officials in the seven countries we visited. Using USDA’s and the United Nations’ trade database, we attempted a statistical analysis to determine whether there was any relationship between title I and commercial imports from the United States for major title I recipients, past and present. Our regression analysis, however, was not successful because of problems with the data, i.e., missing data, incompatible data sets, differences in reporting periods, inconsistencies between figures reported by the United States and other countries, differences in classification, and double counting of transshipments through other countries. Because we were unable to conduct a regression analysis, we based our conclusions regarding the relationship between title I and a country’s commercial imports on evidence drawn from literature we reviewed; an analysis of trade data from the International Wheat Council for our case-study countries for crop years July 1, 1980, through June 30, 1992 (the one data set we found that was complete and consistent for more than a decade); and information we collected from documents and interviews with officials from USDA and U.S. commodity groups in Washington, D.C., and in our seven case-study countries. Unless otherwise noted, we reported dollar values covering periods of 5 years or longer in 1993 dollars. In addition, we assessed title I’s contribution to developing or expanding markets for U.S. agricultural products in South Korea, a former title I recipient considered by USDA to be a best-case example of title I’s market development success. We interviewed officials from USDA, ERS, and three different commodity groups; analyzed trade data for three commodities that were the primary commodities exported to South Korea under the title I program (wheat, corn, and cotton); and reviewed several studies that examined factors contributing to South Korea’s economic development. To evaluate the effect of the 1990 act on certain elements of program management, we interviewed officials from USDA, AID, and the State Department in Washington, D.C., and in our seven case-study countries, as well as officials from OMB. In addition, we looked at the reasons why USDA never implemented a local currency program, section 104, which was authorized in the 1990 act. We requested comments on a draft of this report from the Secretary of Agriculture or his designee. USDA chose not to provide us with written agency comments, but senior USDA officials responsible for title I program management gave us oral comments on the draft. We also discussed the contents of this report at exit conferences with senior officials from OMB and the State Department. Our evaluation of the comments from USDA, OMB, and the State Department appears in chapter 5. AID officials declined to discuss the draft report and did not provide agency comments. We did our work between October 1992 and December 1994 in accordance with generally accepted government auditing standards. While broad-based, sustainable (BBS) development is widely considered to be a cornerstone of any long-term strategy to achieve food security, the results of our review indicate that title I assistance has limited ability to affect sustainable economic development in recipient countries. The primary way that the title I aid can contribute to BBS development in a recipient country is by helping the country save its scarce foreign exchange to invest in projects that promote long-term sustainable economic development. Foreign exchange savings occur when title I imports displace commercial imports. Our analysis indicated, however, that even if the maximum possible foreign exchange savings occurred, title I’s potential contribution to sustainable economic development would still be minimal because the program is small in relation to the country’s overall development needs. There are some cases, though, in which title I assistance may have made a meaningful short-term contribution to the food supply in some recipient countries. However, this assistance is not considered a contribution to BBS development. The recipient government’s sale of the title I commodities to the private sector in-country generates revenues, called “local currencies,” that the recipient government can use to cover budgetary expenses. These revenues, however, are not an infusion of additional resources to the country since they are generated from the sale of the title I commodities within the local economy. Instead, the local currencies are a shift of money from the private to the public sector. The title I program is also intended to promote BBS development through the title I agreements in which countries agree to undertake certain development activities in exchange for receiving title I assistance. However, the results of our review indicated that the title I program provided the United States with relatively little leverage to induce recipient countries to undertake additional BBS development activities or policy reforms. The leverage was limited because the dollar value of the title I aid was small compared to the countries’ basic development requirements as well as to the total assistance provided by other world donors. Moreover, other competing program objectives dilute whatever leverage might have been associated with the provision of title I assistance. Although economic and agricultural development is one of P.L. 480’s objectives, a chief criticism of title I assistance has been that it may have a disincentive effect on local farmers and local food production, according to the studies we reviewed. Any disincentive effect, however, may be diminished to the extent that food aid imports displace commercial imports rather than domestic production. The title I program contains legislative requirements that impede the program’s ability to achieve its BBS development objectives through foreign exchange savings. These requirements also interfere with another provision in the legislation that is meant to ensure that the distribution of food aid in the recipient country does not interfere with that country’s domestic production. The 1990 act unites P.L. 480’s multiple objectives under one central policy goal: to promote the foreign policy of the United States by enhancing the food security of the developing world. While increasing the supply of food may help to relieve hunger and malnutrition in the short term, it is not sufficient for achieving food security. That goal requires long-term solutions to the problems of food availability, accessibility, and utilization in developing countries. BBS development is an integral component of a successful food security strategy because its tangible benefits, which include raising the purchasing power and productivity of the recipient population, are critical to attacking the causes of poverty, hunger, and malnutrition. The P.L. 480 legislation does not define BBS development. The World Bank and AID, however, broadly define BBS development as meeting the needs of the present generation without compromising the needs of future generations. “Broad-based” refers to development policies designed to raise productivity (including agricultural productivity), buying power (including the foreign exchange earnings), and quality of life for the majority of the recipient population. “Sustainability” is concerned with avoiding policies that buy short-term gains at the expense of future growth, e.g., unsound macroeconomic policies that involve excessive borrowing or that unduly damage the environment, thereby impairing the quality of life for current and future generations. “Development” implies a continuing improvement in the “quality” of life and the extension of this improvement in quality to the lives of all the people in the country concerned. According to representatives from USDA, AID, our seven case-study countries, and the World Bank, and based on our literature review, the primary way in which title I aid can contribute to BBS development is through the foreign exchange savings that occur when title I imports displace commercial imports. These foreign exchange savings take place when a country purchases agricultural goods through the title I concessional sales program instead of purchasing them through commercial channels. Maximum gains in foreign exchange savings occur when 100 percent of the title I aid displaces agricultural imports that were previously purchased through commercial channels. Foreign exchange savings do not take place when title I imports are received in addition to a country’s customary level of commercial imports. In other words, title I assistance contributes to foreign exchange savings only when it displaces commercial food imports. This question of “additionality,” whether title I imports displace a country’s commercial imports or constitute an addition to the country’s food supply, is considered to be one of the most important issues when analyzing food aid’s impact on BBS development and on commercial trade. We evaluated two separate literature reviews that together examined over 100 studies on food aid’s impact on commercial trade. While all of these studies evaluated P.L. 480 food aid’s impact on commercial trade, every study did not specifically address the title I program. However, taken as a whole, these studies tended to support the view that food aid partially displaces commercial imports, though the degree of displacement varies greatly from country to country. Three studies within our literature review specifically examined whether title I assistance displaced commercial imports in three of our seven case-study countries—Egypt, Sri Lanka, and Jamaica. Through the use of statistical models, each study concluded that title I assistance had allowed the countries to achieve some foreign exchange savings by displacing commercial imports. For example, the analysis of commercial and concessional wheat imports in Sri Lanka from 1955 to 1981 strongly suggested that food aid had substituted for commercial purchases. The author concluded that P.L. 480 food aid imports clearly resulted in foreign exchange savings for Sri Lanka. We also compiled trade data from the International Wheat Council on wheat imports for six of our seven case-study countries for crop years July 1, 1980, through June 30, 1992, to help assess the impact of title I assistance on U.S. commercial imports. While we could not conclude that title I concessional sales had displaced U.S. commercial sales of wheat in Egypt, it appears that title I wheat had, to varying degrees, displaced U.S. commercial sales of wheat in the other five case-study countries (El Salvador, Guatemala, Jamaica, Morocco, and Sri Lanka). For any of our case-study countries, however, we could not define with certainty the extent to which title I aid had displaced commercial imports because many other factors affected the importation and domestic production of wheat. To be more precise, for example, we would have to know what each country would have imported and produced in the absence of the title I assistance. On the basis of our analysis of wheat import statistics, El Salvador and Guatemala provide the clearest examples of displacement of commercial imports by title I assistance. In both El Salvador and Guatemala, the United States had been the dominant supplier of wheat since the 1950s. Until the early 1980s, when Guatemala and El Salvador first imported wheat under title I programs, these countries had generally imported wheat from the United States on a commercial basis. After the introduction of title I aid, both the volume and share of commercial wheat purchases declined greatly, even as total U.S. wheat exports to these countries increased. For Morocco, the interpretation of import statistics is more complicated due to the volatility of, as well as the reduction in, the volume of total U.S. wheat imports. However, in at least one of the many years of title I assistance, it appears that title I concessional sales replaced U.S. commercial wheat sales to Morocco. For crop years July 1, 1990, through June 30, 1992, the total volume of U.S. sales of wheat to Morocco declined by nearly 50 percent, whereas the volume of title I wheat sales increased by 72 percent. The extent to which foreign exchange savings can contribute to BBS development largely depends on the value of these foreign exchange savings relative to the country’s total economic needs. Imports represent one component of the resources that a country regards as vital to its developmental needs. On the basis of our analysis of fiscal year 1991 recipients, it appears that even if 100 percent of the title I assistance displaced the equivalent in a country’s commercial imports, the foreign exchange savings that title I provides could satisfy only a fraction of a country’s total imports. Consequently, title I’s potential contribution to BBS development is limited. However, despite its small size, title I may constitute a significant percentage of some of the countries’ food imports, which indicates that title I aid could be making a meaningful contribution to these countries’ food supply in the short term. In addition, title I could be quite important to those countries that are severely restricted in their ability to pay for commercial imports due to a critical foreign exchange shortage. To determine the extent to which the maximum foreign exchange savings made possible by the title I program could potentially contribute to a country’s BBS development, we compared the value of title I aid to the country’s total imports. A country’s imports include, but are not limited to, those goods the country finds necessary for its development that are currently available only from abroad and that the country must purchase with its scarce foreign exchange. To highlight the relative scarcity of the countries’ foreign exchange situation, we grouped the 15 title I recipients for fiscal year 1991 according to their foreign exchange position (see table 2.1). A general rule of thumb is that a developing country is experiencing a shortage of foreign exchange if it has less than approximately 3 months of reserves to cover its current rate of imports. We used nongold international reserves, expressed in terms of the number of weeks of imports these reserves covered, to measure a country’s foreign exchange status. Our analysis indicated that even if 100 percent of the title I imports had displaced commercial imports, title I’s maximum foreign exchange savings represented a very small portion of a country’s total import requirements and, therefore, did not meaningfully enhance the recipient’s capacity to import. Consequently, the potential foreign exchange savings, at best, could make only a minimal contribution to BBS development. Data were available for 14 of the 15 recipient countries in fiscal year 1991. In all of these countries, title I assistance as a percent of the value of the countries’ total imports was 4 percent or less, generally much less. For eight of the recipients, title I represented 1 percent or less of the value of the country’s total imports (see table 2.1). Although our analysis of potential foreign exchange savings showed that title I’s contribution to BBS development was limited, our research indicated that title I assistance could contribute significantly, in some cases, to helping a country meet its food import requirements in the short run. Food import data were available for 12 of the 15 fiscal year 1991 title I recipient countries. For six of these countries, title I constituted a significant portion, about 7 to 13 percent, of the countries’ total food imports. For El Salvador, this figure was 24.7 percent (see table 2.1). While a short-term increase in the supply of food may help relieve hunger, achieving food security requires long-term solutions to the problems of food availability, accessibility, and utilization in developing countries. Food security is a long-term, broad-based economic development issue. In addition, title I may have enabled some countries that were experiencing critical shortages of foreign exchange (i.e., reserves available that covered less than 1 month of imports) to acquire food that they otherwise would not have been able to purchase. Five of the 15 fiscal year 1991 title I recipients were experiencing a critical shortage of nongold reserves (see table 2.1). Since these countries were so restricted in their ability to pay for commercial imports, the title I imports were probably in addition to their usual commercial imports. Consequently, the title I assistance probably did not result in foreign exchange savings that then could be invested in long-term BBS development. However, in the short run, title I possibly provided food that these countries otherwise would not have been able to import. According to some program supporters, one way title I assistance might be able to contribute to BBS development is through the recipient government’s sale of the title I commodities in-country. When title I commodities enter a country’s food distribution system, their sale by the recipient government to the private sector generates revenues for the government that are called “local currencies.” These revenues, however, do not represent an infusion of additional money into the country; instead, the revenues are a shift of money from the private to the public sector. In theory, this transfer of resources enables the recipient government to gain control over additional domestic spending power that it would not have otherwise had to help support activities that could contribute to BBS development. Ultimately, any contribution that local currencies can make to BBS development depends on their investment in activities with long-term, broad-based, and sustainable benefits. In practice, there are many difficulties associated with ensuring the effective use of these local currencies. It is difficult for USDA or anyone else to say whether the currencies were actually dedicated to the projects specified in the title I agreements because these local currencies are owned and usually controlled by the recipient country’s government. Ensuring that the local currencies are invested in BBS development activities is further complicated by the fact that money is fungible and difficult to track. This condition is also aggravated by inadequate accounting and control systems in some recipient countries. Before the 1990 act, when AID managed the title I local currency program, we and AID’s Office of the Inspector General found that the monitoring of local currencies by U.S. government officials in-country was insufficient to provide reasonable assurance that the currencies were properly used. The contribution of title I assistance to BBS development depends on the recipient government’s investment in sound, long-term economic policies and projects. In return for the title I assistance, recipients must state in their title I agreement how they will integrate the benefits of the title I assistance into their country’s overall development plans. In general, we found that title I agreements usually reinforce macroeconomic reforms or activities that the recipient governments are already undertaking. The program generally provides USDA with little leverage to direct the recipient governments to undertake additional reforms or projects because the program’s value is small relative to the countries’ overall development needs and the total assistance that other donors provide. Furthermore, other competing program objectives can dilute whatever leverage might be associated with the provision of title I assistance. The 1990 act requires title I agreements to contain a statement that describes how the title I commodities or the revenues generated by the sale of these commodities will assist the overall development plans of the country to improve food security and agricultural development; alleviate poverty; and promote broad-based, equitable, and sustainable agriculture. In addition, the agreements must include a statement about how the recipient country intends to encourage private sector competition and participation. Within the title I agreements, a section known as the “development plan” describes what actions the recipient country will undertake in exchange for receiving title I assistance. For five of our seven case-study countries in fiscal years 1991 and 1992, we found that development plans in the title I agreements tended to reinforce those macroeconomic reforms or activities that the recipient governments were already undertaking (see app. III for development plans found in fiscal year 1992 title I agreements for our seven case-study countries). For example, the 1992 title I agreement in Morocco specified that the government would support two agronomic research institutes, an activity that AID had already included as part of its title I agreements from fiscal years 1988 to 1990. In Jamaica, the fiscal year 1992 title I agreement encouraged the country to work toward meeting the criteria necessary to become eligible for debt forgiveness under the Enterprise for the Americas Initiative, a program established by the United States in 1990 to promote economic liberalization and growth in Latin American and Caribbean countries. Similarly, an Egyptian government official told us that his country’s development plans reinforced economic goals similar to those found in Egypt’s agreement with the International Monetary Fund (IMF). In Sri Lanka, USDA and AID officials explained that the country’s title I agreement paralleled the provisions included in its title III agreement. For example, in both agreements the country pledged to support crop diversification and liberalization of certain import and trade policies. In two of our case-study countries, El Salvador and Guatemala, USDA negotiated title I agreements that included promises by the recipient countries to undertake certain policy reforms in addition to the countries’ ongoing development efforts. In their fiscal year 1992 title I agreements, El Salvador and Guatemala pledged to eliminate “price bands” for certain commodities. Price bands institute tariffs to protect farmers from agricultural imports. Eliminating this policy was in keeping with USDA’s objectives to promote trade liberalization and reduce trade barriers that discriminate against U.S. products. The countries entered into similar agreements for fiscal year 1993. However, El Salvador dropped out of the title I program in fiscal year 1994 because its government did not want to pursue these particular reforms, according to State Department officials. Although the country was initially allocated funds for title I assistance in fiscal year 1994, the funds were never made available to the country because the United States and El Salvador failed to reach an agreement. For El Salvador and Guatemala, their agreements in fiscal year 1992 also supported another USDA activity in-country that was designed to protect the United States from pests and diseases that could be imported into this country. We found that all 22 of the title I agreements for fiscal year 1992 contained some reference to how the local currency proceeds generated from the sale of title I commodities should be allotted to support the reforms or projects cited in the agreement. For 5 of the 22 countries (El Salvador, Guatemala, Guyana, Sierra Leone, and Suriname), the fiscal year 1992 agreements required that some portion of the local currency sale proceeds be deposited into special accounts designated to support activities specified in the title I agreements. In Sierra Leone and Guatemala, it was the U.S. Ambassador rather than USDA who insisted that the sales proceeds be assigned to specific accounts, according to USDA officials. The agreements for the other 17 recipients assigned the local currency to the country’s general treasury, which meant that these funds were intermingled with other government revenues. Title I assistance often provided the United States with relatively little leverage to influence BBS development activities or initiate policy reforms beyond those that the country was already undertaking because of the program’s small size as well as the primacy of other competing objectives. We found the dollar value of title I assistance was small relative to the countries’ overall development needs as well as to the development assistance provided by world donors in most cases (see table 2.2). For example, in fiscal year 1991, total title I assistance distributed among the 15 recipients amounted to $395.2 million, while total official development assistance (ODA) from the entire world to these countries was $10.8 billion. Representatives from the World Bank and a prominent international food policy research group told us that it would not be reasonable for countries to undertake major reforms with wide-ranging economic consequences in exchange for the relatively small amount of assistance provided through the title I program. The dollar value of title I assistance overstates its economic value to the recipient country. As a result, the leverage provided by title I assistance as indicated by its dollar value is likely to be significantly less than the figure suggests. There are several reasons why the recipient country may not place the same dollar value on the title I commodity as does the United States: (1) the title I assistance is a loan that needs to be repaid, not a cash grant; (2) the recipient government may sell the commodity in-country for a price lower than its purchase price; (3) the program restrictions on shipping and reexporting title I commodities may further reduce its value to the recipient country; (4) the recipient country may be buying something (quality or quantity) other than what it actually would have preferred; and (5) the title I price per metric ton may exceed prices for similar commodities available through other USDA programs and suppliers. USDA’s ability to use title I assistance as leverage to influence BBS development in-country may also be limited because other title I objectives, such as promoting U.S. agricultural exports or U.S. foreign policy, sometimes take priority in shaping title I programs, according to AID and USDA officials both in Washington, D.C., and in our seven case-study countries. We reported similar conclusions in past reports on title I assistance. For example, if policy reforms are particularly sensitive, negotiations can be lengthy, and the long negotiation process may be contrary to U.S. farm interests who are concerned about signing agreements as early as possible to move commodities, according to AID officials. The AID officials believed that whatever leverage title I might provide exists only before the agreements are signed. The program’s leverage to influence which development activity a country agrees to undertake is reduced once the agreements have been signed. In addition, in some of our case-study countries U.S. officials told us that it would be difficult for USDA to negotiate additional policy reforms as part of the title I agreements since title I aid is also used to promote U.S. foreign policy objectives. For example, AID officials in the Philippines told us that AID could not be “tough” in the past when negotiating policy reforms to include in the title I agreements because the Philippine government considered all U.S. assistance “rent” for U.S. military bases in the country. Title I assistance also has served as a major symbol of U.S. commitment to Egypt, according to U.S. and Egyptian officials in-country. Egypt has played a key role in U.S. foreign policy strategies in the Middle East. Wheat exported under the title I program has helped to ensure the Egyptian government’s ability to make inexpensive bread readily available—a social policy critical to the country’s political stability. Many AID, State Department, and USDA officials in our case-study countries reported that one of the primary reasons for providing title I assistance to countries was to promote U.S. foreign policy interests. One of the chief criticisms of title I assistance, according to the studies we reviewed, has been that it may have a disincentive effect on local farmers and local food production, although the evidence supporting this criticism remains inconclusive. These studies concluded that title I assistance has the potential to negatively affect local agriculture in particular situations. However, the agricultural policy environment of the recipient country is also very important in determining whether and to what extent food aid creates a disincentive for local agricultural production. To the extent that food aid displaces commercial imports, any disincentive effect on local food production due to an increase in the food supply putting downward pressure on food prices diminishes since the same food aid cannot simultaneously result in foreign exchange savings and be additional to commercial imports. The disincentive effect underscores a difficulty in the title I program. It may not be possible at times to fulfill certain program requirements and simultaneously not interfere with domestic production or marketing in the recipient country. According to the studies we reviewed, food aid can discourage local agricultural production in two ways. Food aid can create disincentives to local production, in a direct manner, if it increases the availability of a commodity to the point where the additional title I imports put downward pressure on local food prices. Food aid can also discourage local agricultural production indirectly by enabling a government to neglect its own agricultural sector and/or postpone making policy reforms needed to enhance domestic food production. Disincentive effects can affect domestic production of those commodities that are imported under title I as well as those commodities that may act as substitutes for locally grown products; e.g., importing wheat could lead to consumer demand for bread rather than for locally grown corn-based foods. P.L. 480 responds to the possibility that the program may create disincentives by requiring that USDA conduct a Bellmon determination before signing a title I agreement. The legislation also requires that USDA consult donor organizations, such as the World Bank and IMF, to ensure that title I aid will not create a disincentive to domestic production or marketing. The literature on the disincentive issue, while inconclusive, indicates that disincentive effects are possible with food aid. The literature emphasizes a case-by-case approach involving a thorough understanding of in-country commodity markets and agricultural policy environments. For example, according to one study, wheat, the principal commodity imported by Sri Lanka under title I, was not produced in Sri Lanka to any significant extent in the 1970s. Therefore, title I aid could have had no direct disincentive effect on domestic wheat production. However, because of the possible substitutability between rice and wheat, it could have been possible that consumers may have substituted bread for rice, thereby causing the demand for rice and its production to decrease. The study, however, suggested that this situation did not occur. Rice production generally remained constant, then increased, during the 1970s, though it is arguable that rice production would have increased even more in the absence of title I wheat. Furthermore, the literature indicates that Sri Lankans prefer rice over bread, unless the price of bread is significantly lower than the price of rice. A country’s agricultural policy environment is important in determining whether food aid creates a disincentive for local agricultural production. Government policies can try to insulate local agricultural production from responding to the changing supply and price conditions as a result of receiving title I aid. Conversely, government can create agricultural distortions through its food policies, which may dwarf any disincentives that food aid may cause. Even if title I assistance increases the overall availability of a commodity, it still may not adversely affect producers or consumers if the government provides price support or direct subsidies, though this may cause repercussions elsewhere in the domestic or international economy. A government might pursue a food policy, perhaps partially financed from the revenue from the sale of food aid, to protect producers and/or benefit consumers by letting consumer prices fall while keeping producer prices at a higher level. For example, one study, which analyzed the grain sector in Brazil from 1952 to 1971, showed that P.L. 480 wheat imports had a positive effect on grain production. This circumstance was due primarily to the government’s wheat import and domestic price support programs whereby revenues gained from wheat imports were used to support domestic grain producers. While a price system such as Brazil’s may, at times, reduce the negative effects of food aid on producers or consumers, it may also backfire and lead to further distortions. For example, according to the study on Brazil, title I imports displaced commercial wheat imports, thus disrupting international wheat markets. Government intervention in Egypt, a country that had been a major recipient of title I assistance for decades, provides an example of how food aid and government policy interact to affect local agricultural production. Egypt’s wheat policy from 1950 through the early 1980s reflected the government’s objective to make bread, a commodity considered critical to Egypt’s political stability, cheap and readily available. To ensure wheat supplies and thereby keep the price of bread low, the Egyptian government encouraged both imports and local production of wheat. This strategy, in turn, supported the government’s policy of subsidizing retail sales of bread by supplying wheat to the predominantly state-owned mills at a low price. However, this policy resulted in an abundant supply of wheat flour with title I wheat shipments constituting an important component of this supply. This policy also contributed to other policies that acted as disincentives to farmers: the producer price of wheat was allowed to decline relative to other crops (maize, rice, and cotton) and relative to world market prices. This system had a direct disincentive effect on domestic wheat production. Egypt’s elaborate food subsidy program is currently under revision as part of Egypt’s commitment to ongoing structural economic reform, including agricultural pricing reform. This reform includes a price liberalization policy aimed at having most prices in the economy determined by market forces by 1995. Aside from the impact of deliberate government intervention in the marketplace, other factors could overshadow food aid’s potentially adverse effect on a country’s agricultural production. In circumstances of war, political strife, or natural disasters, it would be difficult to disentangle title I’s role, if any, in contributing to the decline in agricultural production. For example, the agricultural sector of El Salvador, a country that has received substantial amounts of title I assistance since 1980, has suffered from civil war over the past decade. Resources for agricultural production, especially for cotton, coffee, and livestock, became military targets of the guerrillas. As a result, most crop production declined in the 1980s. In instances such as these, title I assistance may have provided food that the country would not have otherwise been able to supply. The title I program contains legislative requirements that impede the program’s ability to achieve its BBS development objective. Title I aid could contribute to sustainable economic development if it were to provide recipient countries with foreign exchange savings. Food aid provides foreign exchange savings when it displaces commercial imports. However, the title I program contains requirements that are designed to ensure food aid is in addition to normal commercial imports and therefore does not lead to displacement of commercial imports. Section 403(e) requires that reasonable precautions be taken to ensure that the sale of agricultural commodities will not unduly disrupt normal patterns of commercial trade with foreign countries, and section 403(h) requires that reasonable precautions be taken to avoid displacing U.S. agricultural commodity sales. Essentially, these provisions require that the supply of the commodity increase by the full quantity of food aid. These requirements hinder the program’s ability to provide foreign exchange savings, which would otherwise occur through displacement of commercial sales. The mechanism used by USDA to ensure the requirement that title I aid be “additional” to normal commercial imports is the “usual marketing requirement” (UMR) provision of the food aid agreement. UMRs are the normal mechanism used by the United States and other nations to ensure that food aid is “additional”; they are negotiated between the supplying and recipient country and included in the contractual arrangements. The UMR also supports another P.L. 480 objective—to develop and expand markets for U.S. agricultural goods. The USDA calculates a UMR each time new title I agreements are negotiated to determine how much of a given commodity, if any, a country is eligible to receive that year. Title I assistance to Honduras illustrates USDA’s difficulty in implementing a program in-country that meets program requirements while simultaneously accomplishing the multiple program goals and objectives of supporting U.S. foreign policy, promoting economic development, and developing markets for U.S. agricultural goods. It was difficult, if not impossible, for USDA to reconcile the program’s UMR rules with the desire to support BBS development through foreign exchange savings, as well as promote U.S. foreign policy interests. The United States exported wheat on a strictly commercial basis to Honduras until 1975, when the title I program was introduced in response to emergency needs resulting from the ravages of Hurricane Fifi. According to USDA officials, the title I program continued into the 1980s and 1990s, motivated by U.S. foreign policy objectives to sustain political goodwill and provide economic support, despite USDA concerns about disrupting existing commercial markets for wheat. As a condition for receiving title I assistance, Honduras was expected to import an amount of wheat on a commercial basis equivalent to its preceding 5-year commercial import average after adjusting for factors affecting the country’s ability to import the commodity. In the early 1980s, it became more difficult for Honduras to meet its UMR requirement for wheat. For fiscal years 1983 through 1986, USDA was able to continue providing title I wheat to Honduras without technically violating the UMR rules by setting the UMR for wheat at zero—meaning that the country was not expected to import any wheat on a commercial basis during each of those years. According to a USDA official, the agency adjusted the 5-year commercial import average to zero because its analysis indicated that Honduras was unlikely to import any wheat commercially due to economic hardships facing the country. USDA set the UMR for wheat at zero for fiscal years 1983 through 1986, even though Honduras had been expected to import 51,000 metric tons of wheat commercially in fiscal years 1981 and 1982 according to the prior year’s UMR analyses. In addition, import statistics for fiscal years 1983 through 1986 showed that Honduras continued to import commercially, but in smaller volumes, while the title I imports increased. Solely on the basis of the UMR calculation, it would appear that title I wheat imports for fiscal years 1983 through 1986 were additional since Honduras was not expected to import any wheat commercially. However, it is more likely that title I wheat replaced commercial imports to some extent—contrary to the UMR principle. Ultimately, it appears that title I assistance made foreign exchange available without technically violating UMR rules. The program requirements that ensure that food aid be additional to normal commercial imports can also hinder the implementation of another requirement in the food aid legislation, the Bellmon determination. The Bellmon determination stipulates, in part, that the distribution of food aid in the recipient country should not interfere with domestic production or marketing in that recipient country. In economic terms, this generally requires that food aid not increase the total supply of food, as the increase in the food supply may create disincentives to local production by putting downward pressure on local agricultural prices. Whereas UMRs are meant to ensure that commodities exported under the title I program are, in fact, additional to the amount of commodities a recipient country would have bought commercially in the absence of the title I sales. Consequently, it may be impossible at times to simultaneously fulfill the usual marketing requirement and satisfy the Bellmon determination. The ability of title I aid to promote BBS development in the recipient countries is quite limited. The central objective of P.L. 480 legislation, as amended, is to promote the foreign policy of the United States by enhancing the food security of the developing world through the use of agricultural commodities. BBS development is a crucial component of any long-term strategy to promote food security—the goal of the title I program. The primary way in which title I food aid could contribute to BBS development in the recipient country would be by giving the country foreign exchange savings that it would not have had otherwise. While it is probable that the title I program, to varying degrees, provides foreign exchange relief to the recipient countries, even the maximum potential contribution to BBS development is limited, primarily due to the small size of title I aid relative to the needs of the country. Other factors also limit the program’s contribution to BBS development: title I assistance gives the United States relatively little leverage to influence BBS development activities or initiate policy reforms, and other title I objectives sometimes take priority in shaping the title I programs in countries. However, despite the small size of title I assistance, it appears that the program could be making a meaningful short-term contribution to the food imports of some title I recipients. In addition, title I aid may have enabled some countries that were experiencing critical shortages of foreign exchange to acquire food that they otherwise would not have been able to purchase. Several program requirements also hamper the ability of the title I program to achieve its BBS development goals. Title I aid could contribute to BBS development if it were to provide recipient countries with foreign exchange savings. Yet the condition under which the foreign exchange savings occur, i.e., the displacement of commercial imports, is impeded by UMRs, which are meant to ensure the requirements that title I aid be additional to normal commercial imports. UMRs also hinder the implementation of the Bellmon determination, which is meant to safeguard against the disincentives to local agricultural production and marketing that may occur if the food supply increases. The United States can claim market development success in a particular country if either the amount or the market share of U.S. agricultural exports to commercial markets has increased over the long-term. The results of our review, however, indicated that the importance of the title I program to long-term market development has not been demonstrated. To the extent that title I aid contributes to BBS development and expands the recipient’s domestic economy, the program may lead to an increase in U.S. agricultural exports. However, it is difficult to demonstrate a link between market development and title I’s impact on economic development because numerous factors affect the pace of economic growth. Although U.S. agricultural products have been exported under the title I program for 40 years, none of the many studies we reviewed has established a link between food aid and long-term commercial market share for U.S. agricultural products. While USDA officials often point to South Korea as the best example of a successful title I graduate, we believe that many influences, in addition to title I assistance, are responsible for the transformation of South Korea into a leading commercial market for U.S. agricultural products. Title I assistance can contribute to market development if the program creates preferences for U.S. products that remain after the concessional sales have been discontinued, resulting in a greater U.S. share of the country’s commercial market. However, it is difficult to develop product loyalty and secure commercial market share when title I commodities, which are typically bulk and semiprocessed agricultural goods, can easily be replaced by or substituted with products at a lower price from other nations. In the short term, title I allows the United States to move commodities and possibly keep a market presence that it otherwise might not have been able to maintain. Over time, the concessional sales made possible by the title I program will not necessarily translate into commercial market share unless the United States offers exports with competitive prices and financing. While title I sales may help lay the groundwork for establishing trade relations and exposing consumers to U.S. commodities, the program’s usefulness as a market development tool is diminished by several legislative requirements, such as cargo preference provisions, commodity eligibility criteria, and reexport restrictions. The title I program, representing less than 1 percent ($332.8 million) of the total value of U.S. agricultural exports in fiscal year 1993, is just one of several USDA export assistance programs used to increase the export of U.S. agricultural products to developing countries. In addition to the provision of food aid (donations and concessional sales), USDA employs three other basic methods to increase exports. Price reduction. USDA’s Export Enhancement Program (EEP), the Sunflowerseed Oil Assistance Program (SOAP), the Cottonseed Oil Assistance Program (COAP), and the Dairy Export Incentive Program (DEIP) pay cash to U.S. exporters as bonuses, allowing them to sell certain U.S. agricultural products to targeted countries at lower prices. These programs enable the U.S. exporters to meet price competition in world agricultural markets when domestic agricultural prices are higher than world prices. These programs are designed to help counter the effects of other countries that subsidize their exports. Export credit guarantees. Two USDA General Sales Manager programs (GSM-102 and GSM-103) offer short- and intermediate-term credit guaranteed by the U.S. government to countries with foreign exchange constraints. These programs are intended to help increase the availability of export financing to help U.S. agricultural exporters sell in markets with foreign exchange constraints. These programs protect the exporters against the risk of default on payments. Promotion assistance. USDA’s Market Promotion Program is an export promotion program designed to help U.S. producers and trade organizations finance promotional activities for U.S. agricultural products overseas. While the United States guarantees credit under the GSM programs, the terms of the GSM loans are not as attractive as the terms under the title I program. For example, the maximum repayment period is 3 years for GSM-102 and 10 years for GSM-103, compared to title I’s maximum repayment period of 30 years with a maximum 7-year grace period. In addition, the interest rates under the GSM programs are not concessional, whereas title I’s interest rate is set below prevailing market rates. Unlike price reduction programs that subsidize export sales, such as EEP, the contract sales price billed by USDA for title I commodities is the U.S. market price for that commodity and grade, which is frequently higher than world-market prices. Oftentimes, EEP is used in conjunction with the GSM programs so that certain U.S. agricultural exports can be purchased at competitive discount prices using U.S. government credit guarantees. Title I sales are not combined with EEP discounts. Because no discounts are allowed, recipients usually pay more on a price-per-tonnage basis for a title I commodity than they would if the commodities were purchased under one of the price reduction programs. For example, in fiscal year 1992, Egypt purchased wheat through title I at $141 per metric ton and through EEP at $110 per metric ton. In some cases, countries may choose to buy a certain commodity under a price reduction program because of its lower price-per-unit basis even though the cost of the commodity exported under the title I program is cheaper in the long-term since the cost is discounted over a long repayment period at below market rate of interest. However, multilateral development institutions discourage developing countries from incurring long-term debt for nondurable consumption goods, such as food. In addition, some countries forgo the benefits of the title I concessional loan, preferring the flexibility of commercial financing instead, according to USDA officials. Country participation and the amount exported under each U.S. export assistance program vary from year to year depending on factors such as the availability of agricultural commodities, favorable credit terms and credit guarantees, the country’s import needs and foreign exchange constraints, the export activity of competitor countries, and the foreign policy considerations of the United States. See table 3.1 for USDA program allocations to our seven case-study countries for fiscal year 1993. For several of our seven case-study countries, many commodities that were imported under the title I program (i.e., wheat, wheat flour, tallow, soybean meal, and vegetable oil) also were imported under the GSM, EEP, SOAP, and COAP programs. USDA officials in many of our seven case-study countries told us that bolstering sustainable economic development is the key way in which title I assistance could contribute to market development in their countries. Research shows that economic growth is a key factor in enabling developing countries to increase their imports of agricultural commodities. As per capita income rises in the early and middle stages of economic development, consumer demand for food usually grows more rapidly than domestic food production is able to supply. Moreover, as countries continue to develop and consumers’ dietary patterns begin to diversify, imports rise to accommodate these changing tastes and preferences. However, the link between title I, economic development, and subsequent market development is tenuous. We did not find any studies by USDA or other researchers that established a link between food aid and long-term commercial market share for U.S. agricultural products, despite the longevity of the title I program. We attempted to perform a regression analysis to determine what relationship might exist between title I and a country’s commercial imports for major title I recipients, past and present. However, the regression analysis was unsuccessful due to inaccurate, inconsistent, and missing data. While South Korea is frequently cited by USDA as best-case example of a country “graduating” from the title I program, our research did not identify any strong evidence to support a direct tie between title I aid and the development of commercial markets. Moreover, the level of U.S. agricultural exports to other countries having received little or no title I assistance indicated that title I assistance was neither a necessary nor sufficient condition for creating U.S. export opportunities. South Korea has become a leading market for U.S. agricultural exports as a consequence of its rapid economic growth. In 1993, South Korea was the fifth largest market for U.S. agricultural goods, representing $1.9 billion. Our research suggests that to the extent that title I may have contributed to market development for U.S. agricultural products, it is most likely to have done so through the role it played in supporting South Korea’s overall economic development in conjunction with substantial assistance from other U.S. programs and international donors as well as the South Korean government’s own development efforts. Moreover, our research indicates that a variety of other considerations, such as demographic, political, and cultural factors, also contributed to the country’s economic success. According to a 1985 AID study, the amount of international assistance South Korea received between 1943 and 1983 probably totaled over $26 billion, much of it in grant or concessional forms. According to the U.S. Overseas Loans and Grants statistical annex, the United States provided South Korea with approximately $15 billion in economic and military assistance for fiscal years 1946 through 1992, including $1.6 billion in title I assistance for fiscal years 1956 through 1981. These figures represent nominal values. If we had been able to covert these amounts to 1993 constant dollars, their value would have been substantially larger. While economic growth influenced South Korea’s ability to import, other factors, such as technical assistance and commodity price and quality, have played a role in South Korea’s decisions to import from the United States and other countries. For example, U.S. trade associations provided post-war South Korea with the technical abilities to utilize wheat, corn, and cotton exported under the title I program. Western Wheat Associates provided technical assistance to bakers, biscuit makers, and flour millers; and U.S. Feed Grains Council assisted South Korea in upgrading its technology for corn processing and feed and livestock production. In the case of cotton, U.S. technical assistance helped the country rebuild its spinning industry after the Korean conflict in the early 1950s, creating an industry designed to accommodate U.S. cotton specifications and merchandising systems. Because of the numerous and complex factors that influenced South Korea’s economic growth and import decisions, it is very difficult to meaningfully attribute market development results to any one factor in isolation from other possible causal factors. The level of U.S. agricultural exports to other countries suggested that having received title I assistance was neither a necessary nor sufficient condition for creating U.S. export opportunities. For example, the United States has been very successful in increasing the value of its agricultural exports to other Asian markets that received little or no title I assistance, such as China, Japan, Hong Kong, and Singapore (see table 3.2). In 1993, Japan ranked as the top leading market for U.S. agricultural exports. Hong Kong, China, and Singapore ranked as the 10th, 21st, and 30th largest export markets for U.S. agricultural goods, respectively. However, India was the 33rd largest market for U.S. agricultural exports in 1993 (up from 41st in 1992) even though the country received a total of $18.5 billion in title I assistance between fiscal years 1957 and 1978. The level of U.S. agricultural imports to India, South Korea, and the other Asian countries and the tremendous difference in the amount of title I assistance that each received imply that many factors other than title I assistance contribute to a country’s economic success and to U.S. export growth. Title I can contribute to market development by increasing U.S. commercial market share if the program creates preferences for U.S. products that persist after the program sales have been discontinued. Agricultural commodities typically exported under the title I program are bulk and semiprocessed commodities. While many factors influence a country’s import decisions, such as the quality of a product, the availability of commercial financing, the reliability of the supplier, and the existence of trade ties, price is a predominant factor where the import of bulk and semiprocessed products is concerned. According to USDA officials, title I assistance serves as a market maintenance tool. In the short term, the title I program helps U.S. exporters to move commodities, albeit on a concessional basis, and possibly keep market presence that they otherwise may not have been able to maintain. However, this does not constitute long-term market development. Many USDA officials in the seven case-study countries we visited were skeptical of the United States’ ability to maintain its market share for title I commodities once the program is discontinued, unless the United States can offer competitive prices and financing, because the purchasing decisions of these countries are largely driven by price. Title I exports tend to consist of a few bulk commodities, such as wheat, rice, and corn, and a few semiprocessed products, such as vegetable oil, soybean meal, and tallow (see fig. 3.1). Wheat has been the predominate export under the title I program, representing approximately 48 percent of the total value of commodities exported under the title I program during fiscal years 1990 through 1993. Bulk products are traditionally seen as generic products that have little or no identification with a particular producer. According to USDA’s long-term agricultural trade strategy, competitive pricing is particularly important in the marketing of bulk and semiprocessed products. It is difficult to develop product loyalty and secure a market share when the commodities under consideration can be easily replaced with identical products at a lower price and face competition from a range of substitutes. In only one of our seven case-study countries, the Philippines, has USDA claimed success in using the title I program to establish a U.S. market presence by promoting specific characteristics of a commodity, enabling it to be differentiated on the basis of quality. According to USDA and Philippine officials, the Philippines had imported cheaper low-protein soymeal, primarily from Brazil, China, and India, before the title I program was used to introduce high-protein soymeal in fiscal year 1990. At that time, the title I program created a market niche by offering a higher quality (and more expensive) soymeal. Philippine ranchers developed a preference for U.S. soymeal with a high-protein content because it resulted in better livestock growth. While USDA officials in-country claimed market development success for high-protein soymeal, they could not provide import statistics to support their claim and stated that trade statistics do not distinguish between high- and low-protein soymeal. These officials told us that the long-term prospects for high-protein soymeal that have been supported through title I concessional sales are uncertain. Representatives from USDA and the American Soybean Association explained that, without the support of the title I program, users may return to less expensive, low-protein soymeal from China and India. In addition, a crushing plant was reopened in the Philippines, allowing the country to process raw soybeans. As a result, U.S. exports of high-protein soymeal will face increasing competition for market share, according to USDA officials. Other attempts by the United States in our case-study countries to differentiate title I commodities and entice buyers with concessional credit have not been successful. According to USDA officials in Egypt, they tried to diversify the country’s title I imports in fiscal year 1992 by offering an additional $10 million in title I assistance for U.S. soybean oil. Egypt declined the offer, however, because the country purchased more competitively price sunflowerseed oil and cottonseed oil from Asia, South America, and USDA’s price reduction programs—SOAP and COAP. In Guatemala, USDA officials told us that the country had imported vegetable oil (i.e., soybean, cottonseed, and sunflowerseed oil) under the title I program in the mid-1980s. While the program allowed the United States to establish a market presence, these officials said that eventually Guatemala decided to purchase vegetable oil from cheaper sources. Once the country stopped importing vegetable oil through the title I program, the U.S. share of Guatemala’s vegetable oil imports decreased from 37 percent in fiscal year 1988 to 2 percent in fiscal years 1989 and 1990. USDA used SOAP and COAP in fiscal year 1993 to reestablish U.S. market share of Guatemala’s vegetable oil imports; these programs helped increase the U.S. share to 38 percent. In another case-study country, Jamaica, USDA exported soybean oil under the title I and other food aid programs during fiscal years 1977 to 1985. While the food aid programs allowed the United States to establish a market share for its soybean oil, Jamaica imported about 70 percent of its vegetable oil (volume) in fiscal year 1993 from other nations that supplied cheaper varieties, such as palm and coconut oils, as well as competitively priced soybean oil, according to USDA officials. On the basis of interviews with USDA officials and our analysis of title I exports to our seven case-study countries and South Korea, the transformation of concessional sales into commercial market share is largely influenced by USDA’s ability to offer alternative export programs with competitive prices and financing. For example, according to USDA officials and representatives from a U.S. commodity group in Egypt, in fiscal year 1993 the United States was able to transform its concessional sales of wheat into a commercial market share with the help of USDA’s EEP, which subsidizes export sales. These officials believe the title I program helped the United States to establish a market share for wheat in Egypt by offering concessional sales to a country that had a critical shortage of foreign exchange. In fiscal year 1992, after Egypt’s foreign exchange reserves greatly improved due to significant debt forgiveness following the 1991 Gulf War, the country began using its foreign exchange to purchase U.S. wheat under EEP, where the price per ton was lower than under the title I program. Wheat exports to Egypt under the title I program dropped from $108 million in fiscal year 1991 to $40 million in fiscal year 1992; at the same time, U.S. wheat exports to Egypt increased from $120 million to $462 million under EEP. In fiscal year 1993, Egypt did not participate in a title I program and imported all of its U.S. wheat under EEP. USDA officials told us that they expect the United States to retain its market share only as long as it offers prices and credit terms that are comparable to or better than those offered by competing suppliers from the European Union. In Jamaica, USDA officials told us that the country’s import decisions are heavily influenced by price and the availability of favorable credit terms to stretch its scarce foreign exchange reserves. According to these USDA officials, title I concessional sales have helped the United States maintain a market presence that it otherwise might not have for corn and rice. Jamaica has imported corn through the title I program since 1972 and rice since 1981. Jamaica also imported wheat under the title I program during fiscal years 1978-1992. USDA officials told us that the title I program helped the United States to maintain its status as a primary supplier of wheat to Jamaica, competing with Canada for market share. However, U.S. market share has dropped since Jamaica stopped importing title I wheat in fiscal year 1993. On the basis of preliminary statistics, the U.S. share (volume) dropped from 66 percent in June 1992 to 57 percent in June 1994. USDA officials said that Jamaican millers prefer non-title I wheat because they want to reexport their processed and semiprocessed products—an export opportunity that is not permitted under the program for products derived from title I commodities. According to USDA officials, the Jamaican government is purchasing greater quantities of high-quality wheat at lower unit prices from Canada, Germany, and France. These USDA officials told us that the United States seemingly lacks an effective response to the threat to this U.S. market share. Jamaica is ineligible for GSM programs due to arrearages in its repayment schedule, and EEP cannot be activated unless the United States perceives unfair trading practices from European competitors. According to USDA and foreign government officials in Morocco, U.S. exports of vegetable oil under the title I program and EEP have helped the United States to maintain a share of Morocco’s vegetable oil market. The country’s import decisions are largely determined by price, according to the Moroccan government officials. These officials told us that although Moroccan oil refiners prefer soybean oil, a large portion of its vegetable oil imports comes from the European Union, which supplies less-expensive rapeseed oil. According to Moroccan government officials, the United States would need to export vegetable oil under EEP if the title I program were discontinued to compete with price-competitive rapeseed exports from the European Union and soybean oil exports from Argentina and Brazil. Although the United States still remains the primary supplier of cotton, wheat, and corn for South Korea, U.S. market shares established through concessional sales declined once title I assistance ended in 1981. Typical of trade in bulk and semiprocessed products, South Korea’s buying decisions are largely influenced by price. For example, the market for feed corn in South Korea is extremely sensitive to price. The U.S. market share declined from nearly 100 percent in fiscal year 1980 to 36 percent in fiscal year 1986 due to increased competition for feedgrains, a feed corn substitute, and to other corn exporters such as Argentina, South Africa, and Thailand, according to USDA officials. The U.S. share of South Korea’s corn imports increased substantially in the late 1980s due to a reduction in feedgrain and corn supplies from competitor countries. However, by fiscal year 1992, the U.S. market share dropped dramatically to 25 percent primarily because of competitively priced corn from China (see fig. 3.2). While the United States remains the primary supplier of wheat to South Korea, it lost market share to Canada and Australia in the mid-1980s. At that time, the South Korean government gradually relinquished control of grain procurement decisions, and the market became increasingly sensitive to price and different wheat qualities. The U.S. share of South Korea’s wheat imports dropped from 100 percent in 1980 to 43 percent in 1992 (see fig. 3.3). As for South Korea’s cotton market, factors other than price have helped to support U.S. cotton exports. According to cotton industry sources, despite the U.S. market share’s dropping from 95 percent in fiscal year 1980 to 64 percent in fiscal year 1992 (see fig. 3.4), the United States was able to retain its lead position in South Korea because the United States had helped the country rebuild its spinning industry. Important market development activities include differentiating products, establishing trade relations, exposing consumers to U.S. agricultural commodities, and familiarizing country traders with U.S. trade practices. The title I program’s usefulness as a market development tool, however, is limited because of several legislatively mandated program specifications, such as cargo preference requirements, UMRs, export restrictions, and eligibility requirements that determine which commodities can be exported under the P.L. 480 programs. These program requirements impede the program’s ability to respond to market opportunities and complicate trade transactions. The program requirements may also discourage future transactions. Moreover, the title I program may actually disrupt trade relations by replacing ongoing commercial transactions with government-to-government food aid programming. USDA’s difficulties in implementing an effective strategy are compounded because the title I program is subject to U.S. cargo preference requirements. The title I program is intended to strengthen trade linkages between importers in the recipient country and U.S. suppliers, encouraging these importers to turn to U.S. suppliers for future commercial imports. However, cargo preference requirements, which are designed to support the U.S. merchant marine industry, can be obtrusive and undermine market development efforts. These requirements may also lead importers to believe that U.S. exporters provide inferior service. Cargo preference provisions require that at least 75 percent of food aid tonnage be shipped on U.S. flag ships. One of our earlier reviews, which specifically examined the impact of cargo preference rules on food aid programs, found that some recipients were forced to purchase a different variety of commodity than planned because their purchasing decisions were driven by the availability of U.S. flag ships, rather than the availability of the commodities. For example, during the cargo preference year ending March 31, 1994, for title I both El Salvador and Guatemala were interested in purchasing western white wheat, which is available from the West Coast of the United States. However, since very few U.S. flag ships were obtainable from the West Coast, the countries were unable to purchase this desired commodity. Instead, they were forced to purchase different varieties of wheat located where U.S. flag ships were available. According to a Guatemalan purchasing agent, the Guatemalan government sells the title I wheat to a private group of Guatemalan millers, which sells its products at market value in-country. To minimize their commodity costs, the millers want to purchase less expensive, high-quality western white wheat. However, Guatemala’s agent explained that because of cargo preference requirements, when Guatemala puts together a purchasing plan for title I wheat to present to USDA, it must first consider the availability of U.S. flag ships, not what types of wheat it wants to buy. USDA officials stated that they believe that recipient countries that have had this type of unfavorable experience with the title I program are not likely to purchase agricultural products from the United States on a commercial basis in the future. To comply with cargo preference requirements, some title I recipients have not been able to purchase a title I commodity at its lowest cost because U.S. flag ships were not available. This situation forces the recipient to purchase less of the commodity at a more expensive price. Our review of the impact of cargo preference rules on food aid programs found that, for a 1992 title I wheat purchase, Tunisia was unable to take advantage of the four lowest offers that specified particular loading ports, because U.S. flag ships were not available at these ports. Eventually, Tunisia was forced to purchase wheat offered at the seventh and eighth next-lowest price—and these prices were from $3.82 to $3.95 higher per metric ton for the almost 55,000 metric tons Tunisia finally purchased. Food aid recipients are sometimes not able to purchase the title I commodities at their lowest price, even if a U.S. flag ship is available, because the vessel may not be the appropriate type or size to transport the commodity. For example, in a 1992 title I purchase, Estonia wanted to place both its corn and wheat purchases on one U.S. flag ship. However, the only U.S. flag ship that offered to carry these cargos was too large to be accommodated at the U.S. loading facilities that offered the lowest wheat prices. To use this U.S. flag ship, Estonia purchased higher-priced wheat from a supplier with loading facilities that could accommodate this ship. We also reported in June 1993 testimony that cargo preference requirements have forced USDA to transport title I corn on U.S. tankers, leading to excessive kernel breakage. This breakage, in turn, results in increased instances of insect infestation, mold growth, or other damage. Rather than export title I corn via bulk carriers, albeit foreign-owned, U.S. tankers were used to help meet the criteria that 75 percent of the title I export volume be transported using U.S. flag ships. Another problem, according to USDA officials, involves unloading a tanker at a developing country’s port where appropriate equipment for unloading the grain may not be readily available. Furthermore, the tanker may be too large to enter the foreign port and may have to discharge its cargo to smaller vessels while at sea, increasing the amount of grain breakage and subsequent spoilage. According to USDA officials, the use of tankers to transport food commodities would not be tolerated by exporters or importers under normal trade circumstances. Driven by supply-oriented considerations, another program requirement restricts the types of commodities eligible for promotion under the title I program. Consequently, the title I program supports a limited range of agricultural commodities without regard to market demand. The P.L. 480 docket lists the types and amounts of agricultural commodities available for sale or donation under the P.L. 480 food aid programs. With limited exceptions for urgent humanitarian needs, commodities are eligible for export under the P.L. 480 food aid programs only when they are considered “surplus,” that is, when domestic production exceeds what is needed to meet U.S. domestic consumption and reserve requirements, as well as anticipated commercial export opportunities. As a result, many commodities available for export under the title I program are not purchased by recipient countries through the program. For example, in fiscal year 1993, 18 categories of commodities were eligible for export under the title I program; however, commodities associated with only 6 of the categories were actually exported. As illustrated by figure 3.1 (see p. 60), these commodities were wheat, rice, corn, vegetable oil, tallow, and soymeal. Since commodities are not placed on the P.L. 480 docket because of their market potential, many commodities available for export under the title I program face narrow market opportunities. USDA has had little success exporting certain items on the P.L. 480 docket, such as legumes, soyproducts, peanuts, dry nonfat milk, and butter/butteroil, under the title I program. Instead, these commodities are usually donated under the other food aid programs. In one case-study country, the Philippines, a government official stated that periodically there is no match between what country officials want to import and what is available on the P.L. 480 docket. Figure 3.5 illustrates the types of commodities that were eligible for export under the P.L. 480 food aid programs for fiscal years 1983 through 1993 and which ones were actually exported under the title I program. Several case-study countries preferred to restrict the import of certain bulk and semiprocessed goods to support their own domestic production or processing industries. According to USDA and AID officials in the Philippines and Sri Lanka, these countries do not import rice under the title I program to protect their domestic production. In Jamaica, a country with a high level of fish consumption, USDA officials offered to export mackerel under the title I program. However, Jamaican officials declined the offer because they believed the import of U.S. mackerel would have disrupted the country’s own domestic fishing industry. While some commodities appear regularly on the P.L. 480 docket each year, other commodities appear inconsistently. USDA officials in two of our seven case-study countries, Jamaica and the Philippines, told us that it is difficult to introduce new types of title I commodities in recipient countries when USDA cannot guarantee that the commodity will be available through the title I program the next year. According to USDA’s long-term agricultural trade strategy, being a consistent supplier is an important component of having a successful marketing strategy. USDA officials in several of our case-study countries told us that the title I program would be more effective as a market development tool if the program were able to support a greater range of high-value products, especially consumer-oriented products. These officials told us that some high-value products may have strong market development potential in recipient countries with “two-tier” economies, that is, developing countries with pockets of mature markets and prosperous citizens, such as Jamaica and Guatemala. Although these recipient countries do not have foreign exchange to import a large variety of high-value products on a commercial basis, there is a thriving portion of the countries’ population that has the purchasing power, if the goods were made available. These USDA officials stated that the title I program, with its concessional terms, would be a useful market development tool for introducing high-value products into these countries. Other program requirements discourage countries from importing U.S. commodities under the title I program. For example, program provisions prohibit recipient countries from reexporting title I commodities (“export restrictions”) and may prevent or limit recipients from exporting domestically produced commodities similar to those imported under the title I program (“export limitations”). While these provisions are intended to ensure that title I commodities are not used to increase the commercial exports of the recipient countries, they limit USDA’s ability to take advantage of market opportunities. For instance, USDA offered Poland title I assistance to import U.S. cotton in fiscal year 1991. However, Polish officials refused the assistance because title I reexport restrictions would have limited the country’s ability to export its domestically produced textiles—an important source of foreign exchange. Also, in fiscal year 1993, Jamaican officials decided to stop importing wheat under the title I program because they wanted to be free of the program’s reexport restrictions, according to USDA officials in Jamaica. Title I agreements also include UMR rules that limit the amount of each commodity exported under the program to ensure that the recipient’s normal production, import, and marketing patterns are not disrupted. According to USDA officials overseas and in Washington, D.C., UMRs are one of the main reasons why the amount and types of title I exports to recipient countries have been restricted. In Jamaica, for example, UMR rules prevented USDA from exporting corn under the title I program even though the country specifically requested the commodity during its fiscal year 1993 title I negotiations. Since UMR rules prohibited the concessional sale, USDA donated the corn to Jamaica under another food aid program. While USDA officials told us that the title I program helps the United States build trade relations with countries of Eastern Europe and the former Soviet Union, title I’s ability to advance this particular market development goal has not been demonstrated. Because of dissatisfaction with the title I program, several of these title I recipients, such as Bulgaria, Latvia, Poland, and Slovakia, declined to participate in the fiscal year 1994 program, according to USDA and State Department officials. The countries cited high prices, reexport constraints, and additional debt as some of the reasons for their declinations. While the title I program is intended to introduce importers to U.S. export practices, it may actually disrupt the development of trade relations by replacing existing private sector trade that is based on commercial transactions with government-to-government food aid programming. According to USDA officials, the title I program in El Salvador, Honduras, and Guatemala has increased the recipient governments’ role in trade relationships that were once predominately in the private sector. USDA officials also told us that the private sector importers in these countries do not like to import title I wheat because the importers cannot always get the right specifications (e.g., type or protein content), the quality of title I wheat is generally low, and the title I wheat cannot be processed and reexported. USDA officials in two of our case-study countries, Morocco and Sri Lanka, questioned the wisdom of replacing private sector trade with government-to-government export assistance, especially if the United States cannot consistently export the chosen commodity under the title I program each year or offer competitive prices after the program is discontinued. In addition, the USDA official in Morocco was reluctant to promote wood under the title I program because he did not want to disrupt the country’s fledgling private sector trade, and importing title I wood would have required the intervention of the recipient government. The importance of title I as a long-term market development tool has not been demonstrated. To the extent that title I contributes to BBS development and expands the recipient’s economy, the program may lead to an increase in U.S. agricultural exports. However, the link between title I assistance, BBS development, and increased U.S. agricultural exports is tenuous. Our analysis indicates that many factors affect economic growth: even in the best-case scenario, South Korea, we could not determine a strong link between title I assistance, BBS development, and increased U.S. agricultural exports. In addition, in chapter 2 we concluded that the primary way in which title I could contribute to BBS development would be by providing the recipient country with some foreign exchange savings. However, we determined that the amount of foreign exchange relief derived from title I assistance was small and thus its contribution to BBS development was limited. Paradoxically, title I’s primary assistance to market development comes through its contribution to long-term economic development, which occurs with the foreign exchange savings that can take place only if title I exports displace commercial sales. While title I may help the U.S. maintain a market presence by offering concessional financing to developing countries with foreign exchange constraints, these concessional market shares will not necessarily transform into commercial market share once the title I program is discontinued. Many of the commodities exported under the title I program are price sensitive such that price has a greater influence on purchasing decisions than a commodity’s unique characteristics or quality. Unless the United States could offer exports with competitive prices and financing, the United States would more than likely lose market share for these price-sensitive commodities when title I export assistance is discontinued. In the short term, the title I program moves U.S. agricultural commodities. However, as discussed in chapter 1, the importance of title I as an export program has diminished substantially since the program’s inception. The title I program once represented a significant share of total value of U.S. agricultural exports, but its importance decreased as new USDA programs were created to support the export of U.S. agricultural goods. Requirements such as cargo preference provisions, commodity eligibility criteria, and reexport restrictions are built into the title I program to serve stated as well as unstated objectives. These requirements impede the program’s ability to act as a useful market development tool. The title I program does not manifest many of the attributes associated with a successful market development program. A successful program would normally not contain requirements that restrict USDA’s ability to respond to customer needs and that impose confining conditions on the buyer. A successful market development program would normally offer a wide range of products selected for their long-term market potential. Also, the products’ availability under the program would be certain from year to year so as to create a consumer preference and establish the United States as a consistent supplier. The 1990 act streamlined program management by eliminating the interagency administration of the title I program and simplifying the implementation requirements overseas. Although never put into practice, a new program was established by the 1990 act that authorized USDA to accept repayment of title I loans in local currencies and to use these local currencies for projects that support U.S. trade and agricultural development in-country. And, while the 1990 act made changes to the management of the title I program, the program continues to support multiple, and sometimes competing, objectives that are difficult for USDA to integrate into an effective program strategy. The process for selecting countries to participate in the title I program illustrates the difficulty in implementing a coherent strategy that effectively supports a diverse set of objectives. The 1990 act streamlined P.L. 480 program management by abolishing the cumbersome interagency administration of the title I and other P.L. 480 programs. The act clarified program management responsibility by assigning title I to USDA and titles II and III to AID. This clearer delineation of title I program authority simplified the program’s administration by reducing the potential for ongoing agency debate. In addition, the 1990 act eased the implementation of the title I program overseas by eliminating several program requirements pertaining to the execution of title I agreements. However, the 1990 act also created a new program within the title I program, called section 104, that could add significantly to USDA’s administrative responsibilities, if ever implemented. Before the 1990 act, the Development Coordination Committee (DCC), an interagency body, met regularly to make decisions about the allocation and implementation of P.L. 480 assistance. DCC was comprised of five agencies (USDA, AID, OMB, and the Departments of State and the Treasury). DCC working-level groups met on a biweekly basis to plan and approve the P.L. 480 programs as they operated in each country. No one agency had lead responsibility, and decisions were reached by consensus. DCC members’ interests usually reflected the P.L. 480 objective that most closely agreed with their agency’s views. In 1990, we found that, when differences of opinion arose among agencies over the proposed P.L. 480 objectives or policies with respect to a particular country, the DCC decision-making process was cumbersome and time-consuming and would cause delays in the negotiation and signing of a country agreement. The role of the interagency body in managing the P.L. 480 programs changed substantially when the 1990 act assigned USDA direct program responsibility for the title I program and AID direct responsibility for titles II and III. In February 1991, DCC was replaced by the Food Assistance Policy Council (FAPC), which is an interagency body consisting of senior representatives from USDA, AID, the State Department, and OMB. FAPC oversees rather than administers the P.L. 480 programs. A presidential executive order established FAPC to (1) ensure policy coordination of the assistance provided under the Agricultural Trade Development Act of 1954 (P.L. 83-480), as amended, and the Food for Progress Act, as amended (7 U.S.C. 1736o); (2) advise the president on appropriate policies under the act; and (3) coordinate the decisions on allocations and other policy issues. Once actively involved in administrating the P.L. 480 programs, the role of the interagency body, FAPC, is now primarily limited to approving the country selection and program allocations proposed by USDA and AID. FAPC meets annually to review and approve the initial program allocations. Midyear changes to the P.L. 480 program allocations are generally made by the responsible agency after consultation with individual member agencies. FAPC also serves as the “court of last resort” for interagency disputes that cannot be resolved directly among the agencies involved. Since February 1991, FAPC has met about 10 times on an ad hoc basis to respond to a variety of interagency issues. For example, in September 1993, an FAPC meeting was convened to address the impact of potential congressional budget cuts on the P.L. 480 programs and discuss a food aid strategy for countries of the former Soviet Union. FAPC also met on another occasion to discuss the transfer of P.L. 480 funds between the title I and title III programs. Overall, the officials from the four agencies believed the level of interagency competition was reduced substantially when program responsibility for the three titles was divided between USDA and AID. The officials agreed that FAPC has a much simpler review and approval process than DCC and that the interagency process is much less time-consuming. In general, agency officials believed that the consultation process, along with the ad hoc FAPC meetings, provides the necessary degree of communication to coordinate program implementation. Many of the extensive program requirements that directed the implementation of the title I program overseas were also eliminated under the 1990 act. In general, USDA and recipient government officials in our seven case-study countries expressed their satisfaction with the new title I program, often citing its reduced administrative burden. Before the 1990 act when AID managed the title I program, many factors complicated the agency’s efforts to negotiate and implement title I agreements in the recipient country. AID and recipient governments often engaged in lengthy negotiations to develop self-help measures that were “specific and measurable” and in addition to activities already undertaken by the country. When proposed self-help measures or the use of sales proceeds were especially controversial, the negotiation of the title I agreement tended to delay its signing and implementation. As discussed in chapter 2, we and AID’s Office of the Inspector General found that AID representatives in-country were not adequately monitoring adherence to title I self-help measures and use of the commodity sales proceeds. In addition, a number of recipient countries resented the increasing U.S. government auditing and monitoring requirements for these local currencies that were not owned by the United States, according to a 1990 planning document prepared by USDA. Under the 1990 act, many of these implementation requirements were simplified. In part, the provisions of the title I program were revised in recognition of the difficulties in negotiating and administering development activities supported by local currencies owned by the recipient government. Presently, USDA does not have to negotiate specific and measurable development activities as part of the title I agreements. Instead, the 1990 act requires only that the title I agreements contain a statement on how title I assistance and the commodity sales proceeds will be integrated into the overall development plans of the country to improve its food security. As described in chapter 2, most of the agreements in our seven case-study countries for fiscal years 1991 and 1992 contained general and broadly worded development statements that did not specify measurable outcomes. In addition, the 1990 act does not require USDA to monitor a country’s (1) use of the local currency generated from the sale of title I commodities and (2) progress on its development plans. Overall, we found that USDA did not extensively monitor the title I agreements in our seven case-study countries. According to USDA officials overseas, they monitor the program’s implementation through a variety of mechanisms, such as regular contact with recipient government officials, reviews of IMF and World Bank reports, and interagency meetings at the U.S. embassy level. USDA generally requires recipient countries to submit an annual progress report on their country development plans. To minimize reporting burdens, recipient countries can satisfy reporting requirements by giving USDA copies of relevant reports submitted in compliance with other U.S. government and international financial institutions. Despite the reduced reporting requirements, we found that more than 43 percent of the recipient countries had not prepared the requested annual reports for fiscal years 1992 and 1993. According to a USDA official, while USDA posts overseas attempt to collect these reports on a timely basis, the program does not provide enough leverage to motivate recipients to submit them. This is especially true once the country has dropped out of the title I program. For the 22 recipients in fiscal year 1992, only 11 submitted reports, 3 of which were on time; the others were late by 6 to 19 months. In fiscal year 1993, of the 21 recipients who were required to prepare annual progress reports, 12 recipients submitted reports, 4 of which were on time; the others were late by 1 to 8 months. While the 1990 act simplified title I program management in general, it also authorized a local currency program within the title I program that, if implemented, could increase USDA’s administrative responsibilities. Section 104 of the 1990 act authorizes USDA to accept repayment of title I loans in local currency, instead of dollars, and to use the local currencies for projects that promote U.S. trade and agricultural development in the recipient country. That portion of the loan, which is repaid to USDA in local currency, is never repaid to the U.S. Treasury. To begin the section 104 program, USDA solicited project proposals from its post overseas, eventually collecting proposals from three posts to include with its fiscal year 1993 budget submission. These proposals, however, were not included in USDA’s final and approved fiscal year 1993 budget submission. OMB officials raised questions about whether USDA would be able to manage a local currency program and whether some of the proposals would meet the market development criteria. OMB officials were also concerned that the section 104 program would increase the subsidy cost of the title I program because the program is essentially a grant program within a credit program. Since no repayments are made to the U.S. Treasury under section 104, there would be an increase in the total subsidy value. This circumstance would require a parallel increase in the budget authority for the title I program. In addition to these concerns, a hiring freeze imposed on USDA during the budget negotiation process caused USDA to reconsider its ability to adequately manage a section 104 program. According to officials at USDA and OMB, staff resources at USDA in Washington, D.C., and overseas were already being stretched because USDA had assumed responsibility for two additional food aid programs (Food for Progress and section 416(b) of the Agricultural Act of 1949). On the basis of these events and concerns, the section 104 program was not put in place. Some of the USDA officials in two of our seven case-study countries, Egypt and the Philippines, stated that they would like to undertake market development activities in-country using local currencies generated through a section 104 program. However, we interviewed other USDA officials overseas who raised concerns that the problems associated with administering a local currency program may exceed its potential benefits. In one of our case-study countries, Egypt, representatives from a U.S. trade association told us that they declined an opportunity to submit a section 104 proposal because it anticipated tremendous administrative troubles based on their past experience with similar programs. Most USDA and AID officials we met with overseas believed that it would be very difficult for USDA to administer such a program, given its current level of staff resources abroad. Also, at embassies in our two case-study countries that submitted section 104 proposals, the Deputy Chiefs of Mission believed that USDA did not have the administrative capabilities to manage a local currency program in-country. These officials preferred that AID, with its expertise and prior experience, manage any local currency programs in-country. In its budgets submission for fiscal year 1996, USDA requested $10 million to support proposed section 104 projects related to technical cooperation. Unlike in its fiscal year 1993 budget submission, USDA did not solicit section 104 proposals from its posts overseas; instead, the proposed projects were developed by USDA officials in Washington, D.C., and expected to be administered by headquarters officials. According to an OMB official, USDA’s final budget for fiscal year 1996 did not include the proposed section 104 projects for reasons similar to those given when the proposed projects were not included in USDA’s final budget for fiscal year 1993. The objectives of the P.L. 480 legislation are intended to support U.S. foreign policy and U.S. trade interests, as well as humanitarian and BBS development objectives overseas. While these objectives can complement each other, they can also work at cross-purposes, impeding the development of an effective program strategy. The process for selecting countries to participate in the title I program demonstrates USDA’s difficulties in implementing a cohesive strategy that supports a diverse set of objectives. Rather than reflecting the execution of a strategic plan, the process of selecting countries for title I assistance is a conglomeration of several separate events representing attempts to accomplish the different program objectives. While the provision of title I aid to some countries has simultaneously fulfilled several of the program’s multiple objectives, sometimes one objective conflicts with another. These conflicts may result in title I aid being provided to a country to accomplish one objective at the expense of achieving progress on other objectives. According to the 1990 act, a developing country is considered to be eligible for title I assistance if it has a shortage of foreign exchange earnings and difficulty in meeting all of its food needs through commercial channels. The act further directs USDA to give priority to countries that demonstrate the greatest need for food; are undertaking measures for economic development purposes to improve food security and agricultural development; alleviate poverty; and promote broad-based, equitable, and sustainable development; and demonstrate potential to become commercial markets for competitively priced U.S. agricultural commodities. In general, the universe of potential title I recipients is based on per capita gross national product (GNP) criteria. In fiscal year 1993, developing countries with a per capita GNP greater than $635 in 1991 were considered eligible for title I assistance. Those countries with a per capita GNP of $635 or less met the poverty criterion of the World Bank’s Civil Works Preference List and were considered eligible for title III assistance in fiscal year 1993. Although per capita GNP is used as a cutoff for determining which countries will receive title I or title III assistance, there is nothing to prohibit USDA from providing title I aid to countries eligible for title III assistance. Once the list of potential title I recipients was established, USDA’s country selection process gave priority to market development considerations. USDA selected its candidates for title I assistance on the basis of a separate and internal planning exercise nicknamed “spigots.” First, USDA estimated the amount of commodities that countries expect to import in the coming year and then identified the various USDA export programs available to assist with these exports, such as GSM-102, GSM-103, EEP, and P.L. 480 food aid programs. On the basis of its “spigots” exercise, USDA estimated the amount of title I assistance needed to help meet export goals in eligible countries. In its estimates, USDA also considered how much assistance went to which recipients in the preceding year, collected input from its attaches overseas, and assessed the amount by which a country may be behind in its title I payments, if any. In general, USDA’s allocation process focused on moving commodities rather than developing new markets for title I commodities. The State Department and AID also have influenced the selection of title I recipients. The recommendations of these two agencies for title I allocations sometimes coincide with USDA’s. For example, both USDA and the State Department supported title I programs for countries of the former Soviet Union; however, their recommendations were based on fulfilling different objectives. The State Department intends to provide title I assistance to support foreign policy objectives, while USDA hopes to support market development objectives. On the other hand, there have been occasions when an agency’s primary objective has hampered progress on other title I objectives. For example, U.S. foreign policy and economic development objectives in Central America prompted the State Department’s and AID’s support for title I assistance to Honduras despite USDA concerns about displacing commercial sales. Until fiscal year 1993, the State Department also succeeded in allocating title I assistance to Sierra Leone even though USDA argued that Sierra Leone, a country with little market development potential, was eligible for title III grants. According to USDA officials, foreign policy considerations have also influenced program allocations to Jordan, where title I aid was intermittent between fiscal years 1966 and 1993 because of its political alignments in the Middle East. Further, according to USDA officials, title I assistance to Pakistan was reinstated in fiscal year 1993 after a 2-year suspension because of U.S. concerns over the country’s nuclear armament capabilities. While the on-again off-again nature of title I assistance in response to foreign policy considerations is contrary to sustaining important components of a successful market development strategy (i.e., demonstrate a long-term commitment and be a consistent supplier), the over-arching goal of the 1990 act—to promote U.S. foreign policy objectives—is being fulfilled. In addition to the market development and economic development objectives and foreign policy considerations, another objective of the food aid program is to combat hunger and malnutrition and their causes. “Demonstrating the greatest need for food” is one of the conditions a country must demonstrate to receive priority when USDA selects countries for title I assistance. Using a 1992 food security index developed by AID,we determined that title I assistance in fiscal year 1993 went to eight countries considered “borderline” or “most food insecure” (see table 4.1). The amount allocated to these countries represented about 44 percent of the $332.8 million in title I funds allocated that year. However, at least 37 percent of the title I funds went to eight countries considered “relatively food secure.” Food security data were not available for the six countries of the former Soviet Union that received 20 percent of all title I funds in fiscal year 1993 (listed in table 4.1 as “status unknown”). With the exception of Tajikistan, it is likely that these countries would be considered “relatively food secure” because of their relatively higher per capita GNPs. For example, estimated 1992 GNP per capita statistics for these five countries of the former Soviet Union ranged from $1,230 to $2,930 compared to those title I recipient countries considered relatively food secure, whose per capita GNP ranged from $1,030 to $1,960. Therefore, as much as 53 percent of the title I funds may have gone to countries considered “relatively food secure.” Several USDA officials told us that they believed that donations under the title II or III programs are more appropriate for delivering food aid to countries for humanitarian purposes than the title I concessional sales program. While the 1990 Agricultural Development and Trade Act streamlined program management and simplified implementation requirements overseas, the revised structure of the title I program did not improve the program’s ability to accomplish its objectives. Multiple and sometimes competing objectives, along with certain program requirements, continue to encumber the title I program, making it difficult to create and implement an effective program strategy. For example, as discussed in chapter 2, legislative requirements designed to ensure that food aid does not displace commercial sales impede the program’s ability to achieve its sustainable development objectives through foreign exchange savings. Chapter 3 provides examples of how USDA efforts to develop long-term markets for U.S. agricultural goods are hampered by legislatively mandated program requirements. These incude requirements to carry title I cargo on U.S. flag ships, reexport restrictions that impose constraints on recipient countries, and rules that determine which commodities are eligible for export under the P.L. 480 programs. In addition, the process for selecting countries to participate in the title I program illustrates the difficulty in implementing a coherent strategy that effectively supports a diverse set of objectives. When the P.L. 480 food aid legislation was enacted in 1954, its objectives were to encourage the export of large amounts of U.S. surplus agricultural commodities and serve U.S. international policy goals. Today, however, title I is less important in terms of reducing U.S. agricultural surpluses, and title I’s share of U.S. agricultural exports and world food aid has decreased significantly. While the 1990 act streamlined program management and simplified implementation requirements overseas, the revised structure of the title I program did not improve the program’s ability to accomplish its objectives. Multiple and sometimes competing objectives, along with certain program requirements, continue to encumber the title I program, making it difficult to create and implement an effective program strategy to achieve either its sustainable economic development or long-term market development objectives. We found that the title I program has not significantly advanced either the sustainable economic development or market development objectives of the 1990 act. Title I aid has had minimal impact on broad-based, sustainable development because the amount of foreign exchange a country can potentially save through using the title I program is small relative to its overall development needs. Also, title I provides the United States with relatively little leverage to influence development activities or initiate policy reforms, and other title I objectives sometimes take priority in shaping the title I programs in recipient countries. We also found that title I’s importance to long-term market development has not been demonstrated. The link between title I assistance, economic development, and increased U.S. agricultural exports is tenuous. In addition, title I commodities tend to be price-sensitive, and it is difficult to retain market share once the food aid program has been discontinued unless the United States can offer competitive prices and financing. The size and importance of the P.L. 480 title I program have declined, and the program as currently structured does not significantly advance either the economic development or the market development objectives of the 1990 act. Thus, if Congress wants to continue to support these objectives and devote resources to achieving them, it may want to consider alternative approaches to doing so. Among the alternatives available to Congress are (1) refocusing the program on more specific economic and/or market development objectives by eliminating some of the multiple and competing requirements of the present framework; (2) restructuring the program to concentrate on a single objective, such as market development; (3) eliminating the program and transferring its resources to existing programs with compatible purposes; and (4) eliminating the program and replacing it with a new program or programs unencumbered with a history of competing objectives and outdated program requirements. We requested comments on a draft of this report from the Secretary of Agriculture or his designee. On May 3, 1995, we received oral comments on the draft report from the Deputy Administrator for Export Credits of USDA’s Foreign Agricultural Service and other USDA officials responsible for title I program management. We also discussed the draft report with senior officials at OMB and the State Department on May 2 and 4, 1995. These officials included the Chief of OMB’s Economic Affairs Branch of the International Affairs Division and the State Department’s Deputy Director of the Office of Agriculture and Textile Trade Policy. AID officials declined to discuss the draft report and did not provide agency comments. USDA agreed with our conclusions that (1) title I’s contribution to sustainable economic development is minimal because of the current program’s small size relative to each country’s overall development needs; (2) the 1990 act streamlined the management of title I, but the 1990 act did not significantly improve the program’s ability to accomplish its market or economic development objectives; and (3) several program requirements impair the usefulness of title I as a market development tool (i.e., cargo preference requirements, commodity eligibility, and government-to-government loans). USDA disagreed with our conclusion that the title I program has not demonstrated long-term market development success. USDA officials said that the title I program moves commodities and keeps a market presence that the United States might not have had otherwise. However, USDA officials also stated that it is hard to quantify the market development benefits associated with the title I program. This report recognizes these contributions; however, we do not believe that these benefits constitute long-term market development unless market presence remains after the assistance ends. We found that the commodities exported under the title I program tend to be price-sensitive, meaning that purchasing decisions by importing countries are largely driven by price. Our interviews and analyses identified many examples where market share once maintained by title I exports did not transform into commercial share. Title I concessional sales did not lead to commercial sales unless the United States offered competitive prices and financing. Moreover, we did not find any studies by USDA or other researchers that established a link between food aid and long-term commercial market share for U.S. agricultural products. USDA officials did not refute these findings. In addition, USDA agreed that the importance of title I as an export program has diminished significantly since the program’s inception in 1954. USDA also agreed with the report’s overall conclusion that multiple and sometimes competing program objectives, along with certain program requirements, encumber the title I program. USDA suggested restructuring the title I program to allow it to focus on one objective—market development—rather than eliminating the program and applying those resources to new or existing programs that individually address each of the separate objectives. Senior OMB officials agreed with our conclusions that (1) the program, as currently structured, is unable to significantly advance either the sustainable economic development or market development objectives of the 1990 act and (2) the multiple and competing objectives, along with certain program requirements, make it difficult to create and implement an effective program strategy. Rather than eliminate the title I program and dedicate those resources to new or existing programs that individually address each of the program objectives, OMB officials suggested restructuring the program to reduce the impact of multiple and competing objectives and improve the program’s focus on market development. Senior officials from the State Department generally agreed with the information presented in the draft report. However, these officials disagreed with our overall conclusions and the original matters for congressional consideration. The officials said that the title I program as currently structured serves the multiple objectives reasonably well and does not need to be significantly restructured. The officials emphasized the usefulness of the title I program in introducing U.S. commodities and trading practices into recipient countries, especially those with foreign exchange shortages. The report recognizes this benefit of the title I program; however, we also identified several limitations: (1) the government-to-government nature of the title I loan can interfere with private sector trade in-country, (2) U.S. cargo preference requirements can have a negative impact on trade relations because recipients are unable to import the desired commodity quality or grade, and (3) program criteria driven by supply-oriented considerations restrict the types of commodities eligible for export under the title I program such that the program supports a limited range of agricultural commodities without regard to market demand and consistent availability from year to year. We also found that the title I program has had limited success as a tool to introduce U.S. commodities and trade practices in several countries. For example, Bulgaria, Latvia, Poland, and Slovakia dropped out of the program after about a year because of high title I commodity prices, program limitations that restricted the countries’ ability to reexport title I commodities, and an unwillingness to assume long-term debt. The State Department officials also said that title I’s contribution to a country’s food supply can have a long-term economic impact; greater nourishment supports a more productive population, which, in turn, has long-term positive economic consequences. While our analysis found that title I can make a significant contribution to a country’s food supply, we do not consider this to be a contribution to long-term sustainable economic development. The program’s central goal is to enhance the food security of the developing world. This goal requires long-term solutions to food availability, accessibility, and utilization in developing countries. We found that the primary way in which title I can contribute to sustainable economic development in recipient countries is by helping the country save foreign exchange to invest in projects that promote long-term economic development. However, we concluded that the title I program has had a minimal impact on sustainable development because the amount of foreign exchange a country can potentially save through using the title I program is small relative to its overall development needs. While we did not intend to imply in our matters for consideration that elimination of the program and use of its resources on new or existing programs to achieve the program’s objectives was the only option for Congress to consider, it appears that the original wording led the agencies to believe we discounted other options. We have expanded and reworded our matters for congressional consideration to make it clear that there is a range of options available for Congress to consider. | Pursuant to a legislative requirement, GAO reviewed the impact of Title I assistance on: (1) sustainable economic development in recipient countries; and (2) long-term market development for U.S. agricultural goods in those countries. GAO found that: (1) U.S. agricultural exports and world food aid have decreased because there are other donor countries and new programs such as the Department of Agriculture's (USDA) market development program; (2) title I has had minimal effect on sustainable economic development in recipient countries; (3) the primary way in which title I food aid can contribute to broad-based sustainable development in the recipient country is to give the country the foreign exchange savings it needs to invest in long-term economic development projects; (4) the link between title I and market development is uncertain, since USDA and other agency studies have not shown a link between title I assistance and the establishment of a long-term commercial market share for U.S. agricultural products; (5) price-sensitive exports restrict title I market development opportunities; (6) Title I program management has been streamlined by assigning title I programs to USDA and titles II and III to the Agency for International Development (AID); and (7) while the objectives of P.L. 480 legislation can support U.S. foreign policy and trade interests, they can also impede the development of an effective program strategy. |
The TacSat experiments and efforts to develop small, low-cost launch vehicles are part of a larger DOD initiative: Operationally Responsive Space (ORS). In general, ORS was created by DOD’s Office of Force Transformation (OFT) in response to the Secretary of Defense’s instruction to create a new business model for developing and employing space systems. Under ORS, DOD aims to rapidly deliver to the warfighter low-cost, short-term joint tactical capabilities defined by field commanders—capabilities that would complement and augment national space capabilities, not replace them. ORS would also serve as a test bed for the larger space program by providing a clear path for science and technology investments, enhancing institutional and individual knowledge, and providing increased access to space for testing critical research and development payloads. ORS is a considerable departure from the approach DOD has used over the past two decades to acquire the larger space systems that currently dominate its space portfolio. These global multipurpose systems, which have been designed for longer life and increased reliability, require years to develop and a significant investment of resources. The slow generational turnover—currently 15 to 25 years— does not allow for a planned rate of replacement for information technology hardware and software. In addition, the data captured through DOD’s larger space systems generally go through many levels of analysis before being relayed to the warfighter in theater. The TacSat experiments aim to quickly provide the warfighter with a capability that meets an identified need within available resources—time, funding, and technology. Limiting the TacSats’ scope allows DOD to trade off reliability and performance for speed, responsiveness, convenience, and customization. Once each TacSat satellite is launched, DOD plans to test its level of utility to the warfighter in theater. If military utility is established, according to a DOD official, DOD will assess the acquisition plan required to procure and launch numerous TacSats—forming constellations—to provide wider coverage over a specific theater. As a result, each satellite’s capability does not need to be as complex as that of DOD’s larger satellites and does not carry with it the heightened consequence of failure as if each satellite alone were providing total coverage. DOD currently has four TacSat experiments in different stages of development (see figure 1). According to Naval Research Laboratory officials, TacSat 2’s delay is primarily the result of overestimating the maturity of its main payload—an off-the-shelf imager that was being refurbished for space use. Officials also noted that the contracting process, which took longer than expected, used multiple and varied contracts awarded under standard federal and defense acquisition regulations. DOD is also using the TacSat experiments as a means for developing “bus” standards—the platform that provides power, attitude, temperature control, and other support to the satellite in space. Currently, DOD’s satellite buses are custom-made for each space system. According to DOD officials, establishing bus standards with modular or common components would facilitate building satellites—both small and large—more quickly and at a lower cost. To achieve one of the TacSat experiments’ goals—getting new capabilities to the warfighter sooner—DOD must secure a small, low-cost launch vehicle that is available on demand. Instead of waiting months or years to carry out a launch, DOD is looking to small launch vehicles that could be launched in days, if not hours, and whose cost would better match the small budgets of experiments. A 2003 Air Force study determined that DOD’s current class of launchers—the Evolved Expendable Launch Vehicle—would not be able to satisfy these requirements. DOD delivered the TacSat 1 satellite within cost and schedule targets. To develop the first TacSat, DOD effectively managed requirements, employed mature technologies, and built the satellite in the science and technology environment, all under the guidance of a leader who provided a clear vision and prompt funding for the project. DOD is also moving forward with developing additional TacSats; bus standards; and a small, low-cost launch vehicle available on demand. In May 2004, 12 months after TacSat 1 development began, the Naval Research Laboratory delivered the satellite to OFT at a cost of about $9.3 million, thereby meeting its targets to develop the satellite within 1 year and an estimated budget of $8.5 million to $10 million. Once TacSat 1 is placed into orbit, it is expected to provide capabilities that will allow a tactical commander to directly task the satellite and receive data over DOD’s Secure Internet Protocol Router—a need identified by the warfighter. Before TacSat 1’s development began, OFT and the Naval Research Laboratory worked together to reach consensus on known warfighter requirements that would match the cost, schedule, and performance objectives for the satellite. Our past work has found that when requirements are matched with resources, goals can be met within estimated schedule and budget. To inform the requirements selection process, the Naval Research Laboratory used an informal systems engineering approach to assess relevant technologies and determine which could meet TacSat 1 mission objectives within budget and schedule. Once TacSat 1’s requirements were set, OFT did not change them. To meet its mission objectives, OFT sought a capability that would be “good enough” for the warfighter, given available resources—rather than attempting to provide a significant leap in capability. OFT and the Naval Research Laboratory agreed to limit TacSat 1’s operational life span to 1 year, which allowed the laboratory to build the satellite with lower radiation protection levels, less fuel capacity, and fewer backups than would have been necessary for a satellite designed to last 6 years or longer. The use of existing technologies for the satellite and the bus also helped to keep TacSat 1 on schedule and within cost. For example, hardware from unmanned aerial vehicles and other aircraft were modified for space flight to protect them in the space environment, and bus components were purchased from a satellite communications company. Using items on hand at the Naval Research Laboratory—such as the space ground link system transponder and select bus electronics—resulted in a savings of about $5 million. Using and modifying existing technologies provided the laboratory better knowledge about the systems than if it had tried to develop the technologies from scratch. According to a laboratory official, the TacSat 1 experiment also achieved efficiencies by using the same software to test the satellite in the laboratory and fly the satellite. Developing the TacSat within the science and technology environment also helped the experiment meet its goals. As we have stressed in our reports on systems development, the science and technology environment is more forgiving and less costly than the acquisition environment. For example, when engineers encountered a blown electronics part during TacSat 1’s full system testing, they were able to dismantle the satellite, identify the source of the problem, replace the damaged part, and rebuild the satellite—all within 2 weeks of the initial failure. According to the laboratory official, this problem would have taken months to repair in a major space acquisition program simply because there would have been stricter quality control measures, more people involved, and thus more sign-offs required at each step. Moreover, the contracting mechanism in place at the Naval Research Laboratory allows the laboratory to respond quickly to DOD requests. Specifically, the center used several existing engineering and technical support contracts that are competed, generally, at 5-year intervals, rather than competing a specific contract for TacSat 1. According to a number of DOD officials, the ultimate success of the TacSat 1 procurement was largely the result of the former OFT director, who provided the original impetus and obtained support for the experiment from high levels within DOD and the Congress; negotiated a customized mission assurance agreement with Air Force leaders to launch TacSat 1 from Vandenberg Air Force Base at a cost that was affordable given the experiment’s budget; empowered TacSat 1’s project manager at the Naval Research Laboratory to make appropriate trade-off decisions to deliver the satellite on time and within cost; and helped OFT staff develop an efficient work relationship with the Naval Research Laboratory team and provided the laboratory with prompt decisions. DOD is currently working on developing three additional TacSat experiments—along with bus standards—and a low-cost, on-demand launch vehicle. These efforts are generally in the early stages. DOD expects to launch TacSat 2—which began as an Air Force science and technology experiment and was altered to improve upon TacSat 1’s capability—in May 2007. TacSat 3, which will experiment with imaging sensors, is in the development phase. TacSat 4, which will experiment with friendly forces tracking and data communication services, is in the design phase. Table 1 shows the development cost and schedule estimates and the target launch date for each satellite. With TacSat 3, the Air Force began to formalize the process for evaluating and selecting potential capabilities for the TacSats, leveraging the experiences from the first two TacSats. The selection process, which currently takes 3 to 4 months, includes a presentation of capability gaps and shortfalls from the combatant commands and each branch of the military, and analyses of the suitability, feasibility, and transferability of the capabilities deemed the highest priority. According to DOD officials, this process allows the science and technology community to obtain early buy-in from the warfighter, thereby increasing the likelihood that requirements will remain stable and the satellite will have military utility. Obtaining warfighter involvement in this way represents a new approach for the TacSat series. See figure 3 for a more complete description of this evolving process. The Air Force has also begun to create plans for procuring TacSats for the warfighter should they prove to have military utility. The Air Force has developed a vision of creating TacSat reserves that could be deployed on demand, plans to establish a program office within its Space and Missile Systems Center, and plans to begin acquiring operational versions of successful TacSat concepts in 2010. DOD is also working to develop bus standards. Establishing bus standards would allow DOD to create a “plug and play” approach to building satellites—similar to the way personal computers are built. The service research labs, under the sponsorship of OFT, and the Space and Missile Systems Center are in the process of developing small bus standards, each using a different approach. The service labs expect to test some standardized components on the TacSat 3 bus, and system standards by prototyping a TacSat 4 bus. The Space and Missile Systems Center is also proposing to develop three standardized bus models for different-weight satellites, one of which may be suitable for a TacSat. The service labs expect to transition bus standards to the Space and Missile Systems Center in fiscal year 2008, at which time the center will select a final version for procurement for future TacSats. Both DOD and private industry are working to develop small, low-cost, on- demand launch vehicles. DOD’s Defense Advanced Research Projects Agency (DARPA), along with the Air Force, established FALCON, a joint technology development program to accelerate efforts to develop a launch vehicle that meets these objectives. Through FALCON, DARPA expects to develop a vehicle that can send 1,000 pounds to low-earth orbit for less than $5 million with an operational cost basis of 20 flights per year for 10 years. FALCON is expected to flight-test hypersonic technologies and be capable of launching small satellites such as TacSats. DARPA is currently pursuing two candidates for its FALCON launch vehicle— AirLaunch, a company that expects to launch rockets that have been ejected from the back of a C-17 cargo airplane, and SpaceX, whose two- stage launch vehicle will include the second U.S.-made rocket booster engine to be developed and flown in more than 25 years, according to the company’s founder. DARPA could transition the AirLaunch concept to the Air Force after its demonstration launch in 2008. TacSat 1 is contracted to launch for about $7 million on SpaceX’s vehicle. In addition, in 2005, the Air Force began pursuing a hybrid launch vehicle to support tactically and conventionally deployed satellites. The project is known as Affordable Responsive Spacelift, or ARES, and the Air Force has obtained internal approval to build a small-scale demonstrator that would carry satellites about two to five times larger than TacSats. DOD has several challenges to overcome in pursuing a responsive tactical capability for the warfighter. Although DOD and others are working to develop small, low-cost launch vehicles for placing satellites like the TacSats into space, such a vehicle has yet to be developed, and TacSat 1 has waited nearly 2 years since its completion to be launched. Transferring knowledge from the science and technology community to the acquisition community is also a concern, given that these two communities have not collaborated well in the past. Further, it may be difficult to secure funding for future TacSat science and technology projects since DOD allocates the majority of its research and development money to acquisition programs. Finally, there is no departmentwide vision or strategy for implementing this new capability, and the recent loss of leadership makes it uncertain to what extent efforts to develop low-cost, responsive tactical capabilities such as TacSats will continue to be pursued. While DOD has delivered TacSat 1 on time and within budget, the satellite is not yet operational because it lacks a reliable low-cost—under $10 million—small launch vehicle to place it in orbit. TacSat 1’s original launch date was in 2004 on the SpaceX’s first flight of its low-cost small launch vehicle. However, because of technical difficulties with the launch vehicle and launch facility scheduling conflicts, the TacSat 1 launch has been delayed 2 years and more than $2 million has been added to the total mission costs. SpaceX now plans to use a different small satellite for its first launch. Placing satellites in orbit at a low cost has been a formidable task for DOD for more than two decades because of elusive economies of scale. There is a strong causal relationship between satellite capabilities and launch lift. As capabilities and operational life are added, satellites tend to become heavier, requiring a launch vehicle that can carry a heavier payload. With longer-lived satellites, fewer launches are needed, making per unit launch costs high. In addition, the high cost of a large launch vehicle can only be justified with an expensive, long-living multimission satellite. Ultimately, the high cost of producing a complex satellite has created a low tolerance for risk in launching the satellite and a “one shot to get it right” mentality. Over the past 10 years, DOD and industry have attempted to develop a low-cost launch vehicle. Three launch vehicles in DOD’s inventory—the Pegasus, Taurus, and, to some extent, the Minotaur—were designed to provide space users with a low-cost means of quickly launching small payloads into low-earth orbit. DOD expected that relatively high launch rates, from both commercial and government use, would keep costs down, but the market for these launch vehicles did not materialize. For example, since its introduction in 1990, Pegasus has launched only 36 times, an average of 3 launches per year; Taurus has been launched only 7 times since it was introduced in 1994. The average cost of these launch vehicles is $16 million to $33 million. To provide another avenue for launching small satellites, the Air Force has proposed refurbishing part of its fleet of decommissioned intercontinental ballistic missiles—450 of which have been dismantled. The cost of retrofitting the missiles and preparing them for launch is about $18 million to $23 million. However, one Air Force official questioned whether these vehicles are too large for current TacSats. Some new developers in the space industry are cautiously optimistic about the small satellite market. For example, SpaceX signed seven contracts to launch various small satellites, including TacSat 1. Despite this optimism, SpaceX’s first launch of its new vehicle has yet to occur—in part because it lacks a suitable launch facility. The launch facilities located in the United States cannot readily accommodate quick-response vehicles. Vandenberg Air Force Base—one of two major launch sites in the United States—has lengthy and detailed scheduling processes and strict safety measures for preparing for and executing a launch, making it difficult to launch a small satellite within a tight time frame and at a low cost. SpaceX’s launch of TacSat 1 at Vandenberg was put on hold because of the potential risks it posed to a billion-dollar satellite that was waiting to be launched from a nearby pad. In addition, the Air Force licensed the use of another nearby pad at Vandenberg to a contractor for larger-scale launches. Given the proximity of the launch pads, SpaceX’s insurance premium increased 10-fold, from about $50,000 to as much as $500,000, which added $2.3 million to TacSat 1’s total mission costs. Because of these delays, SpaceX decided to carry a different experimental satellite on its first launch and to use a launch facility on Kwajalein Atoll, in the Pacific Ocean. The potential effect of changes—such as increased premiums or the need to transport satellites to distant locations—on efforts to keep costs low and deliver capabilities to the warfighter sooner is unknown. The Air Force is beginning to examine ways to better accommodate a new generation of quick-response vehicles. For example, Air Force officials are examining the feasibility of establishing a location on Vandenberg specifically for these vehicles that is separate from the larger launch vehicle pads. Officials are also assessing the suitability of other locations, such as Kodiak Island, for quickly launching small satellites. To achieve a low-cost, on-demand tactical capability for the warfighter, the TacSat experiments will need to be transitioned into the acquisition community. We have previously reported that DOD’s acquisition community has been challenged to maximize the amount of knowledge transferred from the science and technology community, and that DOD’s science and technology and acquisition organizations need to work more effectively together to achieve desired outcomes. Many of the space programs we reviewed over the past several decades have incurred unanticipated cost and schedule increases because they began without knowing whether technologies could work as intended and invariably found themselves addressing technical problems in a more costly environment. Although DOD recently developed a space science and technology strategy to better ensure that labs’ space technology efforts transition to the acquisition community, the acquisition community continues to question whether labs adequately understand acquisition needs in terms of capabilities and time frames. As a result, the acquisition community would rather use its own contractors to maintain control over technology development. According to DOD officials, action has been taken to improve the level of collaboration and coordination on the TacSat experiments. Officials from DOD laboratories involved in TacSats and acquisition communities agree that they are working better together on the experiments than they have on past space efforts. However, in pursuing a low-cost, on-demand tactical capability, the science and technology and acquisition communities have moved forward on somewhat separate tracks, and it is unclear to what extent the work and knowledge gained by the labs will be leveraged when the TacSat experiments are transferred to the acquisition community. For example, the Air Force and Navy labs are working to develop bus standards for the TacSat experiments that are scheduled to be transitioned to the Space and Missile Systems Center, the Air Force’s acquisition arm, in fiscal year 2008. Yet, the Space and Missile Systems Center, working with the Aerospace Corporation, has proposed three different options for standardizing the bus. While two of the options are generally larger—and are intended for larger space assets—one of the proposed designs may be suitable for TacSats, although it will likely be costlier than a lab-generated counterpart. In addition, our past work has shown that DOD’s space programs—as well as other large DOD programs—have been unable to adequately define requirements and keep them stable, and seldom achieve a match between resources and requirements at the start of the acquisition. One factor that contributes to poorly defined and unstable requirements is that space acquisition programs have historically attempted to achieve full capability in a single step and serve a broad base of users, regardless of the design challenge or the maturity of technologies. Given this track record, some DOD officials expressed concern over Space and Missile Systems Center’s ability to adopt the TacSat approach of delivering capabilities that are good enough to meet a warfighter need within cost and schedule constraints. Air Force officials identified the center’s organizational culture of risk avoidance and the acquisition process as two of the most significant barriers to developing and deploying space systems quickly. TacSats 1 and 2 have been fully funded within DOD, and TacSats 3 and 4 were recently funded. However, funding is uncertain for TacSats beyond 3 and 4. While the Congress added funding to DOD’s 2006 budget to support TacSat efforts, such as developing bus standards, DOD did not request such funding. According to a DOD official, there would not be an effort to develop bus standards if funding had not come from the Congress. Historically, DOD’s research and development budget has been heavily weighted to system acquisitions—80 percent of this funding goes to weapon system programs, compared with 20 percent going to science and technology. In addition, science and technology funding is spread over thousands of projects, while funding for weapon system programs is spread over considerably fewer, larger programs. This funding distribution can encourage financing technology development in an acquisition program. However, as we have previously reported, developing technologies within an acquisition program typically leads to cost and schedule increases—further robbing the science and technology community and other acquisition programs of investment dollars. DOD currently has no departmentwide strategy for providing a responsive tactical capability for the warfighter. Without such a strategy, it is unknown whether and to what degree there may be gaps or overlaps in efforts. DOD efforts to develop low-cost satellite and launch capabilities are moving forward under multiple offices at different levels (see table 2). Since these efforts are occurring simultaneously, it is unclear how and if they will be used to inform one another. Moreover, there are different visions for the roles of low-cost, responsive satellites and launch vehicles in DOD’s overall space portfolio. For example, one Air Force official stated his office is looking for direction from the Congress on how to move forward rather than from somewhere within DOD. Further, when interviewed, other Air Force officials were not in agreement over how the Air Force’s vision for using TacSats fits in with OFT’s proposed use of this capability for DOD. In addition to the lack of a DOD-wide strategy, the recent departure of key personnel may have created a gap in leadership, making it uncertain to what extent efforts to develop tactical capabilities such as TacSats will be pursued. As we reported in November 2005, program success hinges on whether leaders can make strategic investment decisions and provide programs with the direction or vision for realizing goals and alternative ways of meeting those goals. One official involved in developing the overall architecture described the pursuit of these capabilities as a “grassroots effort,” underscoring the importance of having enthusiastic individuals involved in moving it forward. According to a number of DOD officials, the former OFT director was widely respected within and outside the agency and served as a catalyst for transformation across DOD, and was credited with championing and pursuing innovative concepts that could sustain and broaden military advantage. With the departure of the OFT director and other key advocates of the TacSat concept, service lab officials told us they are concerned about the fate of the TacSat experiments. DOD officials we spoke with acknowledged that there is no agreement on who should ultimately be responsible for deciding the direction of the TacSat experiments and other efforts to develop low-cost responsive tactical capabilities for the warfighter. DOD’s experiences developing a tactical capability for the warfighter through TacSats may be used to inform the way major space systems are acquired. Specifically, DOD’s process for developing TacSat 1 reflects best practices that larger space system programs could employ to achieve better acquisition outcomes. In addition, some DOD officials believe that these efforts—focusing on delivering capabilities to the warfighter through TacSats and small, low-cost launch vehicles—could lead to long-term benefits, including providing opportunities for major space systems to test new technologies, enhancing the skills of DOD’s space workforce, and broadening the space industrial base. Our past work has shown that commercial best practices—such as managing requirements, using mature technologies, and developing technology within the science and technology community—contribute to successful development outcomes. TacSat 1 confirms that applying these practices can enable projects to meet cost and schedule targets. While TacSat 1, as a small experimental satellite with only a few requirements, is much less complex than a major space system, we have reported that commercial best practices are applicable to major space system acquisitions and recommended that DOD implement them for such acquisitions. Despite our recommendation, DOD’s major space system acquisitions have yet to consistently apply these best practices. Manage requirements. DOD’s major space acquisition programs have typically not achieved a match between requirements and resources (technology, time, and money) at program start. Historically, these programs have attempted to satisfy all requirements in a single step, regardless of the design challenge or the maturity of technologies needed to achieve the full capability. As a result, these programs’ requirements have tended to be unstable—that is, requirements were changed, added, or both—which has led to the programs not meeting their performance, cost, and schedule objectives. We have found that when resources and requirements are matched before individual programs are started, programs are more likely to meet their objectives. One way to achieve this is through an evolutionary development approach, that is, pursue incremental increases in capability versus significant leaps. Use mature technologies. DOD’s major space acquisition programs typically begin product development before critical technologies are sufficiently matured, forcing the program to mature technologies after product development has begun. Our reviews of DOD and commercial technology development cases indicate that demonstrating a high level of maturity before new technologies are incorporated into product development puts those programs in a better position to succeed. Develop technology within the science and technology environment. DOD’s space acquisition programs tend to take on technology development concurrently with product development, increasing the risk that significant problems will be discovered late in development and that more time, money, and effort will be needed to fix these problems. Our reviews have shown that developing technologies separate from product development greatly minimizes this risk. DOD officials and industry representatives we spoke with also noted that some long-term benefits could result from focusing on delivering capabilities to the warfighter quickly. First, small, low-cost, responsive satellites like the TacSats could augment major space systems—provided there is a means to launch the satellites. Because TacSats do not require significant investment and are not critical to multiple missions, the consequence of failure of a TacSat is low. In contrast, major space systems typically are large, complex, and multimission, and take many years to build and deliver. If a major space satellite fails, there are significant cost and schedule consequences. Ultimately, the already long wait time for the warfighter to receive improved capabilities is extended. Second, developing small, low-cost launch vehicles could provide an avenue for testing new technologies in space. According to DOD officials, less than 20 percent of DOD’s space research and development payloads make it into space, even while relying heavily on the National Aeronautics and Space Administration’s Space Shuttle, which was most recently grounded for 2 ½ years. We recently reported that DOD’s Space Test Program, which is designed to help the science and technology community find opportunities to test in space relatively cost-effectively, has only been able to launch an average of seven experiments annually in the past 4 years. According to industry representatives and DOD officials, efforts to develop a small, low-cost launch vehicle could improve the acquisition process because testing technologies in an operational environment could lower the risk for program managers by providing mature technologies that could be integrated into their acquisition programs. Third, giving space professionals the opportunity to manage small-scale projects like TacSats from start to finish may better prepare them for managing larger, more complex space system acquisitions in the future. According to Navy and Air Force lab officials, managing the TacSat experiments has provided hands-on experience with the experiment from start to finish, unlike the experience provided to program managers of large systems at the Air Force Space and Missile Systems Center. Finally, building low-cost, responsive satellites and launch vehicles could create opportunities for small, innovative companies to compete for DOD contracts and thereby increase competition and broaden the space industrial base. In April 2005, over 50 small companies sent representatives to the Third Responsive Space Conference, an effort hosted by a small private launch company. An industry representative stated that a number of small companies are excited about developing TacSats and small, low-cost launch vehicles and the potential to garner future DOD contracts, but he cautioned that it would be important to maintain a steady flow of work in order to keep staff employed and preserve in-house knowledge. Other industry representatives told Air Force officials that they are receiving mixed signals from the government regarding its commitment to these efforts—there has been a lot of talk about them, but relatively little funding. In addition, another industry representative stated that requirements must be contained; otherwise, costs will increase and eventually squeeze small companies back out of the business. For more than two decades, DOD has invested heavily in space assets to provide the warfighter with critical information needed to successfully conduct military operations. Despite this investment, DOD has been challenged to deliver its major space acquisitions quickly and within estimated costs. TacSat 1—an experimental satellite—has shown that by matching user requirements with available resources, using mature technologies, and developing technologies separate from product development, new tactical capabilities can be delivered quickly and at a low cost. By establishing a capabilities selection process, the TacSat initiative has also helped to ensure that future TacSats will address high- priority warfighter needs. At the same time, the TacSats may demonstrate an alternative approach to delivering capabilities sooner—that is, using an incremental approach to providing capabilities, rather than attempting to achieve the quantum leap in capability often pursued by large space systems, which leads to late deliveries, cost increases, and a high consequence of failure. By not optimizing its investment in TacSat and small launch efforts, DOD may fail to capitalize on a valuable opportunity to improve its delivery of space capabilities. As long as disparate entities within DOD continue moving forward without a coherent vision and sustained leadership for delivering tactical capabilities, DOD will be challenged to integrate these efforts into its broader national security strategy. To help ensure that low-cost tactical capabilities continue to be developed and are delivered to the warfighter quickly, we recommend that the Secretary of Defense assign accountability for developing and implementing a departmentwide strategy for pursuing low-cost, responsive tactical capabilities—both satellite and launch—for the warfighter, and identify corresponding funding. We provided a draft of this report to DOD for review and comment. DOD concurred with our recommendation and provided technical comments, which we incorporated where appropriate. DOD’s letter is reprinted as appendix II. We plan to provide copies of this report to the Secretary of Defense, the Secretary of the Air Force, and interested congressional committees. We will make copies available to others upon request. In addition, the report will be available 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) 512-4841. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to the report are Arthur Gallegos, Maricela Cherveny, Jean Harker, Leslie Kaas Pollock, Noah B. Bleicher, and Karen Sloan. To assess the outcomes to date from the TacSat experiments and efforts to develop small, low-cost launch vehicles, we interviewed Department of Defense (DOD) officials in the Office of Force Transformation, Washington, D.C.; Air Force Space Command, Peterson Air Force Base, Colorado; Space and Missile Systems Center, Los Angeles Air Force Base, California; Air Force Research Laboratory, Kirtland Air Force Base, New Mexico, and Wright-Patterson Air Force Base, Ohio; U.S. Naval Research Laboratory, Washington, D.C.; and the Defense Advanced Research Projects Agency, Virginia, via written questions and responses. We also analyzed documents obtained from these officials. In addition, we interviewed industry representatives involved in developing large space systems and small commercial launch vehicles. To understand the challenges to DOD’s efforts and to determine whether DOD’s experiences with TacSats and small, low-cost launch vehicles could inform major space system acquisitions, we analyzed a wide body of GAO and DOD studies that discuss acquisition problems and associated challenges, including our work on best practices in weapon system development that we have conducted over the past decade. In addition to having discussions with officials at the Office of Force Transformation, the Air Force Space Command, the Space and Missile Systems Center, and the Air Force and Navy research labs, we spoke with officials from the National Security Space Office, Virginia, and the Force Structure, Resources, and Assessment Directorate of the Joint Chiefs of Staff, Washington, D.C. We conducted our review from June 2005 to March 2006 in accordance with generally accepted government auditing standards. | For more than two decades, the Department of Defense (DOD) has invested heavily in space assets to provide the warfighter with mission-critical information. Despite these investments, DOD commanders have reported shortfalls in space capabilities. To provide tactical capabilities to the warfighter sooner, DOD recently began developing TacSats--a series of small satellites intended to be built within a limited time frame and budget--and pursuing options for small, low-cost vehicles for launching small satellites. GAO was asked to (1) examine the outcomes to date of DOD's TacSat and small, low-cost launch vehicle efforts, (2) identify the challenges in pursuing these efforts, and (3) determine whether experiences with these efforts could inform DOD's major space system acquisitions. Through effective management of requirements and technologies and strong leadership, DOD was able to deliver the first TacSat satellite in 12 months and for less than $10 million. The Office of Force Transformation, TacSat 1's sponsor, set requirements early in the satellite's development process and kept them stable. DOD modified existing technologies for use in space, significantly reducing the likelihood of encountering unforeseen problems that could result in costly design changes. The satellite was also built within DOD's science and technology environment, which enabled service laboratory scientists to address problems quickly, inexpensively, and innovatively. The vision and support provided by leadership were also key to achieving the successful delivery of TacSat 1. DOD has also made progress in developing three additional TacSats and is working toward developing a low-cost launch vehicle available on demand. Despite this achievement, DOD faces several challenges in providing tactical capabilities to the warfighter sooner. First, DOD has yet to develop a low-cost, small launch vehicle available to quickly put tactical satellites, including TacSat 1, into orbit. Second, limited collaboration between the science and technology and the acquisition communities--as well as the acquisition community's tendency to expand requirements after program start--could impede efforts to quickly procure tactical capabilities. Securing funding for future TacSat experiments may also prove difficult because they are not part of an acquisition program. Finally, DOD lacks a departmentwide strategy for implementing these efforts, and because key advocates of the experiments have left DOD, it is unclear how well they will be supported in the future. Regardless of these challenges, DOD's experiences with the TacSat experiments thus far could inform its major space system acquisitions. DOD's approach to developing the TacSats--matching requirements to available resources, using proven technologies, and separating technology development from product development--reflects best commercial practices that lead to quicker delivery with less risk. According to some DOD officials, the TacSats and small, low-cost launch vehicles--once they are developed--could also provide an avenue for large space system acquisitions to prove out technologies in the space environment, something DOD has avoided because of the high cost of launching such experiments. These officials also believe that giving space professionals the opportunity to manage small-scale projects like TacSats may better prepare them for managing larger, more complex space system acquisitions. Finally, these officials noted that building small-scale satellite systems and launch vehicles could create opportunities for small, innovative companies to compete for DOD contracts and thereby broaden the space industrial base. |
GPRA is intended to shift the focus of government decisionmaking, management, and accountability from activities and processes to the results and outcomes achieved by federal programs. New and valuable information on the plans, goals, and strategies of federal agencies has been provided since federal agencies began implementing GPRA. Under GPRA, annual performance plans are to clearly inform the Congress and the public of (1) the annual performance goals for agencies’ major programs and activities, (2) the measures that will be used to gauge performance, (3) the strategies and resources required to achieve the performance goals, and (4) the procedures that will be used to verify and validate performance information. These annual plans, issued soon after transmittal of the President’s budget, provide a direct linkage between an agency’s longer-term goals and mission and day-to-day activities. Annual performance reports are to subsequently report on the degree to which performance goals were met. The issuance of the agencies’ performance reports, due by March 31, represents a new and potentially more substantive phase in the implementation of GPRA—the opportunity to assess federal agencies’ actual performance for the prior fiscal year and to consider what steps are needed to improve performance and reduce costs in the future. The role of the Department of Labor is to promote the welfare and economic security of the nation’s workforce and ensure that workplaces are safe. To carry out its mission, the agency oversees a broad array of programs, from those that help students’ transition into the workforce to those that inspect the workplace or ensure the integrity of pension plans for retirees. These activities affect more than 100 million workers and more than 10 million employers. This section discusses our analysis of Labor’s performance in achieving its key selected outcomes and the strategies the agency has in place, relating to human capital and information technology, for achieving these outcomes. Labor reported making progress toward its outcome of reducing injuries, illnesses, and fatalities in the workplace. Labor reported that it met four of the six goals we reviewed under this outcome and substantially achieved another goal. In several cases, Labor exceeded the goal. For example, since fiscal year 1995, injury and illness rates declined by 20 percent in almost 68,000 workplaces where Labor intervened through efforts such as inspections, exceeding the target goal of 50,000 workplaces. In addition, for many of the goals, Labor presented data showing performance trends over a number of years. However, assessing progress for some goals was difficult because it was not always clear which fiscal year goal and target level was being assessed. Like last year, Labor did not meet its fiscal year 2000 goal to reduce fatalities in the construction industry. However, Labor provides a plausible explanation for why external factors may have contributed to this shortfall—demand for more construction workers in a booming economy that likely resulted in a workforce with less experience combined with an increased pace and volume of work. Labor also provides clear strategies that appear likely to achieve the goal in the coming year, such as providing grants to develop, conduct, and expand safety and health training and partnering with local contractor organizations to raise safety awareness and bring training to Spanish-speaking contractors. Another goal under this outcome was reported by Labor as “substantially achieved,” a new category used in the fiscal year 2000 report when at least 80 percent of the goal is attained. The goal is in two parts: to reduce nonfatal mining injuries and to reduce mining fatalities. Labor met the first part of the goal but did not meet the second part of the goal to reduce fatalities below the targeted 5-year average of 89 fatalities. There were 89 fatalities, bringing Labor very close to achieving the goal. Labor fully described actual progress toward the goal and identified the probable cause of the shortfall. Assessing progress on three of the goals under this outcome was complicated because complete fiscal year 2000 data were unavailable. For these goals, Labor reported progress using fiscal year 1999 data and targets instead of fiscal year 2000 data and targets. For example, Labor’s fiscal year 2000 report stated that the fiscal year 1999 goal to reduce injuries and illnesses by 3 percent in industries characterized by high hazards was exceeded based on calendar year 1999 data. Labor could not assess achievement of its fiscal year 2000 goal with a target level of 7 percent because the necessary data would not be available until December 2001. Where complete data were not available, Labor followed OMB guidance calling for agencies to indicate when the data will be available, include performance information from the preceding year, and include the actual information in the subsequent report. However, tracking progress can be confusing because the fiscal year 2000 report lists only the fiscal year 1999 target level and omits the fiscal year 2000 target level. Strategies to achieve goals under this outcome appear to be clear and reasonable and often used information technology, coordination with other federal agencies, and program evaluation to achieve the goals. None of the goals involved human capital strategies. Labor addressed strategic human capital management through agency-wide management goals rather than linking such strategies to specific programmatic goals or outcomes. Labor reported that it will use information technology, including Web-based courses, to provide safety and health training and interactive computer systems to help employers improve hazardous conditions in the workplace. In addition, Labor has been evaluating the effectiveness of the various interventions— such as inspections—it uses to reduce injuries and illnesses. Labor’s fiscal year 2002 plan calls for more program evaluations of its safety and health programs, policies, and specific standards to assess how effectively they reduce workplace injuries and illnesses. Other strategies mentioned in the fiscal year 2002 plan include coordination with other federal agencies, such as the Small Business Administration, to improve workplace safety and health. The importance of coordinating with other federal agencies is highlighted in our previous work on safety at hazardous material facilities. In October 2000, we reported that Labor and at least three other federal agencies were not coordinating requirements, such as training for hazardous material workers. We recommended various ways to improve coordination, such as determining whether agency agreements were effective and consolidating training requirements. Labor acknowledged points of overlap regarding worker training and did not object to the recommendations. Some of the strategies described in Labor’s fiscal year 2002 plan were more clearly linked to achieving goals than in the 2001 fiscal year plan. For example, in our prior review of Labor’s fiscal year 2001 plan, we found that Labor did not sufficiently explain how certain programs, such as the “Consultation” and “Voluntary Protection Programs,” would reduce injury and illness rates. The fiscal year 2002 plan now explains how these strategies will be effective. Labor’s 2002 performance plan retained many of the same performance goals from the fiscal year 2001 plan, and for 2002, Labor added a new goal measuring the effectiveness of voluntary, cooperative efforts between employers and Labor in reducing injuries, illnesses, and fatalities. For several of the goals it retained, Labor raised the target levels, allowing the agency to demonstrate progress toward achieving its overall strategic goals. This includes increasing the target level for its unmet goal to reduce construction industry fatalities from 11 percent in 2001 to 15 percent in 2002, even though Labor did not meet its previous target of 3 percent in fiscal year 1999 and 7 percent in 2000. Labor acknowledges that this is an ambitious target but indicates that recent program initiatives are expected to yield positive results in fiscal year 2001. Labor reported making progress in achieving its outcome to ensure that job training participants get and keep jobs, with performance meeting many of the goals and often exceeding them. For example, Labor’s Women’s Bureau, in collaboration with other organizations, prepared 31,588 women for the workforce, exceeding the target level of 25,000. Labor presented data showing performance trends over a number of years for some of the goals. Table 1 shows the goals we considered under this outcome. Labor reported meeting six goals and substantially achieving two goals. These two goals focused on worker retraining—one related to the Job Training Partnership Act (JTPA) dislocated worker program and another related to the Trade Adjustment Assistance (TAA) and North American Free Trade Agreement-Transitional Adjustment Assistance (NAFTA-TAA) program. For both goals, the target level for the average wage replacement rate was exceeded, but the portion of the goal addressing employment rates fell short. The target level to employ JTPA dislocated workers was 74 percent, but actual performance was 71 percent; the employment target level one quarter after JTPA program exit was 76 percent, but actual performance was slightly lower at 75 percent. Labor notes that it did not fully meet the goal because several states that were high performers under JTPA could not be included in the calculation for fiscal year 2000. These states no longer collect data under JTPA; they collect data under the newly implemented Workforce Investment Act (WIA). For the goal related to the TAA and NAFTA-TAA programs, Labor reported that the target level to employ NAFTA-TAA program participants was 72 percent, but actual performance was about 65 percent. Labor attributes the shortfall to continued difficulties in getting complete and accurate data. The report discusses efforts to improve reporting and explains how the revised reporting system for fiscal year 2001 should help states provide more complete and accurate information. Our ongoing work on NAFTA- TAA may help shed light on the need for comprehensive performance data to determine the efficacy of training and job placement approaches. In our prior work, we recommended that Labor establish: (1) an effective performance measurement system for these programs, (2) procedures to allow Labor to certify workers within required time frames, and (3) more effective internal controls and oversight procedures to decrease the likelihood that ineligible workers are given benefits. Labor appears to be making significant efforts to respond to these recommendations. Labor is redesigning its data reporting system to match the system used in WIA and is developing a detailed manual on data reporting for states and localities. Labor has also established processing procedures to improve the time frame within which petitions are reviewed. Although Labor is reviewing data to identify ineligible recipients, the performance report does not identify what steps are being taken to develop internal controls. Assessing progress toward meeting the goals under this outcome has been complicated by the transition from JTPA to WIA and the lag in available performance data for fiscal year 2000. Labor provides a reasonable discussion of its fiscal year 2000 performance and its plans for transitioning to WIA performance measures for the coming year. However, a clearer description of the challenges posed by this transition would help to assess whether its plans are sufficient to facilitate meeting next year’s goals. In addition, the three JTPA goals and the Job Corps goal were assessed using fiscal year 1999 target levels and not target levels set in Labor’s fiscal year 2000 plan. This lag in available data arises because the programs run on a program-year basis that begins 9 months after the fiscal year for which program funding is received. Finally, the goal to assist women in the workforce is very broad, and the performance measure fails to capture what services participants are receiving or accessing—a weakness we observed in our previous review of Labor’s performance report. The strategies Labor uses to achieve the goals we reviewed under this outcome are largely clear and reasonable. Some goals use strategies related to information technology; one goal includes strategies related to human capital management. Labor provides a clear explanation for training needs when discussing its goal to award Youth Opportunity grants, explaining that experienced staff coaches will help train case managers, teach youth development strategies, and assist in building relationships with other organizations that serve youth. Yet other strategies are unclear. In the fiscal year 2000 report, when discussing efforts to improve data integrity in the JTPA disadvantaged adult program, Labor mentions “providing system-wide staff training, where necessary,” without adequately explaining what types of training might be required or how they will assess when and where training will be needed. Finally, our previous review noted that the discussion of this goal contained very little information on the quality of performance data used to assess it; however, this year’s report is improved because it provides information on Labor’s efforts to validate the program data it is using. In its fiscal year 2002 performance plan, Labor continues to focus its efforts on increasing the earnings of participants in certain programs. Target levels are raised for several fiscal year 2002 performance goals, allowing Labor to demonstrate progress toward achieving its goals over time. However, the transition from JTPA to WIA will make performance on some goals difficult to compare. In spite of transition problems, Labor anticipates that the implementation of WIA will significantly improve its reporting capabilities and program outcomes. The incorporation of job retention measures in its fiscal year 2002 plan for WIA goals provides an important dimension of program performance, and our ongoing work on WIA performance measures may help Labor assess the effectiveness of the measures proposed for WIA. Labor reported making progress toward its outcome of protecting worker benefits. Labor reported meeting all but one of its fiscal year 2000 goals related to protecting worker benefits. Table 2 shows the goals we reviewed for this outcome. For example, Labor reported making significant progress in its goal of reducing the average time frame to decide final benefit levels for participants in pension plans taken over by the Pension Benefit Guaranty Corporation (PBGC). By focusing its newly streamlined case processing strategies on the oldest cases during fiscal year 2000, PBGC reduced the average time frame from between 5 and 6 years to between 4 and 5 years. In its 2002 performance plan, Labor reports that its goal is to further reduce this timeframe to 3 years. In its annual report, Labor presented data showing performance trends over a number of years for several goals. The performance plan shows that it has increased target levels for some goals under this outcome, modified others, and discontinued one. However, in some cases, the discussion of the impact of these changes was incomplete or unclear, as was the discussion of the strategies Labor proposes to accomplish the goals. Labor reported that it failed to meet only one of its performance goals in the area of protecting worker benefits—paying UI claims fairly and promptly—which it reported as “substantially achieved.” Labor established two separate criteria for this goal—one that judged whether eligibility was determined fairly and another that judged whether workers received their UI benefits on schedule. Out of a goal of 24 states, 23 met the criteria for determining eligibility fairly. Labor reports that an additional six states came very close. For the other portion of the goal— workers receiving their UI benefits on schedule—Labor reported that it met the goal of 47 states. Labor explains that the lower performance level for fairly determining eligibility reflects, in part, states’ focus on cost- saving efforts, such as telephone claims-taking. Furthermore, Labor has been tightening the underlying review process making it harder for states to meet the criterion. Despite missing the goal, Labor reported that it has increased the threshold for fiscal year 2002—30 states must meet the eligibility fairness criteria and 49 states must provide UI benefits on schedule. Labor provides reasonable strategies that appear likely to help achieve this goal, such as engaging in ongoing discussions with states, employers, and UI claimants to improve communication, identify issues, and promote input in the design of the programs. One of the goals that Labor reported meeting in fiscal year 2000, through the efforts of the agency’s Pension and Welfare Benefits Administration (PWBA), was to increase by 2.5 percent both (1) the number of closed investigations of employee pension and health benefit plans where assets are restored (to 819) and (2) the number where prohibited transactions are corrected (to 301). During fiscal year 2000, Labor combined the data for pension and health benefits, but tracked separate goals for each element— assets restored and prohibited transactions corrected. Beginning in its fiscal year 2001 plan and continuing in its 2002 plan, Labor has created two separate goals—one for pensions and another for health benefit plans. This move could make it easier to track outcomes for the two separate benefit components. However, Labor aggregated goals for the individual elements into a single targeted goal that covers both assets restored and prohibited transactions corrected. In addition, it added two more elements to this aggregate goal—the number of cases in which participant benefits are recovered and the number in which plan assets are protected from mismanagement. As a result, it will be difficult to assess whether the goal is actually being met, because success in one element of the goal may obscure failure in another. Performance goals for 2002 raise the target levels for several measures and include a new goal to promptly review applications for foreign labor certifications to ensure that aliens admitted to work will not adversely impact domestic workers’ wages or working conditions. The importance of this goal was highlighted in our earlier work on the H-2A program for agricultural workers and the H-1B program for highly skilled foreign workers. Additionally, in our major management challenges series, we cited weaknesses in strategic planning and resulting problems in organizational alignment that could affect the agency’s ability to protect worker benefits. Specifically, we found that having multiple agencies manage these programs resulted in program inefficiencies that confuse participants and delay the application process. We recommended ways to simplify and shorten the H-2A application process and better protect H-2A and domestic workers, including a recommendation that Labor collect data on its performance in meeting deadlines and use these data to monitor and improve its performance. We also recommended that Labor consolidate program authority for H-2A workers into a single agency within Labor to increase the effectiveness of enforcement. Labor has made efforts to implement these recommendations, and has completed some. In a September 2000 report, we suggested that the Congress consider eliminating Labor’s role in reviewing H-1B petitions because its review is limited by law and duplicates the efforts of the Immigration and Naturalization Service. Labor disagreed with this suggestion. As a result of accomplishing a portion of the goal related to establishing prevailing wage rates for the construction industry as required by the Davis-Bacon Act, Labor reported that it is undertaking a reengineering effort to apply new information technologies and processes to the existing Davis-Bacon survey program to improve its accuracy, timeliness, and participation. Labor discontinued the goal for fiscal year 2002; but neither Labor’s fiscal year 2002 performance plan nor its fiscal year 2000 performance report discussed how it plans to monitor the law’s survey requirements in the interim. In its fiscal year 2002 performance plan, Labor continues a goal for protecting workers’ benefits that we previously criticized—increasing by 1 percent the number of workers who are covered by a pension plan sponsored by their employer. In our review of Labor’s fiscal year 1999 performance report and fiscal year 2001 plan, we said that Labor could develop a more useful measure by focusing on the proportion of the total workforce covered by pensions. In addition, the number of workers with pensions is affected by a multitude of factors outside of Labor’s control and, as a result, it is unlikely that a valid relationship exists between Labor’s efforts and the outcome as measured. We have suggested that Labor use program evaluation methods to determine whether such a relationship exists and that Labor develop intermediate outcomes or output-oriented indicators that have a clearer relationship with the activities it undertakes. In its fiscal year 2002 performance plan and fiscal year 2000 report, Labor does not mention such efforts and continues to rely upon educating customers regarding the importance of retirement planning as the primary strategy for achieving this outcome. Our ongoing work to assess Labor’s retirement savings education efforts under the Savings Are Vital to Everyone’s Retirement Act (SAVER) of 1997 may shed light on this issue. Labor’s fiscal year 2002 plan describes several program-specific strategies for achieving the outcome of protecting worker benefits. The strategies often appear to be clear and reasonable; none directly address human capital management. Some strategies emphasize the use of new information technologies, such as the use of new document imaging hardware to convert older paper files into electronic files. Other strategies in the plan were not specific or clear enough to be able to assess whether they would help Labor achieve the goal. For example, to improve the fairness and timeliness of UI benefits, Labor proposes developing and implementing a UI performance management system “…to enhance performance planning, facilitate performance achievement, and assess the effectiveness of program improvement efforts through capacity building, technical assistance, best practices, and other key initiatives.” Similarly, in last year’s review, we noted that this strategy did not sufficiently explain how Labor will achieve this goal. Labor’s 2002 performance plan does not discuss several strategies it is undertaking to serve pension plan participants more effectively and efficiently. In prior work, we found weaknesses in PBGC’s contract management—such as inadequate links between contracting decisions and long-term strategic planning and a lack of centralized performance data to monitor contractor performance—and we made several recommendations to address these problems. For example, we recommended that PBGC undertake a comprehensive review to better link staffing and contracting decisions to its long-term strategic planning process so that it will be prepared for future workload changes and that it compile performance data centrally to better manage contractors. PBGC has begun work on these efforts, but these efforts are not reflected in the performance plan because Labor does not consider them to be a key strategy in achieving this goal. Labor reported that it made progress toward the key selected outcome of transitioning individuals from welfare dependency to self-sufficiency. For this year, Labor’s single goal under this outcome has incorporated a measure for job retention and one for increased earnings, which are critical dimensions of program performance. This is an improvement over the fiscal year 1999 measure, which did not address job retention and targeted wage rates. Labor reported that it exceeded the goal with 84 percent remaining in the workforce for six months with an average earnings increase of 59 percent, surpassing the target levels of 60 percent that remained in the workforce with an average earnings increase of 5 percent. Labor acknowledged data limitations in the earnings increase rate of 59 percent, reporting that this rate may be inflated due to inconsistent reporting by Welfare-to-Work grantees. It is working to improve reporting methods by grantees and will issue revised reporting instructions. This is an improvement over Labor’s fiscal year 1999 report which, as noted in our previous review, did not provide information on the quality of performance data. Although Labor reported that it exceeded the goal, it did not provide detailed information on how many participants have been served, which would clarify the impact the program has had to date—a weakness we observed in our previous performance review. At the same time, Labor acknowledges that participation levels lag and has requested and received congressional approval to extend the period over which grantees may expend their funds. Although this time period has been extended, the Welfare-to-Work grant program was only funded in fiscal years 1998 and 1999 and no new funding is expected. In future plans, Labor might consider discussing the limited nature of the program and providing long- term strategies for serving this population when funding expires in future plans. In general, Labor’s strategies for meeting the goal in fiscal year 2002 are plausible. None of the strategies involved the use of human capital management. Labor plans a pilot program to fund employers to upgrade the skills of Temporary Assistance for Needy Families (TANF) participants, allowing the employers to then backfill entry level positions with Welfare-to-Work participants. In addition, Labor will target development of whole family programs to help participants, primarily fathers, focus on their children and help the custodial parent access community resources to achieve self-sufficiency. The strategies also involved program evaluation to assess the effectiveness of Welfare-to- Work initiatives, including those undertaken by both formula and competitive grantees. A set of recently issued evaluation reports tell us that program implementation has advanced, but that participation remains low and the projected scale of the programs continues to be modest. Labor’s report does not explicitly state why performance goals have been revised; however, it appears that Labor is seeking increasingly higher levels of performance for this goal, allowing the agency to demonstrate progress toward achieving its overall strategic goals. Labor has raised the target to 67 percent of participants who will be employed for 2 consecutive quarters after placement, with an average earnings increase of 7 percent. For the selected key outcomes, this section describes major improvements or remaining weaknesses in Labor’s (1) fiscal year 2000 performance report in comparison with its fiscal year 1999 report and (2) fiscal year 2002 performance plan in comparison with its fiscal year 2001 plan. This section also discusses how the agency’s fiscal year 2000 report and fiscal year 2002 plan address concerns raised by GAO and OIG. Labor made improvements to its fiscal year 2000 performance report from its fiscal year 1999 performance report. In our review of Labor’s fiscal year 1999 report, we identified as a weakness the lack of information the agency presented concerning the quality or credibility of performance data relative to the performance goals. Labor’s fiscal year 2000 report greatly improves its presentation of such information by identifying performance data challenges, steps it will take to verify and validate its performance data, and the implications of data limitations for assessing performance. For example, the agency reported that it completed an audit of the validity and reliability of its workplace injury and illness data and found the data to be reasonable and accurate. The agency will improve the audit program by, among other things, maintaining a standard sampling universe so that trends in the universe estimates can be tracked. As previously noted, Labor also recognized that Welfare-to-Work data may be subject to error due to misinterpretation of reporting guidance by grantees, resulting in overestimates of increased earnings rates for participants. Labor describes a major effort it will undertake to gauge the extent of inaccurate reporting, correct these reports, and improve the reporting instructions and format. In our previous review, we observed that the fiscal year report did not directly or comprehensively address its progress in resolving major management challenges identified by GAO and Labor’s OIG. The fiscal year 2000 report makes significant improvement by including a summary of the most serious management and performance challenges identified by OIG, as required by the Reports Consolidation Act of 2000, and discussing strategies Labor will use and progress it has made in resolving these challenges. Labor more clearly identified when it reported on goals that were assessed using older data and target levels when current fiscal year 2000 data were not available. Specifically, last year’s report listed goals in the appendix as met or not met, but did not clearly indicate on which fiscal year goal and target level the assessment was based. This year’s report clearly indicates the year of the data and target level on which the goal was assessed. In addition, Labor’s fiscal year 2000 report also followed OMB guidance calling for agencies to identify the goals for which complete data are not available, indicate when the data will be available, include performance information from the preceding year, and include the actual information in the subsequent report. However, tracking progress is still difficult because the fiscal year 2000 report does not always list the fiscal year 2000 target level when the agency had assessed a goal using older data and target levels. One concern about Labor’s fiscal year 2000 report is that Labor added the category “substantially achieved” to its assessment categories “met” and “not met” when at least 80 percent or more of the targeted goal was attained. Although OMB allows agencies to use a third category to assess goals when the difference between the target level and actual performance is slight, Labor should be aware of the potential risk in using the category substantially achieved. Relying on this indicator could mask an understanding of actual progress in achieving goals and affect an agency’s vigilance in its efforts to achieve progress. It could give an impression of successful performance across all goals or on a specific goal when actual performance might be as much as 20 percent below the target. OMB guidance calls for agencies to compare actual performance with the projected performance level set out in the plan and explain why the goal was not met. We found that, for most of the goals we reviewed that Labor assessed as substantially achieved, the agency was very close to meeting the goal, reported its actual performance against planned performance, and explained the shortfall. Another concern with this year’s report regards Labor’s presentation of its future plans. Last year’s performance report included a section entitled “Goal Assessment and Future Plans” that highlighted, among other things, strategies that would be used to achieve a goal in the future. This year’s fiscal year 2000 report eliminated information on future plans, calling the section “Goal Assessment.” Labor officials told us that, due to the transition in the administration and uncertainty about the agency’s future direction and goals, they determined that any discussion of future plans would be premature and could be subject to change. We understand Labor’s concern; however, we are hopeful that future performance reports will return to the format included in the fiscal year 1999 report because it provides more linkage between the performance report and subsequent performance plans and reports. We found a limited number of substantive changes between Labor’s fiscal years 2001 and 2002 performance plans. Generally, the fiscal year 2002 plan continues to provide a clear progression toward intended outcomes. For example, for several goals aimed at reducing injuries, illnesses, and fatalities, only the numeric targets have changed (from 11 percent to 15 percent from the baseline in selected industries and occupations) and not the goals themselves, allowing Labor to demonstrate progress toward achieving its outcomes. In addition, the fiscal year 2002 plan now links budget authority and outlays to both the strategic and outcome goals. This will provide a basis for assessing how the resources are contributing to accomplishing the expected levels of performance. In our previous review of Labor’s fiscal year 2001 performance plan, we observed that Labor did not adequately discuss the steps it will take to verify and validate performance data, as well as the implications of data limitations for assessing performance. Labor significantly improved its fiscal year 2002 performance plan by providing more detailed information and by expanding its discussion to include data systems that were not cited in the 2001 plan. However, the plan still lacks sufficient information on how Labor will address the implications of certain data limitations. For example, employment and training programs, such as WIA, are increasingly relying on UI data to measure outcomes. However, these data suffer from significant time lags, are not readily shared from state to state, and do not cover all employment categories. While the 2002 plan cites the anticipated completion of a data system to track performance for key employment and training programs, it does not address the implications of these UI data limitations for assessing program performance or how these factors will be mitigated. The fiscal year 2002 performance plan could be improved by revising its information technology goal. Because the goal is broad and not directly measurable, it must include performance indicators that are specific, measurable, and related to the goal, according to GPRA, OMB Circular A-11, and related guidance. In addition, goals and indicators should be objective and quantifiable or defined in a way that allows an accurate determination to be made of how actual performance compares to the goal. Labor developed one broad performance goal for its outcome of improving organizational performance and communication through information technology: Improve automated access to administrative and program systems, services, and information. The goal uses eight indicators to measure and assess progress toward the goal. But these indicators are not always specific enough to be able to assess the agency’s plans or progress toward achieving its goal and do not allow for consistently accurate measurement of performance. For example, it is not clear that replacing the Remote Terminal Network (RTN)—one of the indicators— will help achieve the goal and improve access to information technology. Furthermore, it is not clear how the indicators will be aggregated to determine whether the goal has been achieved, which is especially important when the broader goal is not quantifiable or directly measurable. This section discusses Labor’s efforts to address major management challenges identified by GAO. This includes two governmentwide, high- risk areas—strategic human capital management and information security— and three major management challenges facing Labor that were identified in our performance and accountability series. Regarding strategic human capital management, we found that Labor’s fiscal year 2000 performance plan had goals and measures related to strategic human capital management, and the fiscal year 2000 performance report explained its progress in achieving these goals. Labor’s 2002 performance plan includes a goal to measure key aspects of strategic human capital management that had not been addressed in the 2000 report or plan. Furthermore, the report has helpfully divided management goals into human capital, financial, and information technology, making it easier to track progress from year to year and more clearly focus efforts on these areas. However, the fiscal year 2002 performance goal that addresses key aspects of strategic human capital management—similar to Labor’s information technology goal—is overly broad and vague and uses performance indicators that do not sufficiently measure the goal. The goal—The right people in the right place at the right time to carry out the mission of the department—encompasses a wide range of human capital issues, from recruitment and organizational alignment to skills training and workforce diversity. Given a goal so broad, care should be taken to develop indicators that can gauge whether the goal has been achieved. When goals are not measurable, OMB guidance states that the performance indicators should set out specific, measurable values related to the goal that will help determine goal achievement. Unfortunately, the number and nature of indicators that Labor proposes do not appear to provide all the data needed to fully assess goal achievement. Not all aspects of the goal are adequately addressed through the indicators Labor proposes, and those that are proposed are not always clearly linked to the goal and do not allow for accurate assessment of performance. For example, several indicators rely on opinion surveys to measure performance, which may involve subjective considerations or judgments. In addition, the indicators do not capture agency strategies that will be used to achieve the goal. For example, although the 2002 performance plan describes agency efforts to identify future workforce needs—such as skill gaps—and ensure the development and skills of its workers, the indicators do not reflect these efforts. Finally, it is not clear how the indicators will be aggregated to determine whether the goal has been met. With respect to information security, we found that, while Labor’s fiscal year 2000 performance plan did not have goals and measures related to information security, it described the agency’s efforts to address this challenge, and the fiscal year 2000 report described its progress on these efforts. The agency identified information security as a long-term management initiative in its fiscal year 2002 performance plan rather than a specific goal. The plan states that Labor has developed (1) an information security program that is being integrated into programs throughout the agency, (2) security plans for all Labor’s agencies, and (3) a security awareness program to train all employees. In addition to these governmentwide management challenges, we identified three major management challenges facing Labor: increasing the employment and earnings of America’s workforce, protecting the benefits of workers, and fostering safe and healthy workplaces. These challenges are generally similar to the key outcomes selected for Labor. Therefore, goals and measures included in the fiscal year 2000 report and 2002 plan that address these challenges are discussed under the outcomes. In general, Labor appears to be making progress in achieving the key outcomes. Labor has increased its target levels for some goals for fiscal year 2002 and generally provided sound strategies for achieving these new targets. We continue to have concerns about some of the measures Labor uses. We are most concerned about the way in which Labor addresses two of its management challenges—information technology and strategic human capital management. Given the breadth of these goals, goal achievement cannot be fully assessed with the performance indicators Labor proposes. Without better indicators that more accurately and comprehensively measure performance toward the goal, Labor will be unable to fully assess its progress in these areas. To ensure that progress toward performance goals can be accurately and fully assessed, and that performance indicators effectively measure the goal, we recommend that the Secretary of Labor revise its performance goals regarding strategic human capital management and information technology so that the performance indicators effectively capture efforts to achieve the goal. As agreed, our evaluation was generally based on the requirements of GPRA, the Reports Consolidation Act of 2000, guidance to agencies from OMB for developing performance plans and reports (OMB Circular A-11, Part 2), previous reports and evaluations by us and others, our knowledge of Labor’s operations and programs, GAO identification of best practices concerning performance planning and reporting, and our observations on Labor’s other GPRA-related efforts. We also discussed our review with Labor agency officials in the Office of the Assistant Secretary for Administration and Management. The agency outcomes that were used as the basis for our review were identified by the Ranking Minority Member of the Senate Committee on Governmental Affairs as important mission areas for the agency and generally reflect the outcomes for all of Labor’s programs or activities. For these outcomes, we identified goals that we believed to be clearly linked to the outcomes. The major management challenges confronting Labor, including the governmentwide, high-risk areas of strategic human capital management and information security, were identified by GAO in our January 2001 performance and accountability series and high-risk update and were identified by Labor’s OIG in December 2000. We did not independently verify the information contained in the performance report and plan, although we did draw from other GAO work in assessing the validity, reliability, and timeliness of Labor’s performance data. We conducted our review from April through June 2001 in accordance with generally accepted government auditing standards. We provided a draft of this report to Labor for its review and comment. Labor’s comments are in appendix II. Labor generally agreed with our findings and was pleased with our acknowledgement of its efforts to improve explanations about data quality and major management challenges. The agency also agreed with our recommendation to revise the performance indicators used to measure its progress toward achieving its goals on information technology and strategic human capital management. With regard to the issue we raised about using a third category— substantially achieved—Labor maintained that it will continue to use this category, but only when performance is very close to achieving the goal. We incorporated Labor’s comments and clarifications where appropriate. Labor commented on our observation that aggregating goals for individual elements regarding PWBA’s investigations of health and welfare plans into a single goal could make it difficult to assess performance. Labor plans to examine this observation further, but is concerned that establishing multiple, separate indicators would result in the selection of cases most likely to achieve the best results rather than selection of the most significant cases. Labor should be aware, however, that in using the current, aggregate goal, case selection may similarly result in the selection of cases from a range of categories for their potential to achieve the overall goal. Labor also commented that revising the goal to increase the number of workers covered by a pension plan to measure the percentage of the workforce, as we suggested, could distort the measure’s reliability. We disagree that revising the goal may hamper reliability, however, we are pleased that Labor said it plans to explore ways to improve the measure and evaluate which strategies most effectively expand coverage levels. Finally, in response to our concern that Labor lacked sufficient information to address certain data limitations, particularly the use of UI data, Labor provided helpful information that illuminates its strategies. We encourage Labor to incorporate this information in future plans. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies to appropriate congressional committees; the Secretary of Labor; and the Director, Office of Management and Budget. Copies will also be made available to others on request. If you or your staff have any questions, please call me at (202) 512-7215 or Dianne Blank at (202) 512-5654. Key contributors to this report were Ronni Schwartz, Abbey Frank, Mikki Holmes, and Bonnie McEwan. The following table identifies the major management challenges confronting Labor, which include the governmentwide, high-risk areas of strategic human capital management and information security. The first column lists the management challenges that GAO and Labor’s OIG have identified. The second column discusses what progress, as discussed in its fiscal year 2000 performance report, Labor made in resolving its challenges. The third column discusses the extent to which Labor’s fiscal year 2002 performance plan includes performance goals and measures to address the challenges that GAO and Labor’s OIG identified. We found that Labor’s fiscal year 2000 report discussed its progress in resolving many of these challenges. Of the agency’s 15 major management challenges, its performance plan had (1) goals and measures that were directly related to 9 of the challenges, (2) goals and measures that were indirectly applicable to 1 of the challenges, and (3) no goals and measures related to 5 of the challenges, but discussed strategies to address them or stated that these challenges, if not already resolved, will be resolved by the end of fiscal year 2001. | This report reviews the Department of Labor's fiscal year 2000 performance report and fiscal year 2002 performance plan required by the Government Performance and Results Act. GAO found that Labor appears to be making progress in achieving the key outcomes in its strategic plan. Labor has increased its target levels for some goals for fiscal year 2002 and generally provided sound strategies for achieving these new targets. GAO continues to have concerns about some of the measures Labor uses. GAO is most concerned about the way in which Labor addresses two of its management challenges--information technology and strategic human capital management. Given the breadth of these goals, goal achievement cannot be fully assessed with the performance indicators Labor proposes. Without better indicators that more accurately and comprehensively measure performance toward the goal, Labor will be unable to fully assess its progress in these areas. |
Navy boats are self-propelled craft, suitable primarily to be carried on board ships and to operate in and around naval activities. As of November 2011, there were 2,872 small boats in the Navy’s inventory and 58 different types of small boats, varying in length from 16 feet to over 200 feet, with expected service lives ranging from 7 to 12 years. Small boat types include rigid inflatable boats, riverine command boats, riverine assault boats, force protection boats, fleet harbor security boats, and unmanned craft. These small boats vary widely in the missions they perform, which include maritime interdiction, antiterrorism, force protection, and oil spill response operations, as well as riverine operations in Iraq. Table 1 provides the inventory and mission descriptions for various types of Navy small boats. Appendix II contains photographs of selected Navy small boats. Navy small boats are military equipment and are centrally procured, managed, and tracked by Naval Sea Systems Command (Program Executive Office, Ships, Support Ships, Boats and Craft Program Office). Naval Surface Warfare Center (Carderock Division, Detachment Norfolk, Combatant Craft Division) is responsible for boat inventory management and other activities, including boat allocation changes for certain activities. A small boat may be assigned to and carried aboard a ship as a ship’s boat. Also, small boats may be assigned to an expeditionary command, shore station, or fleet operating unit. Navy officials reported that currently the Navy has assigned small boats to over 320 separate commands and activities (e.g., Navy Expeditionary Combat Command). According to Chief of Naval Operations Instruction 4780.6E, these commands and activities are responsible for proper maintenance of their small boats and for establishing a boat maintenance program for them. The Navy utilizes several techniques to store and harbor small boats, including trailers and lifts. The Navy may use trailers, which can be purchased as an accessory to the boat and may allow for the boat to be kept out of the water and then launched back into the water via a boat ramp. According to the Navy, the use of trailers can also facilitate timely logistical movement. The Navy has over 1,800 boat trailers in stock. Another technique is to use boat lifts, which are designed to raise a boat out of the water to reduce the effects of the saltwater environment on the hull, appendages, and exposed machinery components. The Navy has 72 boat lifts in stock located at Navy installations around the world (e.g., Norfolk, Virginia; Pearl Harbor, Hawaii; and Bahrain). These lifts were acquired from fiscal year 2007 to fiscal year 2010 at a cost of about $7 million. Small boats can also be stored in the water or on a ship. Figure 1 displays various techniques the Navy uses to store and harbor small boats. The Navy report addressed four of the five elements specified in the House report, while partially addressing one of the five elements. Figure 2 identifies the five elements the House report directed the Navy to address and our assessment of the degree to which the Navy report addressed each of them. The Navy report addressed the following elements: Investigate the potential for reduced maintenance and repair costs for the Navy’s small boat fleet by using advanced boat lifts: The report discussed potential benefits associated with using boat lifts to remove boats from water during periods of nonuse. These potential benefits included reducing some types of corrosion and lowering maintenance costs by eliminating the need to remove the boat from the water for inspection. Include a recommendation regarding the potential establishment of improved boat corrosion control and prevention as a key performance parameter for the selection of boat maintenance and storage equipment: The report did not recommend improved boat corrosion control and prevention as a key performance parameter for the It noted that selection of boat maintenance and storage equipment.boat maintenance and storage equipment should be selected based on its potential benefit to corrosion control and prevention on boats and craft, but added that improved corrosion control and prevention will be hard to clearly define and measure, making them inappropriate for key performance parameters. Include a recommendation regarding the potential establishment of improved boat corrosion control and prevention as a key performance parameter for sustainment: The report did not recommend improved boat corrosion control and prevention as a key performance parameter for sustainment. It stated that boat corrosion control and prevention is certainly an important aspect of sustainment; however, it is not sufficiently definable to be used as a key performance parameter. Specifically, the report noted that the boat corrosion and control prevention aspect of sustainment is not a stand-alone testable quantity; therefore it fails to meet an important criterion for a key performance parameter. Include a recommendation regarding the potential establishment of improved boat corrosion control and prevention as a requirement for Naval Sea Systems Command to incorporate into its acquisition strategies: The report stated that corrosion control and prevention are already a well-established part of the requirements used by Naval Sea Systems Command in its acquisition strategies for procurement contracts for small boats. It noted that corrosion control and planning are addressed through performance requirements, design requirements, and contractual requirements to the extent possible. A review of current fleet repair and maintenance procedures and records does not reflect a need for additional requirements, according to the Navy report. The Navy report partially addressed the following element: Include an evaluation and business case analysis of the impact of advanced boat lifts for potential improvements to small boat acquisition costs and life-cycle sustainment: The report’s business case analysis evaluated potential improvements to life-cycle sustainment, focusing on potential maintenance cost savings associated with boat lifts. However, this business case analysis did not evaluate the impact of the use of advanced boat lifts on potential improvements to small boat acquisition costs. Navy officials told us that the use of advanced boat lifts would not significantly contribute to extending the service life of the boats or produce any other additional benefits that would lead to reduced small boat acquisition costs. This is primarily because a critical feature of current procurement strategies is to select, specify, or design boats that are made from corrosion-resistant materials and use components that are corrosion resistant. Nonetheless, the Navy did not include this justification in the report or analyze the potential effects of the use of boat lifts on small boat acquisition costs in the report’s business case analysis. While the Navy completed a business case analysis of the impact of reduced maintenance and repair costs for the Navy’s small boat fleet through the use of advanced boat lifts, we found several areas in which more complete information could have been included to better support the findings of the Navy study. Navy officials told us that they broadly used service experience and general guidance from the Naval Center for Cost Analysis to structure and execute the business case analysis. The Navy collected data from the existing boat inventory; maintenance procedures and practices, such as inspections; and maintenance actions to determine potential maintenance cost savings associated with boat lifts and compared them with data collected on lift installation and lift maintenance costs to determine the payback on a boat lift investment. The Navy assigned risk ranges to each data input and ran them through a software program that used Monte Carlo simulation techniques and ran 5,000 simulations. Based on this analysis, the Navy concluded that it was unlikely that implementing boat lifts would provide a positive return on investment. The April 2011 DOD Product Support Business Case Analysis Guidebook presents a uniform methodology for developing accurate, consistent, and effective support of value-based decision making while better aligning the acquisition and life-cycle product support processes. The guidebook provides standards for the DOD business case analysis process used to conduct analyses of costs, benefits, and risks. We identified several areas in which more comprehensive information, consistent with the DOD guidebook, could have been included in the business case analysis. For example: The Navy did not utilize discounting in the business case analysis and did not document its reasons for not doing so within the report or in additional documentation provided to us. The DOD guidebook indicates that as a general rule, discounting should be done unless there is a documented rationale not to discount. Discounting future benefits and costs using an appropriate discount rate illustrates the time value of money, as benefits and costs are worth more if they are experienced sooner. Discounting benefits and costs transforms gains and losses occurring in different time periods to a common unit of measurement. The Navy did not include comprehensive data from Navy installations that are using 72 recently acquired boat lifts on (1) actual lift installation and maintenance cost data or (2) qualitative data on other potential costs and benefits associated with the use of boat lifts. Navy officials reported that they contacted one primary boat lift user command to gather a significant amount of data for the study and relied on boat lift vendors’ estimates for lift cost and maintenance data. The DOD guidebook indicates that authoritative data sources— those used to conduct the financial and nonfinancial analysis for a business case analysis—should be comprehensive and accurate. Navy officials explained that because the way boat lifts are used and any benefits associated with their use are location and mission specific, qualitative data would be particularly valuable. For example, Navy officials told us that boat lifts may improve the operational availability of small boats at installations that have limited access to boat ramps that allow boat trailers to launch boats in the water. Navy officials responsible for conducting the business case analysis were unaware of the DOD Product Support Business Case Analysis Guidebook, but acknowledged its applicability to their analysis. Navy officials recognized that more comprehensive information would have been useful, but noted that they were unable to systematically survey all current boat lift users within the few months they had to complete their business case analysis. Navy officials reported that including this information would likely not have changed the study’s conclusions, as the analysis showed that the opportunity for a positive return on investment from implementing boat lifts for storage and harboring was so low. Navy officials also noted that the business case analysis did not address other potential costs associated with the use of boat lifts, such as the cost of adding new pier space to accommodate boat lifts. Although a more comprehensive analysis may not reverse this study’s conclusions, decision makers would benefit from collecting and including more complete information in future analyses, particularly when evaluating investment decisions at individual locations, such as using discounting and conducting comprehensive surveys of boat lift users to obtain all potential costs and benefits associated with implementing boat lifts. The Navy noted in its report that a significant number of boat lifts have recently entered service in the fleet and that the Navy will monitor service experience, data that may provide a basis for future decisions regarding the use of boat lifts. Without more complete information, the Navy may not be fully informed when it considers making future investments in boat lifts or other storage and harboring techniques at individual locations. The Navy continues to rely on small boats to meet emerging fleet, antiterrorism, and force protection needs and support ongoing operations. While these boats vary widely in the missions they perform and the approaches for maintaining them, fiscal challenges require DOD to maximize its investment in small boats by reducing maintenance and repair costs where appropriate. Making informed decisions on effective and efficient small boat storage and harboring options will play a key role in doing so. While the Navy report addressed nearly all of the elements specified in House Report 112-78, additional information would better inform Navy decision makers. In particular, collecting and including more complete information—such as using discounting and conducting comprehensive surveys of boat lift users to obtain all potential costs and benefits associated with implementing boat lifts—would better inform the Navy when it considers making future investments in boat lifts or other storage and harboring techniques at individual locations. To enable the Navy to make informed decisions when it considers making future investments in boat lifts or other storage and harboring techniques, we recommend that the Secretary of Defense direct the Secretary of the Navy to collect and include more complete information when evaluating investment decisions at individual locations, for example, by using discounting and conducting comprehensive surveys of boat lift users to obtain all potential costs and benefits associated with implementing boat lifts. We provided a draft of this report to DOD for comment. DOD concurred with our recommendation to have the Secretary of Defense direct the Secretary of the Navy to collect and include more complete information when evaluating investment decisions at individual locations (DOD’s comments are reprinted in app. III). DOD provided technical comments during the course of the engagement, and these were incorporated as appropriate. We are sending copies of this report to the Secretary of Defense, the Secretary of the Navy, and appropriate congressional committees. 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) 512-5257 or [email protected]. 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 determine the extent to which the Navy’s report addressed the House Armed Services Committee’s direction, we analyzed House Report 112- 78 to identify each element of the committee’s direction for the Navy report. We developed an evaluation tool based on House Report 112-78 to assess the extent to which the Navy’s report addressed these elements. Using scorecard methodologies, two GAO analysts independently evaluated the Navy report against the elements specified in the House report. The analysts rated compliance for each element as “addressed,” “partially addressed,” or “not addressed.” We considered the element to be addressed in the report when the Navy explicitly addressed all parts set forth in the element. We considered the element partially addressed in the report when the Navy addressed at least one or more parts of the element, but not all parts of the element. We considered the element not addressed by the Navy when the report did not explicitly address any part of the element. After the two analysts had completed their independent analyses, they compared the two sets of observations and discussed and reconciled any differences. The final assessment reflected our consensus. We also interviewed Navy subject matter experts to obtain additional information and corroborate the statements made in the Navy report, and we obtained the officials’ opinions of our assessments. We interviewed officials from the Office of the Deputy Assistant Secretary of the Navy for Ships, Naval Sea Systems Command, and the Naval Surface Warfare Center. To determine the extent to which the findings in the Navy’s study are supported by the data and information examined, we reviewed the study and obtained information on the objectives, scope, and methodology officials used to conduct it. We evaluated the Navy study’s business case analysis using criteria found in the DOD Product Support Business Case Analysis Guidebook, which provides standards for the Department of Defense’s (DOD) business case analysis process as well as generally acceptable economic methodologies. We reviewed the Navy’s study to determine the extent to which the Navy incorporated elements of the DOD guidebook into the planning, design, and execution of the study. We also obtained and analyzed key data sources, such as maintenance cost savings inputs and boat lift cost data, for information included in the study. We interviewed Navy officials to obtain their views on key aspects of the study, findings and conclusions, and any limitations that may have affected the study’s findings. We also interviewed officials responsible for procuring and maintaining Navy small boats, to determine the extent to which the Navy factored appropriate costs and benefits into the study’s key assumptions and related findings. We assessed the reliability of the data we analyzed by reviewing existing documentation related to the data sources and interviewing knowledgeable agency officials about the data that we used. We found the data sufficiently reliable for the purpose of evaluating the planning, design, and execution of the Navy’s business case analysis. We conducted this performance audit from November 2011 to 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 audit objectives. Figures 3 through 5 contain photographs of different types of Navy small boats in use. In addition to the contact named above, Carleen Bennett, Assistant Director; Tarik Carter; Joanne Landesman; Mehrzad Nadji; Terry Richardson; Mike Shaughnessy; Amie Steele; and Chris Watson made key contributions to the report. | The Navy has noted that successful execution of its maritime strategy requires the acquisition of not only surface combatants, but also small boats. The Navy reported that it received about $135 million in fiscal year 2010-2012 base procurement funding for small boats. These small boats vary widely in the missions they perform, their sizes, and the approaches for their maintenance. The House Armed Services Committee directed the Navy in House Report 112-78 to conduct a study on strategies to reduce maintenance and repair costs associated with small boat storage and harboring and to submit a report to the House and Senate Armed Services Committees on its findings by October 31, 2011. The committee directed GAO to assess the Navys report for completeness, including the methodology used in the Navys analysis. For this report, GAO evaluated the extent to which (1) the Navy's report addressed the committees direction and (2) the findings in the Navy's study are supported by the data and information examined. GAO analyzed study documents and the business case analysis, obtained and analyzed key documents, and interviewed cognizant officials. The Navy report addressed four of the five elements specified in House Report 112-78, while partially addressing one of the five elements. The Navy report addressed the potential for reducing maintenance and repair costs for the Navys small boat fleet by using advanced boat lifts, and it addressed recommendations regarding the potential establishment of improved boat corrosion control and prevention as key performance parameters. The Navy report partially addressed the committees direction to include an evaluation and business case analysis of the impact of advanced boat lifts for potential improvements to small boat acquisition costs and life-cycle sustainment. The reports business case analysis evaluated potential improvements to life-cycle sustainment, focusing on potential maintenance cost savings associated with boat lifts. However, this business case analysis did not evaluate the impact of the use of advanced boat lifts on potential improvements to small boat acquisition costs. Navy officials told GAO that the use of advanced boat lifts would not significantly contribute to extending the service life of the boats or produce any other additional benefits that would lead to reduced small boat acquisition costs. This is primarily because a critical feature of current procurement strategies is to select, specify, or design boats that are made from corrosion-resistant materials and use components that are corrosion resistant. Nonetheless, the Navy did not include this justification in the report or analyze the potential effects of the use of boat lifts on small boat acquisition costs in the reports business case analysis. While the Navy completed a business case analysis of the impact of reduced maintenance and repair costs for the Navys small boat fleet through the use of advanced boat lifts, GAO found several areas in which more complete information could have been included to better support the findings of the Navy study. The April 2011 DOD Product Support Business Case Analysis Guidebook provides standards for the DOD business case analysis process used to conduct analyses of costs, benefits, and risks. GAO identified several areas in which more comprehensive information, consistent with the DOD guidebook, could have been included in the Navys business case analysis. For example, the Navy did not include (1) actual lift installation and maintenance cost data or (2) qualitative data on other potential costs and benefits associated with the use of boat lifts, particularly location- and mission-specific benefits, from Navy installations that are using 72 recently acquired boat lifts. The DOD guidebook indicates that authoritative data sourcesthose used to conduct the financial and nonfinancial analysis for a business case analysisshould be comprehensive and accurate. Navy officials recognized that more comprehensive information would have been useful, but noted that they were unable to systematically survey all current boat lift users within the few months they had to complete their business case analysis. The Navy noted in its report that a significant number of boat lifts have recently entered service in the fleet and that the Navy will monitor service experience, data that may provide a basis for future decisions regarding the use of boat lifts. Without more complete information, the Navy may not be fully informed when it considers making future investments in boat lifts or other storage and harboring techniques at individual locations. GAO recommends that the Navy collect and include more complete information when evaluating future investment decisions at individual locations. DOD concurred with the recommendation. |
NRC is an independent agency established by the Energy Reorganization Act of 1974 to regulate civilian uses of nuclear materials. It is responsible for ensuring that those who use radioactive material—in generating electricity, for experiments at universities, and for other uses such as in construction and medicine—do so in a manner that protects the public, the environment, and workers. NRC has issued licenses to the 103 operating nuclear power plants and the 7 facilities that produce fuel for these plants. In addition, NRC, or the 33 states that have agreements with NRC, regulates about 22,000 other entities that use nuclear materials. For example, in the medical field, nuclear material licensees annually perform millions of diagnostic and therapeutic procedures using radioactive material. NRC is headed by a five-member commission appointed by the President and confirmed by the Senate. The President designates one commissioner as Chairman and official spokesperson. NRC has over 3,000 employees who work in its headquarters office in Rockville, Maryland, and its four regional offices. NRC is financed primarily by fees it imposes on commercial users of the nuclear material that it regulates. For fiscal year 2005, NRC’s appropriated budget of $669 million included approximately $540 million financed by these fees. NRC regulates the nation’s commercial nuclear power plants by establishing requirements for plant owners and operators to follow in the design, construction, and operation of nuclear reactors. NRC also licenses the reactors and the people who operate them. To ensure that nuclear reactors are operated within their licensing requirements and technical specifications, NRC oversees them by inspecting activities at the plants and assessing plant performance. NRC’s inspections consist of both baseline inspections and supplemental inspections to assess particular licensee programs or issues that arise at a particular power plant. Inspections may also occur in response to a specific operational problem or event that has occurred at a plant. NRC maintains from two to three inspectors at every operating nuclear power site in the United States and supplements the inspections conducted by these resident inspectors with inspections conducted by staff from headquarters and/or its regional offices. Generally, inspectors verify that the plant’s operator qualifications and operations, engineering, maintenance, fuel handling, security, emergency preparedness, and environmental and radiation protection programs are adequate and comply with NRC requirements. An important part of NRC’s regulatory strategy is that licensees have programs that include monitoring, maintenance, and inspection to ensure safe operations. In addition to the construction and operation of commercial nuclear power plants, NRC regulates the storage, transportation (together with the Department of Transportation), and disposal of spent fuel. Although nuclear power licensees ship a small amount of spent fuel off site for storage and some fuel is stored in dry casks on site, most spent fuel is taken from the reactor and moved directly to the nuclear power site’s spent fuel pool. Spent fuel pools are constructed according to NRC requirements, typically with 4- to 6-foot thick steel-lined concrete walls and floors. Pools are typically 30 to 60 feet long, 20 to 40 feet wide, and 40 feet deep. The location of these pools is dependent on the type of reactor. Essentially, all commercial nuclear power reactors in the United States are one of two types, either a boiling water reactor or a pressurized water reactor.For most boiling water reactors, the pools are located close to the reactors, several stories above ground. For pressurized water reactors, the pools are located in structures outside the reactor building, on the ground or partially embedded in the ground. Regardless of reactor type, these pools are required by NRC to be constructed to protect the public against radiation exposure, even after a natural disaster, such as an earthquake. The water in the pool is constantly cooled and circulated, and the fuel assemblies are generally 20 feet below the surface of the water. In 1982, under the Nuclear Waste Policy Act, the Congress directed the Department of Energy (DOE) to construct an underground repository for the disposal of spent fuel and other high-level radioactive waste. The Congress amended the act in 1987 and required DOE to only consider Yucca Mountain, Nevada, as a potential site for the repository. In 2002, the President recommended to the Congress, and the Congress approved, Yucca Mountain as a suitable site for the development of a permanent high- level waste repository. For a variety of reasons, DOE is unlikely to open the repository in 2010 as planned. Lacking a long-term disposal option now, some nuclear utilities must move a portion of their spent fuel into dry storage or face shutting down their plants because their spent fuel pools are reaching capacity. The majority of dry storage facilities are located on site but licensed at a different time from the power plant. These facilities are known as independent spent fuel storage installations, or ISFSIs. Once dry storage is approved by NRC, spent fuel is loaded into dry storage casks, which are steel containers surrounded by additional steel, concrete, or other material meant to provide radiation shielding, and are backfilled with inert gas. The full casks are welded or bolted shut and placed either horizontally or vertically in concrete vaults or on a concrete pad, depending on the design. Dry storage casks are very large. According to NRC, a vertical cask may be 20 feet tall and 9 feet in diameter and could weigh 125 tons fully loaded. Once in place, the fuel is cooled by air. NRC requires these storage systems to be capable of protecting against radiation exposure and surviving natural disasters. Because the move to dry storage is time consuming and expensive, utilities are, wherever possible, modifying wet pool storage capacity so they can store larger quantities of spent fuel in these pools. To ensure that all spent fuel is accounted for and that unauthorized acts such as theft or diversion are detected, NRC regulations require each licensee to (1) establish, maintain, and follow written procedures that are sufficient to enable the licensee to control and account for the material in storage; (2) conduct a physical inventory of the spent fuel; and (3) maintain records of receipt as well as records on the inventory (including location), disposal, and transfer of the material. The physical inventory is required to be performed at intervals not to exceed 12 months. Compliance with these requirements is a condition of each plant’s operating license. There is a high public perception and fear that spent nuclear fuel, if lost or stolen, could be used maliciously. According to NRC, the control of spent fuel is of great importance because of the potential health and safety implications. However, NRC stated that the very high radiation level of spent fuel makes its theft difficult, dangerous, and very unlikely. NRC also explained that individual spent fuel rods contain only a very small amount of nuclear material, making it unlikely that stolen rods could be used to manufacture a weapon. Theft of many rods would be necessary to acquire enough material to manufacture a weapon. To expose a large number of people to the harmful effects of radiation, the spent fuel would have to be released from its protective containers and dispersed over a wide or densely populated area. Unlike many other hazardous materials, spent fuel is neither explosive nor volatile. Putting the material in a dispersible form would be a difficult and dangerous task involving extensive preparation using special equipment and radiation shielding. In the event of a dispersal, the most significant health effects would involve persons who inhaled very small particles. Such particles would be absorbed into the body and possibly remain there for many years. According to NRC officials, protective systems at nuclear power reactors are designed using the concept of “defense in depth.” The officials pointed out that it is very unlikely that pieces of spent fuel could be out in the public domain because power reactors have layers of protection and controls to detect and prevent spent fuel from leaving the spent fuel pool. Material control and accounting is one of these layers. Physical security, another layer, relies on measures such as portal radiation monitors, fences, guards, locks, and limited access. Additional layers relate to safety. For example, reactors store spent fuel under at least 20 feet of water because of the heat and radiation. If an item of spent fuel is raised out of the spent fuel pool, extremely sensitive detectors in the pool area alarm. The officials said that NRC requires licensees to respond to these alarms and keep records of them. All parties agree that it is very important to fully account for this material. Three nuclear power plants have recently reported the discovery of missing or unaccounted-for spent nuclear fuel to NRC. These plants were the Millstone Nuclear Power Station in Connecticut in 2000, the Vermont Yankee plant in Vermont in 2004, and the Humboldt Bay Power Plant in California in 2004. NRC’s actions in response to the missing or unaccounted-for spent fuel at Millstone led directly to identifying the problems at Vermont Yankee and help identify the problems at Humboldt Bay. In all three cases, the missing or unaccounted-for spent fuel was in loose fuel rods or segments of fuel rods that had been removed from the fuel assemblies. Other plants have also identified possible instances of lost or unaccounted-for spent fuel. At Millstone, two nuclear fuel rods were discovered to be missing when, in November 2000, the licensee, Northeast Utilities, was involved in a records reconciliation and verification effort to support preparations to move spent fuel into dry cask storage. The location of the two full-length fuel rods was not properly reflected in special nuclear material records. The licensee reported that in 1972, a fuel assembly was disassembled after it was removed from the reactor during a shutdown. In 1974 when the fuel assembly was reassembled, two rods that were damaged were not placed back into the assembly. Instead, they were placed in a container for individual rods and stored in the spent fuel pool. Records dated 1979 and 1980 show the individual fuel rods in the container in the spent fuel pool. However, spent fuel pool map records after 1980 do not show either the fuel rods or the container. Records do not indicate what happened to these rods. The licensee’s investigations of the loss centered on the significant spent fuel pool activities that occurred between 1980 and 1992, which potentially related to the missing fuel rods. These activities included two re-racks, which modified the racks to accommodate more fuel assemblies, and several shipments to facilities licensed to receive irradiated nonfuel components. The unaccounted-for material from Millstone was never found; the licensee concluded that the rods were shipped to a low-level waste disposal facility in Barnwell, South Carolina. NRC undertook a special inspection to review the licensee’s efforts to locate the missing fuel rods and in February 2002 agreed with the licensee that the two missing rods were most likely shipped to the Barnwell facility. In June 2002, NRC took enforcement action against the licensee and fined the licensee $288,000 for failure to adequately account for the special nuclear material contained in the two fuel rods and for failure to report missing material to NRC in a timely manner. Spent fuel at Vermont Yankee was discovered missing in April 2004, as the NRC resident inspectors at the plant conducted an inspection required by NRC headquarters in response to the lost spent fuel rods at Millstone. The resident inspectors found that although the licensee had been performing an annual physical inventory of the spent fuel pool, the inventory did not verify that two fuel rod segments contained in a special container stored on the bottom of the pool were still present in the container. In responding to the NRC senior resident inspector’s questions, the licensee determined that two spent fuel rod pieces, the product of a 1979 fuel reconstitution to replace corroded fuel rods that had failed, were not in the storage location identified in the inventory records. The two fuel rod pieces were approximately one-half inch in diameter by approximately 9 inches and 17.75 inches in length. The Vermont Yankee licensee formed an investigation team to search for the fuel rod pieces. According to the licensee, the investigation included inspecting the spent fuel pool, reviewing documents, interviewing past and present Vermont Yankee employees, and interviewing contractors that had been associated with spent fuel pool activities and radioactive waste operations at Vermont Yankee. In July 2004, after identifying an aluminum cylinder in the spent fuel pool as potentially containing the two fuel rod pieces, the licensee opened and inspected the cylinder, which in fact contained the two fuel rod pieces. The licensee concluded that the root causes of this event were that (1) the special nuclear material account devices used in inventorying the material had not been properly maintained and (2) the plant’s special nuclear material inventory and accountability procedures did not provide guidance for controlling pieces of special nuclear material as they do for whole fuel assemblies. According to a licensee representative, it cost the licensee several million dollars to locate the spent fuel rod pieces and review the plant’s material control and accounting procedures and activities to determine the root causes of this incident. The licensee representative also told us that the plant has already taken or is in the process of taking various corrective actions. For example, the plant has revised its material control and accounting procedures to reflect the findings of the root cause analysis. NRC conducted a special inspection to review the results of the licensee’s investigation at Vermont Yankee, assess the licensee’s determination of the root cause, determine whether the licensee and its predecessor were in compliance with applicable regulations, and identify which findings or observations may have implications for other nuclear power plants. The inspection was performed from April through August 2004, and a report was issued to the licensee in December 2004. NRC inspectors concluded that the licensee and its predecessor did not keep adequate special nuclear material inventory records of the two spent fuel rod pieces, did not follow the licensee’s written procedures when the two spent fuel rod pieces were moved to a fuel storage container, and did not conduct adequate periodic physical inventories of the two spent fuel rod pieces. NRC inspectors also concluded that because the two spent fuel rod pieces remained in the Vermont Yankee spent fuel pool the entire time the apparent violation existed, no actual safety consequence resulted from this apparent violation. Nevertheless, NRC considered the apparent violation a potentially significant failure of the licensee’s material control and accounting program. Enforcement action against the licensee for its apparent violation of material control and accounting regulations is currently under review by NRC management. A decision is expected sometime in 2005. In July 2004, Humboldt Bay officials reported to NRC that in the process of reviewing records and verifying the contents of the spent fuel pool in preparation for dry storage operations, the licensee identified a discrepancy in plant records that questioned the location of three 18-inch fuel rod segments removed from a single spent fuel rod. A plant record from 1968 indicated that the three fuel rod segments were stored in the spent fuel pool in a small container. However, licensee spent fuel shipment records indicated that the entire fuel assembly, including the rod segments, had been sent off site for reprocessing in 1969. The licensee notified NRC of the record discrepancy in the records and the apparent loss of accountability records for the special nuclear material. The licensee implemented a program to search the spent fuel pool for the fuel rod segments, review additional plant records, and interview plant personnel who were on site during the 1968 to 1969 time period. In November 2004, NRC officials initiated a special inspection that included a review of the licensee material control and accounting procedures. According to an NRC official, current material control and accounting procedures appear to be adequate, but there were some problems with past accounting practices. The licensee has completed its physical search of the spent fuel pool and other areas of the plant for the three rod segments and has not conclusively identified the missing three 18-inch segments. The licensee is continuing its review of plant records as well as interviewing plant personnel who may have knowledge of the whereabouts of the three fuel rod segments. The licensee issued an interim report of its search results and evaluations at the end of February 2005. NRC plans to issue an interim inspection report after reviewing the licensee interim report. A final inspection report will not be issued until the licensee completes its investigation, currently expected in May 2005. Another example of an inaccurately accounted-for fuel rod occurred at a plant that is being decommissioned. The material from its spent fuel pool is being moved to dry cask storage. In 1974, a failed fuel assembly was being disassembled because it was leaking. A fuel rod from this assembly was found to be completely broken in two. The broken rod was supposed to have been put in a fuel rod storage basket in the spent fuel pool. In 1997, an attempt was made to verify the presence of the 16-inch fuel rod segment before the basket was placed into a dry storage cask. The attempt failed, and because the basket was too tall, it was not placed into the dry storage cask at that time. In October 2001, because of the case of the lost fuel rods at Millstone, the licensee decided to again inspect the basket to verify the presence of the fuel rod segment. While the licensee successfully examined the basket, it did not find the fuel rod segment. The licensee undertook a complete review of the site’s spent fuel records and concluded that the accounting failure resulted from (1) the poor visual clarity in the spent fuel pool at the time the fuel rod fragment was being placed in the basket and (2) inadequate care by the operators performing the task. The licensee also concluded that the fuel rod segment did not contain any fuel pellets because when the fuel rod broke, the pellets were ejected into the reactor cooling system and ultimately ground into powder. In January 2002, when NRC regional inspectors performed a special inspection at the plant concerning this issue, the inspectors did not take issue with the licensee’s conclusions concerning the missing fuel rod. However, they did find that— since the same procedures were being used at the other operating plants on site—the licensee should examine the fuel assembly and fuel rod storage baskets at these locations to determine that the fuel rods that are supposed to be in them are actually present. In February 2004, NRC inspectors reported that the licensee had inspected the baskets and determined that the existing inventory sheets were correct. NRC closed this matter. NRC is also aware of additional instances of lost or unaccounted-for spent fuel. In 1990, a nuclear power plant shipped one more spent fuel rod than planned. The licensee discovered the discrepancy in 1991, then notified NRC and corrected its records. On several occasions, licensees reported “lost” or “missing” spent fuel, but, according to NRC, in each case, the spent fuel was actually known to be contained within the facility, either in the reactor coolant system, the spent fuel pool, or a refueling pathway. The potential exists for missing or unaccounted-for spent fuel rods to be discovered at additional plants. NRC’s inspections at plants in response to the Millstone incident revealed that many nuclear power sites (a site may consist of more than one plant) had removed spent fuel rods from fuel assemblies or had reconstituted fuel assemblies. In performing these inspections, NRC inspectors were to obtain from the licensee a list of all irradiated or spent fuel rods that have been removed from their parent assembly. Using the current fuel pool map, the inspectors were to identify the presumed location of the separated rods. Then, by observing from the edge of the pool, the inspector was to answer whether there were rods in all of the locations on the map identified as containing separate rods. At some of these sites, this was not possible. Some containers where rods were presumably stored were closed or their contents were not visible. Even when containers were not closed, some contents were unverifiable because of poor water clarity and lighting and container design. According to NRC officials, the agency has preliminarily chosen these sites for further inspection. Although NRC requires nuclear power plants to maintain an accurate record of their spent fuel and its location, agency regulations do not specify how licensees are to conduct physical inventories of this material nor how they are to control and account for loose or separated spent fuel rods and fragments. In addition, NRC oversight does not include routine monitoring of plants’ compliance with its material control and accounting regulations. Under NRC regulations, reactor licensees are required to maintain and follow written procedures sufficiently to enable them to control and account for their special nuclear material. They are to keep records showing the receipt, inventory (including location), disposal, and transfer of all special nuclear material. Each record of receipt, acquisition, or physical inventory of special nuclear material must be retained as long as the licensee has possession of the material and for 3 years following any transfer of such material. Physical inventories of special nuclear material must be performed at least annually. However, NRC guidance for material control and accounting of spent nuclear fuel does not characterize what constitutes a physical inventory nor how to conduct one. NRC regulations define physical inventory as the means to determine on a measured basis the quantity of special nuclear material on hand at a given time. The regulations also state that the methods of physical inventory and associated measurements will vary depending on the material being inventoried and the processes involved. As a result, licensees implement the physical inventory requirement in different ways. NRC resident inspectors found that inventories may include anything from comparing a map with the assembly racks in the spent fuel pool to performing a comprehensive identification of fuel assemblies according to their serial numbers. For example, at one site, the NRC resident inspector reported that the annual inventory is performed in a “piece counting” manner and does not specifically verify the bundle serial number and fuel pool location. At another site, the NRC resident inspector reported that the annual inventory is only conducted for special nuclear material that has been moved since the last audit. Further, according to an NRC program official, no definition of physical inventory is provided in NRC’s regulatory guidance for spent fuel because the concept of physical inventory is a simple “first course in accounting” term. That is, a physical identification of items for the purpose of determining the number of items physically on hand and for comparison with a “book” record, which is the listing of items according to the accounting records. This NRC official also stated that it’s what large retailers do at least once a year, it’s a well-understood concept, and it has never been thought to require clarification until now. An NRC resident inspector at still another site told us that the annual physical inventory was an office paperwork review to ensure that all the “i’s were dotted and t’s were crossed” from past material movements and transfers. The resident inspector added that the licensee had never actually opened its storage container to visually verify the accuracy of the paperwork. In responding to our survey, several resident inspectors suggested that if licensees sealed their containers—for example, with tamper-safe sealing— the containers would not have to be opened during the physical inventory. According to NRC officials, verification of items in spent fuel pools is difficult and time consuming, raises concerns about radiation exposure, and can be costly. Additionally, although NRC regulations state that licensees are to control and account for all special nuclear material, the regulations do not specifically require licensees to track individual fuel rods or fragments that may be stored in their spent fuel pools. Further, individual rods, fragments, or other controlled special nuclear material may or may not be specifically accounted for in licensees’ inventories. As a result, licensees employed various methods of storing and accounting for this material. For example, according to an NRC resident inspector, at one plant the spent fuel rods are in a closed container in a designated area of the spent fuel pool. According to the licensee’s procedures, the canister is opened every 6 years and the presence of the correct number of rods is verified. At another plant, the licensee told the resident inspector that it was not sure how many fuel rod fragments are in two storage baskets or how the fragments might be divided up between the baskets. In responding to our survey, several NRC resident inspectors described current practices and offered suggestions for best practices for storing and controlling loose rods and segments. Several respondents described placing loose spent fuel in “dummy” or “skeleton” fuel assemblies, which are empty of fuel, or only in specially designed and approved containers placed in designated cells and racks in the spent fuel pool. In addition, one resident inspector suggested that given that fuel rod breaks are often the result of reconstitution, a best practice would be for the reconstitution of fuel assemblies to be done off site. Licensees of nuclear power plants also control and account for their inventories of spent fuel to help meet requirements relating to U.S. treaty obligations for the control of nuclear material. NRC regulations require power reactor licensees to submit a Nuclear Material Transaction Report to the Nuclear Materials Management and Safeguards System every time their facilities receive or transfer special nuclear material or make corrections to their material balances. At least once a year, licensees must also submit to the system material balance reports concerning special nuclear material received, produced, possessed, transferred, consumed, disposed of, or lost, and inventory composition reports. This system, which is managed by the DOE and partially supported by NRC, is operated by a DOE contractor. Because reporting to the system is done in the amount or weight of the nuclear material, such as plutonium, rather than the number of items of spent fuel, nuclear power plant licensees use complex computer programs to provide estimates of the amount of special nuclear material that these items contain. According to plant officials we spoke with, their sites send their annual inventory information to their corporate headquarters to be calculated and reported to the Nuclear Materials Management and Safeguards System contractor. Since 1988, NRC inspections of power reactor licensees’ compliance with material control and accounting requirements have been done on an exception-only basis—that is, if a particular problem or incident was reported by the licensee or identified by NRC that warranted investigating. Since 1988, NRC has not routinely monitored licensee compliance with material control and accounting regulations or verified that licensees’ inventories are complete and accurate. In 1984, NRC’s overall inspection program for monitoring nuclear power plants’ compliance with their licenses had three parts: (1) a minimum program to be completed at all operating nuclear facilities without exception, (2) a basic program to be completed at all operating facilities, but under some circumstances parts did not have to be completed because of extraordinary demands on limited inspection resources, and (3) a supplemental program of additional inspections to be done on the basis of an assessed need or problems at a facility. According to NRC, the basic program included material control and accounting inspections to be conducted once every 3 years. In 1988, according to NRC officials, this requirement for the periodic inspections of material control and accounting was discontinued. Officials said that although there is no written documentation available, these inspections were discontinued because spent fuel stored in spent fuel pools was considered to be “self protecting;” that is, the fuel bundles are heavy, highly radioactive, and contained in 40- foot deep pools of water. Spent fuel was viewed as a low-risk danger to public health and the environment and a low priority for use of NRC’s resources. NRC substantially revised its nuclear reactor oversight process in 2000, but did not reinstitute routine material control and accounting inspections. According to NRC, the new process—called the Reactor Oversight Process—uses more objective, timely, and safety-significant criteria in assessing nuclear plant performance. NRC stated that the revised program includes baseline inspections common to all nuclear plants and focuses on activities and systems that are risk significant—that is, those activities and systems that have a potential to trigger an accident, increase the consequences of an accident, or mitigate the effects of an accident. The Reactor Oversight Process also allows for inspections beyond the baseline program if there are operational problems or events that NRC believes require greater scrutiny. Material control and accounting fall under this criteria. When the new process was being developed, NRC officials continued to believe that the material in spent fuel pools was self protecting and that it was appropriate to perform material control and accounting inspections on an exception-only basis. NRC officials told us that there were no indications prior to the discovery of missing fuel rods at Millstone that routine inspections were needed. According to NRC officials, a few Reactor Oversight Process inspections can indirectly involve NRC inspections of licensees’ material control and accounting programs. One of these inspections is of licensee operations during refueling of the reactor. This inspection includes verifying that the location of fuel assemblies is being tracked and that discharged fuel assemblies are placed in permissible locations in the spent fuel pool. To perform such an inspection, NRC inspectors observe the movement of a sample of fuel bundles between the reactor core and the spent fuel pool. NRC officials told us that material control and accounting problems with spent fuel may also be reviewed under plant status inspections. These inspections involve a number of activities surrounding NRC resident inspectors’ efforts to be aware of emergent plant issues, potential adverse trends, equipment problems, and other ongoing activities that may impact the plant’s safety risks. These efforts include control room walkdowns, attending licensee meetings, and weekly plant tours. Inspectors generally would not learn of material control and accounting problems during one of these inspectors unless the licensee was aware of them and raised them during meetings with the inspectors. In addition, a few NRC resident inspectors that we surveyed mentioned some review of spent fuel records during the loading of dry storage fuel casks. In light of the missing or unaccounted-for spent fuel at Millstone and subsequently at other locations, NRC has various activities under way to assess the need to revise its regulations and oversight of spent fuel. While final completion dates for these efforts have not been set, it will likely be late in 2005 before all of them will be completed. This date would be over 5 years after the spent fuel rods were first found missing at Millstone in 2000. We believe that after the more recent instances of missing spent fuel at Vermont Yankee and Humboldt Bay, the 2003 NRC Office of the Inspector General report outlining weaknesses in NRC’s oversight of special nuclear materials (including spent fuel), and information collected during its ongoing efforts, NRC has considerable information that suggests the need to address nuclear power plants’ material control and accounting problems, including compliance with NRC regulations. According to NRC officials, they plan to submit the results of these activities to the NRC Commissioners in the spring of 2005. The Commissioners will decide what, if any, actions will be taken in response to the findings. NRC has three principal activities under way to assess the need to revise its regulations and oversight of spent fuel. These are (1) a three-phase project under which NRC inspectors are collecting information on the status of material control and accounting programs at individual plants; (2) a comprehensive program review of NRC material control and accounting programs for special nuclear materials, including spent fuel, through the contract with DOE’s Oak Ridge National Laboratory; and (3) a bulletin issued on February 11, 2005, to nuclear power plant licensees requesting information concerning their compliance with NRC material control and accounting regulations. In November 2003, NRC issued a temporary instruction (TI) to its inspection manual. NRC’s overall objective in issuing the TI was to gather site-specific information on nuclear power plants’ material control and accounting programs to determine if the issues affecting the missing spent fuel rods at Millstone were present at other power plants. More specifically, NRC wanted to obtain enough information to determine if material control and accounting guidance for nuclear power plants should be modified to reduce the possibility of a licensee losing spent fuel rods in the future; licensees can account for all spent fuel, including any rods that have been separated from their parent assembly; and all items of spent fuel listed in the spent fuel inventory, including rods that have been separated from their parent assembly, can be located in the spent fuel pool. The TI also called for obtaining site-specific data for the purposes of improving the plants’ material control and accounting programs. According to the TI, several inspection activities were aimed at identifying conditions for future program improvement rather than inspections for compliance with regulatory requirements. NRC is carrying out the TI in three phases. Phases I and II have been completed. In phase I, NRC regional and/or resident inspectors determined if nuclear power plant licensees had ever removed irradiated (spent) fuel rods from an assembly or had reconstituted fuel assemblies. For licensees that had removed rods or reconstituted assemblies, phase II was conducted. During phase II, inspectors used inspections and interviews to fill out a questionnaire about the licensees’ material control and accounting programs. Among the questions were the following: Does the licensee have a program that tracks individual fuel rods from the point of removal from a fuel assembly to where they are stored in the spent fuel pool and to their final destination? Are there rods in all of the locations identified on the spent fuel map (or equivalent) as containing separated rods? (The inspectors were instructed to obtain from licensees a list of all spent fuel rods that had been removed from their parent assembly and, to the extent possible, answer this question by observing from the edge of the spent fuel pool. If the rods were stored in a closed container, they were to report this under the “Comments” section of the questionnaire.) Does the licensee have written material control and accounting procedures approved by licensee management? Does the licensee have written procedures for the movement of individual spent fuel rods within the spent fuel pool? Does the licensee have procedures for performing oversight of all spent fuel pool operations? Does the licensee have records documenting spent fuel pool operations conducted by contractors or fuel vendors? Does the licensee perform an annual physical inventory of the spent fuel pool that includes resolution of all discrepancies? The TI did not specify an approach to answering the questions but instead allowed the resident inspectors to use their best judgment and experience. Our survey of NRC’s senior resident inspectors identified some differences in what the inspectors did to answer the phase II questions. The inspectors generally interviewed licensee staff and reviewed licensees’ records and written procedures. For the most part, they also used the licensee’s map to verify materials in the spent fuel pool. About half used visual tools such as binoculars or underwater cameras to verify materials in the spent fuel pool. About one-fifth observed licensee activities. Phase III, which has not begun, is to expand on the questions in phase II with more detailed inspection and review of site documentation to verify that procedures or controls are implemented and that they are adequate. For a sample of sites, including those for which “no” was answered to any of the phase II questions, personnel with material control and accounting expertise, rather than the regional and on-site inspectors, are to carry out the activities. The TI called for phases I and II to be completed within 6 months (by May 2004) and phase III within 18 months (by May 2005). Phases I and II were carried out from January 2004 to May 2004. The phase I review at 70 sites— all 103 operating nuclear power plants at 65 sites (a site may contain more than one nuclear power plant), decommissioning plants at 4 sites, and 1 wet storage facility—identified 65 sites that had removed irradiated fuel rods from an assembly or had reconstituted fuel assemblies. Phase II was conducted for these sites. On the basis of the phase II results, NRC officials determined that at least 19 sites were candidates for more detailed phase III review because NRC inspectors identified that the site had two or more programmatic issues. As of February 2005, NRC officials told us that they are in the planning stages for phase III inspections. Because the TI expires 2 years after its November 2003 issuance, if the phase III inspection were to be performed before this, it would be late 2005 before the project would be completed. In September 2001, shortly after the terrorist attacks on the World Trade Center and the Pentagon, the Chairman of NRC directed the staff to undertake a comprehensive review of all the agency’s safeguards and security programs. NRC contracted with the Oak Ridge National Laboratory in August 2003 to review NRC’s material control and accounting programs for special nuclear materials at all NRC licensees. This contract, which according to an NRC official was for about $500,000, was part of a broader NRC effort. The Oak Ridge laboratory, which was chosen because of its expertise in material control and accounting, began the work under the contract in September 2003. Its four principal tasks were to (1) review NRC’s current material control and accounting requirements, (2) discuss material control and accounting with current and former employees involved in these activities, (3) visit selected facilities representing different types of special nuclear material licensees to explore current material control and accounting requirements and inspection practices at each site, and (4) develop a report that offers Oak Ridge’s views on NRC’s material control and accounting requirements across the range of NRC- licensed facilities, discusses any concerns or deficiencies with the current regulations and inspection practices, and provides specific recommendations for programmatic changes. Oak Ridge submitted its report in August 2004 and concluded its work with a management briefing in October 2004. NRC is currently reviewing the report. According to NRC officials, the staff will complete its review of the report and consider the results of its review, as well as additional recommendations from the staff, in developing a paper to the NRC Commissioners. The paper is due to the Commissioners by spring 2005. In February 2005, NRC issued a bulletin to holders of operating licenses for nuclear power plants, decommissioning nuclear power plants storing spent fuel in a pool, and wet spent fuel storage sites. The bulletin, which requests information about procedural controls and inventories, responds to issues involving accounting and control of spent (and other irradiated) nuclear fuel, which were first identified at Millstone and then at Vermont Yankee and Humboldt Bay. The purpose of the bulletin is to gather specific information from the licensees about the status of control and accounting of special nuclear material at power reactors and other facilities with wet storage of irradiated fuel. NRC officials told us that results from the bulletin will contribute to assessing the need to revise the current NRC material control and accounting regulations and inspection program. The results from the bulletin will also determine where phase III inspections will be conducted. The data collected by NRC inspectors during phases I and II of the TI identified material control and accounting problems or shortcomings. Of the sites that had removed fuel rods from their parent assemblies or had reconstituted fuel assemblies, the inspectors reported that some sites did not appear to be in compliance with all of NRC’s material control and accounting requirements or otherwise had questionable material control and accounting practices involving procedures, physical inventory, accounting records, or tracking and control. Additionally, in May 2003, NRC’s Office of the Inspector General (OIG) issued its report, Audit of NRC’s Regulatory Oversight of Special Nuclear Materials. In its report, the OIG concluded that NRC’s oversight did not provide adequate assurance that all licensees properly control and account for special nuclear material. The OIG found that NRC performed limited inspections of licensees’ material control and accounting activities and could not assure the reliability of the tracking system for special nuclear material. It stated that NRC managers believed that most spent fuel is self- protecting from a health and safety point of view and that the risk of undetected loss, theft, or diversion of special nuclear material at power reactors is low. Therefore, according to the OIG, NRC trusts power reactor licensees to implement their material control and accounting activities effectively. The OIG further concluded that without adequate routine inspections of these activities, NRC cannot reasonably ensure that licensees are controlling and fully accounting for special nuclear material. The OIG recommended, among other things, that NRC conduct periodic inspections to verify that licensees comply with material control and accounting requirements, including, but not limited to, visual inspection of licensees’ special nuclear material inventories and validation of report information. In its October 2003 response to the OIG recommendation, NRC said that its staff planned to perform a review of the agency’s material control and accounting program (which it did by commissioning the Oak Ridge study) as part of a comprehensive review of the agency’s safeguards and security program. NRC added that based on the results of the program review, the staff will determine what changes need to be made to the inspection program. According to NRC’s response, any decision to change the inspection program would be made during fiscal year 2005, following completion of the program review. In February 2004, the OIG responded by stating that delaying any decision to make changes to the material control and accounting inspection program until fiscal year 2005 was untimely and did not reflect the importance of ensuring licensee’s compliance with material control and accounting requirements. In March 2004, NRC replied that the staff considered the program review to be vital to developing and documenting the regulatory basis for subsequent permanent revisions to the inspection program. An NRC official told us that once the Oak Ridge study has been completed and its findings and recommendations have been addressed, the OIG’s recommendation can be closed. The staff currently anticipates that it will develop specific recommendations and submit them to the NRC Commissioners during the spring of 2005. The effectiveness of nuclear power plants’ efforts to control and account for their spent fuel is uneven. A number of plants have experienced instances of missing or unaccounted-for spent fuel, and NRC has identified weaknesses in the material control and accounting programs at various other plants. Contributing to this unevenness is the fact that NRC regulations do not specifically require plants to control and account for loose rods or segments of rods. Although loose spent fuel rods do not appear to have been a concern when NRC developed its regulations, recent information collected by NRC indicates that most plants have removed rods from their fuel assemblies or reconstituted fuel assemblies. NRC data further indicate that plants are treating loose rods and segments differently under their material control and accounting programs. The absence of specific guidance in NRC regulations for how licensees should conduct physical inventories has also resulted in unevenness in licensees’ compliance with these important requirements. Loose spent fuel rods and rod segments also were not an issue when NRC stopped inspecting licensees’ compliance with material control and accounting regulations. Spent fuel was generally viewed in terms of fuel assemblies, which NRC considered to be, in effect, self-protecting because of their high radioactivity and large size and weight. However, individual rods, and especially rod segments, are also highly radioactive and are much smaller and lighter than fuel assemblies. This issue was first raised in 2000, with the loss of spent fuel rods at Millstone. The occurrences of missing or unaccounted-for spent fuel rods and the unevenness in licensees’ compliance with material control and accounting requirements highlight the need for more effective oversight of these programs. In the aftermath of terrorist attacks on the United States, material control and accounting of spent nuclear fuel has become more important. Material control and accounting requirements are of great importance because of the potential health and safety consequences of failing to effectively account for and control spent nuclear fuel. While NRC’s multifaceted and phased approach to these issues may have been appropriate in the initial context of a single incident at Millstone, waiting longer to make a decision on changes in the agency’s regulations and oversight is—as the OIG stated in February 2004—not timely and does not fully reflect the importance of ensuring that licensees comply with control and accounting requirements for spent fuel. We believe that NRC has sufficient information about problems with material control and accounting at nuclear power plants to proceed with revising NRC’s regulations and oversight. To improve the effectiveness of nuclear reactor licensees’ material control and accounting programs for spent nuclear fuel, we recommend that the NRC Commissioners take action, in a timely manner, on the following two items: Establish specific requirements for the control and accounting of loose spent fuel rods and rod segments and nuclear reactor licensees’ conduct of their physical inventories. Develop and implement appropriate inspection procedures to verify compliance and assess the effectiveness of licensees’ material control and accounting programs for spent fuel. We provided a draft of this report to NRC for review and comment. In its written comments (see app. III), NRC generally agreed with the report’s conclusions and stated that, overall, the report is well written and balanced. Regarding our recommendation that NRC establish specific requirements for the control and accounting of loose spent fuel rods and rod segments and nuclear reactor licensees’ conduct of their physical inventories, NRC stated that it will develop guidance concerning control and accounting of rods and pieces of spent nuclear fuel and the conduct of physical inventories. According to NRC, its current regulations are clear that licensees are required to keep complete records of and conduct annual physical inventories of all special nuclear material, but the implementation guidance does need to be enhanced. Regarding our recommendation that NRC develop and implement appropriate inspection procedures to verify compliance and assess the effectiveness of licensees’ material control and accounting programs for spent fuel, NRC said that it plans to revise its existing procedures for inspecting material control and accounting for spent nuclear fuel to include instruction on inspecting control and accounting of rods and pieces. In addition to comments directly relating to our recommendations, NRC offered a number of comments concerning the report’s context. For example, NRC said that its development and issuance of its temporary instruction was postponed by the need to devote NRC’s limited resources to areas requiring more immediate attention, especially the comprehensive security and radiological protection activities conducted after the September 11, 2001, terrorist attacks. NRC also said that the report needs to provide balance by giving credit to NRC for making prioritized decisions based on a variety of factors, including, but not limited to, risk of malevolent action, attractiveness of the material for potential malevolent activities, other controls, and available personnel resources. According to NRC, there is no reason to conclude that any of the missing fuel segments were removed for any malevolent purpose. NRC further stated that the report does not make sufficiently clear that the problems at Vermont Yankee were identified as a direct result of NRC’s implementation of its temporary instruction and that implementation of the temporary instruction also helped identify the problems at Humboldt Bay. We believe that our report provides sufficient context for the issues relating to the instances of unaccounted-for spent nuclear fuel. It also devotes considerable attention to describing NRC’s actions in response to those instances, including efforts already under way when we began our review. We have added language to the report to emphasize that NRC’s actions in response to the Millstone incident led directly to identifying the problems at Vermont Yankee and helped identify the problems at Humboldt Bay. While we also agree that there is no evidence that any of the missing fuel segments were removed for malevolent purposes, we note that it is still not certain what happened to the missing spent fuel at Millstone and Humboldt Bay. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of its issuance. At that time, we will send copies of this report to interested congressional committees, the Chairman of NRC, and other interested parties. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please call me at (202) 512-3841 or contact me at [email protected]. Key contributors to this report are listed in appendix IV. To assess nuclear power plants’ performance in controlling and accounting for their spent nuclear fuel, we reviewed and analyzed relevant documents, including Nuclear Regulatory Commission (NRC) and nuclear power plant licensees’ event inquiry reports and NRC studies and investigations of missing spent fuel rods. We also interviewed NRC and nuclear power plant officials and conducted two site visits to nuclear power plants. In the context of this report, control and accounting for spent nuclear fuel refers to plants’ tracking of and recordkeeping for the movement and storage of their spent nuclear fuel. We did not assess plant safety procedures for handling or storage of spent fuel or plant security and the vulnerability of spent fuel to theft or terrorist attacks. To assess NRC’s material control and accounting requirements for spent fuel stored at nuclear power sites, we reviewed and analyzed relevant legislation, regulations, and NRC orders and policies and we interviewed NRC and industry officials to identify the key NRC requirements and how they are implemented. To determine how NRC performs oversight of nuclear power plants’ material control and accounting activities, we reviewed NRC inspection policies, instructions, and reports; analyzed relevant NRC Inspector General reports and internal NRC analyses and studies; and interviewed appropriate NRC program and regional officials. To determine the status of NRC’s actions and plans in response to licensees’ spent fuel control and accounting problems, we reviewed internal NRC memorandums, instructions, and reports and interviewed appropriate program officials. To further explore how NRC performs oversight of control and accounting activities for spent fuel at nuclear power plants, we conducted an e-mail survey of all NRC lead/senior inspectors located on site at the plants about NRC inspection practices, management controls, and the inspectors’ suggestions for improvements, if viewed necessary. There are no sampling errors because this was not a sample survey; rather, we sent and received a response from every lead/senior inspector at every site. Nonetheless, the practical difficulties in developing and administering any survey may introduce errors, commonly referred to as nonsampling errors. For example, difficulties may arise in how a particular question is interpreted or from differences in experiences and information available to respondents when answering a question. We took steps in the development of the survey, its administration, and the data editing to minimize these nonsampling errors. We conducted three pretests of the survey instrument. The first pretest was with two inspectors at one location by telephone; the second and third pretests were with expert NRC officials, both by telephone. We modified the survey instrument to reflect questions, comments, and concerns received during the pretests. The instrument was also internally reviewed by one of our survey methodologists. In addition, we edited all completed surveys for consistency and contacted NRC inspectors to clarify responses whenever necessary. While our survey responses reflect the opinions of NRC resident inspectors, to ensure the reliability that our survey data was accurate and complete and that spreadsheet calculations were correct, 100 percent of the data entry and all formulas were internally and independently checked and verified. Through discussions with appropriate NRC officials, we determined in the course of developing our survey that although there are 103 plants currently in operation in the United States, some reactors are colocated on a total of 65 sites. Because only one of the two or three inspectors assigned to each site is designated as the lead NRC authority, we sent our survey to that person. Therefore, we sent our survey to a total of 65 senior/lead NRC inspectors. We expected that given their experience, the lead/senior inspector would obtain additional views and input from the other resident inspectors if they felt it was needed. For example, this additional input would be important if the other inspectors performed the requirements of the temporary instruction for inspection of material control and accounting at nuclear power sites, or if the senior resident was newer to and, therefore, less familiar with the practices and history of the material control and accounting program at the site. We received 67 responses to our survey. In one case, we received a response from the senior inspector and an additional resident inspector at the same site. We kept only the senior inspector’s response in our analysis and deleted the other response from that site. In the second instance where we received two responses from one site, special circumstances at that site provided for two senior resident inspectors, but one of those inspectors is primarily responsible for the recovery effort of one of the units at that site. We excluded that inspector’s response from our analysis, retaining only the response from the senior inspector with the more general role. This left us with 65 responses for a 100 percent response rate. The detailed results of our survey of NRC resident inspectors are presented in appendix II. We performed our work primarily in Washington, D.C., between July 2004 and February 2005, in accordance with generally accepted government auditing standards. Overall, we received 65 responses to our survey. Our detailed scope and methodology (Appendix 1) contains particulars regarding the development and administration of the survey. Not all of the respondents answered all questions. This may have been a result of either the respondent’s choice or they may have been instructed to skip a question according to their previous response. Throughout this appendix, we will note the number of respondents answering each question by noting “n=number of respondents to this question”. The Vermont congressional delegation, along with a member from a nearby Massachusetts district, has asked the U. S. Government Accountability Office to review the NRC’s oversight of licensees’ material control and accounting program for spent nuclear fuel at commercial nuclear power plants. As part of our review, we have met with NRC officials in headquarters and at the regional level. We have spent a day touring a nuclear power plant, discussing and reviewing licensee procedures. With this survey, we are gathering information on resident inspectors’ activities and views related to this issue. We are distributing the following survey to all NRC senior resident inspectors. Your contribution to our efforts is gratefully appreciated. The information you provide will assist us in responding to Congressional interest on this important issue. Please complete and return this survey by November 24, 2004 Simply reply to this email by selecting "Reply to Sender (include message)" and then type in your responses by the return date. Although we are sending this to senior resident inspectors, please feel free to include other resident inspectors at your site in developing your answers. If you do include other inspectors, please provide the contact information of all inspectors contributing to the survey in Question 1. If you have any questions about this survey or have problems submitting your response, please contact Melissa A. Roye by phone at (202) 512-6426 or by email at [email protected]. ~~~~~~~~~~~~~~~~~~~BEGIN SURVEY~~~~~~~~~~~~~~~~~~~ 1. In case we would like to clarify any of your responses, please provide the following information for ALL persons involved in submitting information requested in this survey (please copy and paste fields for Respondent 3+, if necessary): Respondent 1 (n=65) Name: Title: Phone number: Site Name/Location: Months at current site: Months as SRI or RI at any site: Months at NRC: Respondent 2 Name: Title: Phone number: Site Name/Location: Months at current site: Months as SRI or RI at any site: Months at NRC: Material Control and Accounting Related Activities: 2. What did you do to execute the requirements of “Spent Fuel Material Control and Accounting at Nuclear Power Plants,” Temporary Instruction (TI) 2515/154? Please mark all that apply. (n=65) Interviews Records review Review of licensee's written procedures Observation of licensee activities Verification of materials in the spent fuel pool using a map Verification of materials in the spent fuel pool using visual aides such as binoculars or underwater cameras Only Phase I of the TI was completed at this site At this site, the TI was conducted by someone else. Name of Inspector(s): 22 provided a name and some also included an explanation. Other? Please explain: 10 provided explanation. 3. Do you routinely inspect or verify the licensee’s material control and accounting program policies, records, or procedures for spent nuclear fuel? (n=65) Yes. Please elaborate below, if you wish. No. Please elaborate below, if you wish. Don’t know (Please go to question 4). Page 2 Elaboration: Overall, 42 respondents provided an elaboration. Of that 42, 23 responded yes and 19 responded no. 4. Do you engage in inspection activities under the Reactor Oversight Process (ROP) that indirectly involve material control and accounting for spent fuel? (n=65) Yes. Please elaborate below, if you wish. No. Please elaborate below, if you wish. Don’t know (Please go to question 5) Elaboration: Overall, 53 respondents provided an elaboration. Of that 53, 49 responded yes and 4 responded no. 5. Do you engage in additional oversight activities (beyond the requirements of the ROP) that aid you in assessing the licensee’s abilities for material control and accounting of spent fuel? (n=65) Yes. Please elaborate below, if you wish. No. Please elaborate below, if you wish. Don’t know (Please go to question 6) Elaboration: Overall, 23 respondents provided an elaboration. Of that 23, 13 responded yes and 10 responded no. 6. Do you think that the NRC should be doing more with regard to the oversight of material control and accounting for spent fuel? (n=65) Yes. Please elaborate below, if you wish, and then go to question 7. No. Please elaborate below, if you wish, and then go to question 8. Don’t know (Please go to question 8) Elaboration: Overall, 38 respondents provided an elaboration. Of that 38, 20 responded yes, 12 responded no, and 6 responded that they did not know. 7. Would you need more training to perform oversight of the licensee’s material control and accounting program? (n=26) Yes. Please elaborate below, if you wish. No. Please elaborate below, if you wish. Don’t know (Please go to question 8) Elaboration: Overall, 13 respondents provided an elaboration. Of that 13, 5 responded yes and 8 responded no. In addition, there were 23 respondents who should have skipped this question based on their previous response but chose to answer it anyway. Of that 23, 8 also provided us with further elaboration; 3 responded yes, 3 responded no, and 2 responded that they did not know. Page 3 8. With regard to the material control and accounting of spent fuel, do you have any best practices or lessons learned to share? For example, the transferring of fuel pellets from broken pins into new pins, the insertion of pins into skeleton assemblies, or any recordkeeping improvements. (n=65) Yes. Please elaborate below, if you wish, and then go to question 9. No. Please elaborate below, if you wish, and then go to question 10. Don’t know (Please go to question 10) Elaboration: Overall, 17 respondents provided an elaboration. Of that 17, 14 responded yes and 3 responded no. 9. Please indicate if these best practices or policies: (n=12; respondents could check all that could apply) Are in place at your current site. Please elaborate below, if you wish. Were learned or practiced elsewhere. Please elaborate below, if you wish. Are just something you believe can improve procedures and the oversight process. Please elaborate, if you wish: 3 respondents provided elaboration. Of those three, all described practices or policies in place at their current site and one respondent stated that it is something they believe can improve procedures and the oversight process. Other. Please explain: One respondent provided an explanation to discuss a best practice or policy. 10. Please share with us any additional comments: (n=16) 16 respondents provided an elaboration. Thank you for your participation. In addition to the individuals named above, Ilene Pollack and Melissa A. Roye made key contributions to this report. Also contributing to this report were John W. Delicath, Doreen Feldman, Judy K. Pagano, Keith A. Rhodes, and Barbara Timmerman. | Spent nuclear fuel--the used fuel periodically removed from reactors in nuclear power plants--is too inefficient to power a nuclear reaction, but is intensely radioactive and continues to generate heat for thousands of years. Potential health and safety implications make the control of spent nuclear fuel of great importance. The discovery, in 2004, that spent fuel rods were missing at the Vermont Yankee plant in Vermont generated public concern and questions about the Nuclear Regulatory Commission's (NRC) regulation and oversight of this material. GAO reviewed (1) plants' performance in controlling and accounting for their spent nuclear fuel, (2) the effectiveness of NRC's regulations and oversight of the plants' performance, and (3) NRC's actions to respond to plants' problems controlling their spent fuel. Nuclear power plants' performance in controlling and accounting for their spent fuel has been uneven. Most recently, three plants--Vermont Yankee and Humboldt Bay (California) in 2004 and Millstone (Connecticut) in 2000--have reported missing spent fuel. Earlier, several other plants also had missing or unaccounted for spent fuel rods or rod fragments. NRC regulations require plants to maintain accurate records of their spent nuclear fuel and to conduct a physical inventory of the material at least once a year. The regulations, however, do not specify how physical inventories are to be done. As a result, plants differ in the regulations' implementation. For example, physical inventories at plants varied from a comprehensive verification of the spent fuel to an office review of the records and paperwork for consistency. Additionally, NRC regulations do not specify how individual fuel rods or segments are to be tracked. As a result, plants employ various methods for storing and accounting for this material. Further, NRC stopped inspecting plants' material control and accounting programs in 1988. According to NRC officials, there was no indication that inspections of these programs were needed until the event at Millstone. NRC is collecting information on plants' spent fuel programs to decide if it needs to revise its regulations and/or oversight. In addition to reviewing specific instances of missing fuel, NRC has had its inspectors collect basic information on all facilities' programs. It has also contracted with the Department of Energy's Oak Ridge National Laboratory in Tennessee to review NRC's material control and accounting programs for nuclear material, including spent fuel. It further plans to request information from plant sites and visit over a dozen of them for more detailed inspection. These more detailed inspections may not be completed until late 2005, over 5 years after the instance at Millstone that initiated NRC's efforts. However, we believe NRC has already collected considerable information indicating problems or weaknesses in plants' material control and accounting programs for spent fuel. |
The broadening of purchase card use from procurement offices to individual government cardholders in 1994 improved the ability of agencies to quickly and easily acquire items needed to support daily operations and reduced the administrative costs associated with such small purchases. Though government purchase cards were originally reserved for use by procurement personnel, the Federal Acquisition Streamlining Act of 1994 allowed authorized government cardholders to make purchases under the micro-purchase threshold without obtaining competitive quotations if the price to be paid was considered reasonable. Further, the act dictated that cardholders distribute their purchases equitably among qualified suppliers. Moreover, according to the Federal Acquisition Regulation (FAR), these cards are the preferred means to complete purchases under the micro-purchase threshold. According to GSA, from fiscal year 2010 to 2015, cardholders spent a range of about $17 billion to $19.5 billion annually in goods and services using purchase cards. (See figure 1) Although purchase cards may be used as a payment mechanism against contracts, for the agencies in our review, over 97 percent of the purchases in fiscal year 2015 were transactions valued below the micro- purchase threshold. (See table 1) The government’s purchase card program—part of the SmartPay program—is managed by GSA, which currently administers the purchase card contracts with three banks: US Bank, Citibank, and JP Morgan Chase. According to GSA’s SmartPay website, streamlining paper-driven acquisition processes of the past with the use of purchase cards saves the government about $1.7 billion annually (approximately $70 per transaction) in administrative costs. Further, when selecting which bank to use for its purchase card program, an agency can negotiate with its bank the terms for purchase card refunds under the purchase card program’s contract. These refunds are based on speed of payment and volume of transactions and may also result in a cost savings for agencies. The GSA’s SmartPay website indicates that the government has received approximately $3 billion in refunds from purchase card spending since the SmartPay program’s inception in 1998. Purchase card data are available from two sources: the bank servicing the agency as well as a system developed by GSA called the SmartPay Data Warehouse, which was designed to assist with purchase card analysis. According to GSA officials, the Data Warehouse can be used to compile aggregate data from banks for each participating agency and for the government as a whole. The data can be sorted by various fields, such as vendor, agency, and transaction date. Additionally, GSA officials stated that they can sort the data based on an agency’s spend for improving internal management and, in the future, may be used to identify opportunities for savings. Although purchase card data can be used to support spend analysis, agency officials told us that these data are primarily used for internal control purposes, notably to mine the data in order to identify card misuse and potential fraud and abuse. In 2004, GAO found that while agencies had begun to take actions to achieve cost savings through purchase card programs, most had not yet taken full advantage of available opportunities to obtain more favorable prices on the items purchased with cards. For example, we found that agencies had only negotiated discount agreements with a few of the vendors frequently used by cardholders; purchase card training programs lacked practical information to help cardholders take advantage of the discounts that had been negotiated; and there was a lack of management focus on leveraging buying power to achieve cost savings on items purchased. As a result, we found that the government was not taking advantage of opportunities which could have saved taxpayers hundreds of millions of dollars. Officials cited inconsistent vendor reporting of detailed transaction data—referred to as level 3 data, which is necessary for identifying specific items for each transaction—as an impediment to analysis of purchase card spending patterns. However, we found that despite lacking specific data on transactions, agencies could take steps to get better prices such as identifying vendors with high volumes of sales. As a result, we made several recommendations to focus management attention on the cost saving opportunities available for purchase card buys, facilitate cardholder access to discounted prices, and develop mechanisms that provide cardholders with better pricing from major vendors for key commodities, such as agency-wide discount agreements. Over the last decade, OMB has taken additional steps to implement strategic sourcing initiatives meant to increase the value of each dollar spent by government. In 2005, it issued a memorandum implementing strategic sourcing practices across the government. In the same year, OMB, Department of Treasury, and the General Services Administration established the Federal Strategic Sourcing Initiative (FSSI) to identify government-wide opportunities to strategically source commonly purchased products and services and to eliminate duplication of efforts across agencies. Further, in a 2009 update to its purchase card guidance for federal agencies, OMB asked that agencies think more strategically about what they were buying with purchase cards. The guidance required that agencies incorporate purchase card spending into analysis that supports strategic sourcing decisions and recommended that agencies review and analyze patterns of purchase card spending for potential cost- saving opportunities. More recently, OMB announced the government’s intent to use a category management approach and GSA issued guidance in May 2015 to provide agencies with consistent standards for its implementation. Category management calls for lead agencies to analyze acquisition approaches for particular groups of goods or services to further reduce duplication of acquisition efforts among agencies and help ensure that agencies receive uniform, competitive pricing. However, this guidance on category management does not address agencies’ review of purchase card transaction patterns. Although the federal government has taken these steps to enhance strategic sourcing of goods and services, GAO has reported multiple times on the shortcomings of implementing such initiatives by federal agencies. For example, in 2012 we found that selected agencies were only leveraging a fraction of their buying power through contracts as a result of strategic sourcing analysis. While leading private sector companies reported strategically managing as much as 90 percent of their spending, we found that agencies responsible for the majority of government procurement spending reported managing less than 5 percent of their spending through strategically sourced contracts. Further, we found that FSSI contracts had low levels of use and that commodities and services purchased the most by the government were not available through FSSI. We made several recommendations to DOD, VA, and OMB to improve department and government-wide strategic sourcing efforts. While DOD has taken steps to evaluate resources devoted to strategic sourcing, it has not yet completed steps to identify and evaluate the best way to strategically source its highest spending categories. VA implemented both of its recommendations by taking steps to evaluate ways to strategically source high spending goods and services and by establishing strategic sourcing goals and metrics. OMB has not yet fully addressed recommendations to provide federal agencies with metrics to measure progress toward strategic sourcing goals nor to require an assessment of whether more top spend products and services should be considered for strategic sourcing. All of the agencies in our review incorporated purchase card data into aggregate spend analysis to support strategic sourcing initiatives as required by OMB; however, many officials pointed to data challenges, such as a lack of specificity, that make it difficult to conduct more detailed analysis. Despite these challenges, four of the six agencies took additional steps to conduct specific analysis of purchase card spending patterns as recommended by OMB guidance. Moreover, two of these four agencies identified opportunities for savings through such analysis, demonstrating that savings can be found. However, while some DOD components analyzed purchase card data, certain components of DOD did not. Further, Energy did not perform agency-wide analysis of purchase card data. Without more focused efforts on this type of analysis, these agencies may be missing opportunities to find cost savings with purchase card buys. The January 2009 OMB Circular A-123, Appendix B, stipulates that to support strategic sourcing initiatives underway at agencies, purchase card data must be incorporated into spend analysis along with contract and delivery order data. All six of the agencies selected for our review incorporated purchase card spend data into their annual or quarterly aggregate spend analysis to support strategic sourcing initiatives. Our prior work defines spend analysis as providing knowledge about how much is being spent for which products and services, who the buyers are, who the suppliers are, and where the opportunities are for leveraged buying and other tactics to save money and improve performance. From this analysis, organizations can evaluate and prioritize commodities to create a list of top products or services to target for strategic sourcing. This list typically includes the products or services on which most of the organization’s spending is focused. Although agencies we reviewed incorporated purchase card data into their aggregate spend analysis, some officials stated that its inclusion had little impact on results due to its relatively small dollar value. The OMB guidance also states that agency purchase card program coordinators should further conduct a more specific analysis of purchase card data, reviewing spending patterns and levels—independent of the aggregate agency spend analysis—to identify opportunities for savings through negotiation of discounts, improvements to the buying process, and increased volume purchases. Officials at most of the selected agencies, however, raised concerns about the costs and benefits of using resources to analyze purchase card spending because it represents a small part of overall spending. The six agencies’ average purchase card spend ranged from about 2 percent to 17 percent of total spend for fiscal year 2015 (see table 2). Furthermore, officials also stated that the value of extensive analysis is questionable, as individual purchase card transactions are low-cost and, therefore, considered low risk. For example, Interior officials told us that, in general, the cost of doing analysis on such a small portion of overall spending tends to outweigh benefits if it does not lead to a cost-saving contract. DOD officials told us they do not focus on purchase card spend, using resources to focus on higher dollar value spending instead. Moreover, although purchase card data are readily available, agency officials cited several challenges as obstacles to analyzing the data separately. Similar to what we found in 2004, officials at all six selected agencies stated that purchase card data are generally not sufficient to support the detailed spend analysis necessary to target specific commodities or services for strategic sourcing opportunities. Bank databases provide agency officials with information on all purchase card transactions, including vendor name, merchant category code (general description of what a vendor sells), transaction date, and transaction dollar amount, but other transaction level details are not consistently tracked or provided. Transaction level data—referred to as level 3 data— would provide insight into the specific items purchased, including quantity and unit prices. However, only vendors can provide level 3 data to the banks and we found not all vendors submit this information. Without it, agencies rely on merchant category codes, which provide only a general description of what vendors sell, and the total amount spent with each vendor. Our analysis of the 18 months of bank data we had requested confirmed this data challenge and also highlighted that the level 3 data fields are not standardized, which further complicates data analysis. For example, approximately 36 percent of records did not contain information in data fields meant to provide a description of the item being purchased. Further, the information that was included varied significantly. Although some transaction records contained information on the make and model of items, other transactions had general descriptions of what was purchased. Other purchase card transaction records contained only a series of letters and numbers without a description of what was purchased. Additionally, purchase card data also may associate multiple merchant category codes with one type of vendor, impeding spend analysis and requiring extensive, time-consuming data cleanup to maximize usefulness. For example, office supply vendors can be classified under merchant category codes for Office/Photo Equipment, Stationary/Office Supplies, Stationery Stores, and Combination Catalog and Retail. DHS officials reported that in fiscal year 2014 transactions with Staples and Office Depot—both vendors under the Office Supply FSSI—were largely recorded under different merchant category codes. To perform an analysis of office supplies, officials would have had to use a combination of merchant category codes and vendor names for both vendors. However, they would not have had enough information to know which vendors provide what commodities or services. Another challenge with the purchase card data is that one vendor may be listed under multiple names, making it time consuming to develop a list of top vendors. For example, as part of its agency-wide strategic sourcing efforts, DHS regularly standardizes different names for the same vendor reported in purchase card data to improve the accuracy of vendor information for analysis. DHS officials noted that there may be many variations of vendor name, for example, for vendors with franchises or multiple locations, complicating analysis of bank data. Our analysis of 18 months’ worth of purchase card data confirmed this phenomenon; for example, one major general merchandise store was identified with more than 5,000 different variations of its name. Although time consuming, standardizing vendor names helps ensure that vendor information is more appropriately counted when developing a list of top-spend vendors to support analysis for potential savings. Despite concerns with the data, four agencies in our review—DHS, EPA, VA, and Interior—took additional steps to analyze purchase card spending patterns as recommended by OMB guidance. Because the data do not provide consistent insights into what agencies are buying, these agencies identified the vendors with which they spent the most. Interior reviewed quarterly reports provided by its purchase card bank to identify the top high-spend vendors. To improve the accuracy of vendor information for analysis, DHS took the extra step to normalize the differing names reported in bank data for the same vendor. VA has performed product spend analysis on an as-needed basis to identify opportunities to leverage spend. The last of these analyses was conducted in May 2015 resulting in consideration of a potential department-wide contract for specific medical equipment which would provide for discounts on items that could be procured with purchase cards. In January 2016, VA began a pilot program where a small core team will routinely conduct spend analysis to identify opportunities to aggregate requirements and leverage purchase card spending. Further, VA purchase card officials have access to reports from the bank that may assist with analysis of purchase card spend patterns and plan to collaborate with the department’s procurement office to establish regular reviews of these data in the future. Some positive outcomes resulted from individual agencies’ purchase card analyses. Specifically, two agencies—EPA and Interior—used their analysis of purchase card data to identify potential commodities to be strategically sourced. For example, EPA, spurred by dissatisfaction with previous contracts, identified the vendors its cardholders most frequently used to obtain lab supplies. Officials stated that based on this analysis of its data, the agency established three new blanket purchase agreements (BPA) for the lab supplies. EPA reported approximately $50,000 savings to date on lab supplies, $43,000 of which it attributed to purchase card procurements. In another instance, Interior used bank data to identify that wireless service providers were among the top vendors with whom the agency used purchase cards. However, officials are still evaluating possible solutions to determine the best combination of wireless services and equipment to be provided through contract. Two agencies in our review did not perform agency-wide analysis of purchase card data—DOD, which accounts for just over one quarter of all government purchase card spending—and Energy. Though DOD purchase card program guidance does not require analysis of spending patterns, DOD officials told us that they expect such analysis to be performed at the component level rather than across the entire department. The department provided examples of steps taken by individual DOD components to perform analysis of purchase card spend: The Army reported that it coordinates with US Bank to perform an annual review of spending to identify potential strategic sourcing opportunities and to review Army usage of FSSI and mandatory vendors—but did not provide us with examples of results of this analysis. Washington Headquarters Services reported that management attention to recurring purchases within the organization resulted in the award of 16 BPAs for supplies and services including ones for locksmith supplies, maintenance services, and interpreter services. Defense Logistics Agency (DLA) conducts analysis of government purchase card data yearly to identify opportunities to leverage buying power. Recently, DLA reported the award of a contract based on this analysis that allows for centralized ordering of nails and staples— two items previously purchased separately by component sites. However, other components of DOD, such as the Air Force and Navy, did not report any purchase card spend analysis activity. Until DOD, specifically the Office of Defense Procurement and Acquisition Policy, issues agency-wide guidance or direction on analysis of purchase card spending, components may be inconsistently identifying opportunities for cost savings. Similarly, Energy did not conduct agency-wide analysis of purchase card data citing resource and data constraints as an impediment. Energy officials stated that they lack tools necessary to develop accurate analysis of vendor spending. However, our own analysis of VA and DOD purchase card data shows it is possible to analyze vendor names to more accurately identify high-spend vendors. Through statistical analysis that compared vendor names, similar names were identified, evaluated, and aggregated as appropriate. This allowed us to have a more accurate count of transactions for high-spend vendors from the Army and VA offices from which we selected case study cardholders. Like DOD, Energy may be missing opportunities to obtain savings without performing some level of analysis of purchase card spending. We examined local efforts at two of the six agencies in our review—VA and DOD—and found local initiatives that may benefit the whole agency. None of the local DOD purchase card program officials we spoke with provided examples where they reviewed purchase card spending patterns to identify areas for cost savings. However, based on local knowledge of purchase card spend patterns, cardholders and other officials we interviewed from VA regional offices identified commodities procured with purchase cards that could be bought through BPAs instead, helping ensure pre-negotiated discounted prices and reliable service from vendors. Specifically, In December 2014, a regional VA office established two BPAs for modular wheelchair ramps and installation services—once procured through individual purchase card transactions—to achieve better prices and to ensure more timely delivery. According to officials, these BPAs reduced delivery and installation times from 4-6 weeks to approximately 4 days and saved $1.1 million. Similar arrangements for use across VA are expected to be established in the third quarter of fiscal year 2016. This same office reported that they recently awarded orthotics contracts to 17 vendors for various items, including diabetic shoes and braces that had been procured with purchase cards. The contracts are intended to access the best quality of care for veterans, but the office also achieved better prices, getting discounts from 1 to 22 percent on items purchased through the contracts. Another VA regional office reported that it transitioned bed rentals from individual card buys to a national contract to avoid instances of cardholders’ purchase authority being exceeded when patients required use of beds for longer than anticipated. The contracts allowed for reduced workload and easier placement of orders according to officials, even though the level of usage was not enough to achieve significant cost savings. Further, individual VA cardholders we spoke with leveraged knowledge of existing local contracts to receive better prices or provided information to contracting staff of possible opportunities to obtain savings. For example, one VA cardholder noticed that a contract for protective boots had been allowed to lapse and that VA was using purchase cards to buy the boots at a higher price than the previously negotiated contract rate. Her office informed contracting officials, who are planning to negotiate lower prices on a new contract. This cardholder also noticed that when she moved from one VA office to another, the prices her new office paid for protective eyewear was much more expensive than what her old office paid. According to this cardholder, she was able to coordinate the use of a contract from her previous office at her new one thereby reducing costs for eyewear by approximately 77 percent. Another cardholder noticed her office was making recurring purchases for data communication services. Her office reviewed purchase card orders and worked with the contracting office to place these services on a contract. Agency officials expect this contract to reduce costs and to be available to multiple VA hospitals. These efforts further demonstrate that with more attention to patterns of purchase card buys and increased information sharing, the government could better leverage its buying power when using purchase cards. As seen in the example with the wheelchair ramps, some of these opportunities for savings may be appropriate to expand to the entire agency, which may increase potential savings significantly. Cardholders we spoke with were generally aware of existing contracts that they could use to procure items. Further, we also found examples where agency offices used various mechanisms to share information with cardholders and to remind cardholders of negotiated contracts that could provide a cost savings. Some of the training or practices we identified may be useful for other offices to use or emulate. For example, One Army program manager includes information on government contracts cardholders should use in a quarterly newsletter he sends out. Another Army program manager provides training on purchase card operating procedures that directs cardholders to use government contracts. Additionally, one cardholder told us that she incorporated these topics into her own training which she provides to local personnel who place purchase card order requests with her. One program manager we spoke with from VA forwards emails from agency-level contracting offices concerning the mandatory use of certain contracts or changes to existing government contracts to cardholders under his responsibility. For example, one email directed cardholders to VA’s list of national mandatory government contracts and noted that the contracting office updates the list monthly. Another VA program manager provides supplemental purchase card training to cardholders which discusses mandatory use of certain strategic sourcing contracts and other agency-wide contracts and notes that open-market purchases are a last resort for cardholders. Some cardholders we spoke with told us that other factors may result in using a vendor other than those under an FSSI contract or other contract vehicle. For example, speed of delivery is at times a consideration when selecting a vendor, especially for urgent requirements. Further, some Army cardholders we spoke with noted that they frequently need to purchase equipment that meets specific technical requirements for conducting experiments, and thus need to use vendors that can meet these specific criteria. None of the six agencies in our review have purchase card guidance that encourages local officials to examine purchase card spend patterns to obtain savings and to share information on such efforts. The existing guidance focuses largely on preventing fraud or misuse of purchase cards, rather than leveraging buying power to achieve savings. However, the examples we found demonstrate that sharing information on initiatives at the local level broadly across the agency may help to improve knowledge of available cost saving contracts—such as the example with the cardholder that knew of the contract for protective eyewear—and finding new opportunities for cost savings—such as the instance where VA is expanding use of a contract for wheelchair ramp services. Also, sharing information on local training efforts may be a way for other offices to use pre-existing resources to train their own cardholders. Federal internal control standards state that management should internally communicate the necessary information to achieve the entity’s objectives. Effective information and communication throughout an organization are vital for an entity to achieve its objectives, which can be accomplished through written guidance. Although we did not speak with local offices in the other agencies in our review, our experience in speaking with officials at VA regional offices indicates that other agencies could benefit from identifying and sharing information on local initiatives that leverage spend. Without communication of any local efforts taking place, agencies may be missing opportunities to leverage the buying power when using purchase cards. OMB’s policy clearly indicates the importance of conducting analysis on purchase card data to identify cost savings. Paying attention to purchase card spending has yielded positive results, both at an agency-wide level—where EPA and Interior’s actions resulted in savings or potential better terms for government buyers—and at a local level where VA cardholders noticed patterns and focused efforts to obtain savings. However, agencies remain reluctant to invest substantial time and resources into leveraging the government’s purchasing power when it comes to purchase cards. Some of the reasons are valid—imperfect and challenging data, larger procurements that require attention, and lack of resources. Yet, when totaled across agencies, purchase card spend represents billions of taxpayer dollars that the government has a responsibility to spend wisely. Agencies that are not performing even a modest amount of purchase card spend analysis, specifically certain components within DOD and Energy, may be missing opportunities to identify areas for savings with purchase cards. Although some DOD components have taken steps to analyze purchase card spend data for cost-saving opportunities, without clear guidance from DOD for all components, resources may not be applied to seek out opportunities. Aside from spend analysis, an agency has shown that paying attention to purchase card spending at the local level can also result in cost savings. Further, by having all agencies encourage local officials to examine purchase card spend patterns to identify opportunities to obtain savings and to share information on such efforts, agencies may leverage buying power more effectively. To help identify opportunities for cost savings, we recommend that the Secretary of the Department of Defense direct the Office of Defense Procurement and Acquisition Policy to issue guidance or instruction to help ensure that components make reasonable efforts to analyze component-level purchase card spend patterns to identify areas for possible savings. To help identify opportunities for cost savings, we recommend that the Secretary of the Department of Energy take reasonable steps to regularly analyze agency-wide purchase card spend patterns to identify areas such as high-use vendors or frequently purchased commodities for further analysis. To ensure that good practices are shared within agencies, we recommend that the Secretaries of Defense, Veterans Affairs, the Interior, Homeland Security, and Energy, and the Environmental Protection Agency develop guidance that encourages local officials to examine purchase card spend patterns to identify opportunities to obtain savings and to share information on such efforts. Where applicable, we further recommend that these agencies determine the feasibility for broader application of these efforts across the agency or organization. We provided a draft of our report to the Secretaries of Defense, Veterans Affairs, the Interior, Homeland Security, and Energy as well as the Administrators of the Environmental Protection Agency and General Services Administration, and the Director of the Office of Management and Budget. DOD, VA, DHS, and Energy concurred with our recommendations and Interior partially concurred. Agencies’ comments are summarized below and written comments from DOD, VA, Interior, Energy, and DHS are reproduced in appendices II-VI. OMB and GSA did not to provide comments on our report. EPA did not respond to our request for comments on the draft. We also received technical comments from VA, which we incorporated as appropriate. In its written comments, DOD concurred with both of our recommendations and stated that the Office of Defense Procurement and Acquisition Policy will issue guidance to help ensure that DOD components and local officials take steps to analyze purchase card spending for potential cost-saving opportunities. Similarly, Energy concurred with both recommendations in its written response. It will use a new spend analytics database to analyze agency-wide purchase card spending patterns and update existing acquisition guidance, purchase card policy, and operating procedures to encourage local examination of spending patterns and share information on such efforts. Both agencies estimate implementation of these recommendations by the fourth quarter of fiscal year 2016. DHS and VA agreed with our recommendation to develop guidance that encourages local officials to examine purchase card spending patterns for opportunities to obtain savings and to share results of these analyses. Staff from the Office of the Chief Finance Officer will update the DHS purchase card manual to encourage local officials to perform quarterly analysis of purchase card data in order to identify strategic sourcing opportunities. In its written comments, VA stated that the Office of Management is working with the Office of Acquisition, Logistics, and Construction to develop guidance and implement strategic sourcing for the department’s overall spending to include purchase cards. The Office of Management will also update the VA’s purchase card policy to encourage agency officials to analyze purchase card spending patterns for cost-saving opportunities and share the results of these analyses. Interior partially concurred with our recommendation to encourage examination of purchase card spending patterns by local officials. The agency stated in its written comments that it will encourage its bureaus to use data analysis tools to make purchase card spend data available to program managers and buyers. It will promote sharing of data across regional boundaries to help identify potential opportunities to negotiate savings for commonly used items. However, the agency does not see a need for additional guidance to assist the bureaus in implementing these efforts. While encouraging additional, bureau-level analysis of purchase card data is a positive step toward fully leveraging Interior’s buying power, we continue to believe that formalizing these actions through guidance will help ensure uniform implementation across its offices. 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 appropriate congressional committees, the Secretaries of Defense, Veterans Affairs, Interior, Homeland Security, and Energy as well as the Administrators of the Environmental Protection Agency and General Services Administration, and the Director of the Office of Management and Budget, 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) 512-4841 or [email protected]. 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 VII. The Office of Management and Budget’s Circular No. A-123 Appendix B requires agencies to incorporate purchase card spending data into overall spend analysis to support strategic sourcing initiatives and recommends that agencies analyze purchase card spending patterns and levels to identify opportunities for negotiation of discounts and increased savings based on volume. In response to a congressional committee request, we assessed the extent to which selected (1) agencies analyze purchase card data to identify opportunities to leverage buying power agency-wide and (2) local purchase cardholders take advantage of opportunities to achieve cost savings when using purchase cards. To address these objectives, we reviewed laws and regulations in place relating to the use and management of purchase card programs and strategic sourcing initiatives. We met with General Service Administration (GSA) officials who manage the SmartPay purchase card program as well as officials from the Office of Management and Budget responsible for issuing government-wide guidance on managing purchase card programs to gain insight into what purchase card transaction data are available to individual agencies and the requirements placed upon these agencies to analyze purchase card spending. We also collected and analyzed government-wide purchase card transaction data from the three SmartPay banks for fiscal year 2014 and the first two quarters of fiscal year 2015 to understand what data are available to agencies for performing spend analysis and to identify potential challenges presented by the data supplied by vendors through the banks. We analyzed data to determine top vendors used by certain agency offices and understand the extent to which descriptive information on procured goods and services is included in purchase card transaction data supplied by the banks. To determine the extent to which individual agencies perform analysis of purchase card data, we reviewed policies and conducted interviews with finance and acquisition officials from six, case study agencies that represent three differing levels of purchase card spending. Based on analysis of fiscal year 2014 purchase card statistical data available from the GSA website describing total spending and transactions by each agency participating in the SmartPay program, we selected: 1. The Department of Defense (DOD) and Department of Veterans Affairs (VA), the two largest users of purchase cards, both making purchases valued well over $500 million, 2. The Departments of Homeland Security (DHS) and Interior (DOI), each having spent between $100 and $500 million, and 3. The Environmental Protection Agency (EPA) and Department of Energy (Energy), each having spent less than $100 million. Selection of DHS and EPA was also informed by the findings of GAO and inspector general reports. Specifically, previous GAO reports found that DHS has a well-resourced strategic sourcing program and a recent EPA Inspector General report stated that the agency had begun to conduct analysis of purchase card spend to identify commodities to be sourced strategically. We used this information as an indicator that these agencies may have performed analysis of purchase card spending patterns to identify new strategic sourcing opportunities as recommended by OMB guidance. We reviewed each agency’s own policies describing the responsibilities of cardholders and program management to understand the extent to which they address issues of pricing and vendor selection. We conducted interviews with agency purchase card program and strategic sourcing officials to understand how data on purchase card transactions are used to inform overall spend analysis and to identify specific services or commodities where buying power could be better leveraged through strategic sourcing. We asked each of the six agencies to provide us data describing the purchase card transactions and spending for fiscal year 2015 which we used to provide context. Findings based on information collected from these six agencies cannot be generalized to all agencies. To examine the extent to which cardholders seek opportunities to achieve cost savings when making purchases, we collected purchase card documentation and conducted interviews with 20 purchase cardholders from DOD and VA. We selected cardholders from these two agencies because DOD and VA have the highest amount of purchase card spending, representing nearly 78 percent of total government purchase card spending in fiscal year 2014. To select the cardholders we analyzed the transaction data for these two agencies collected from US Bank, one of the three SmartPay banks, to identify top vendors used by DOD and VA and compared this list to vendors associated with the Federal Strategic Sourcing Initiative (FSSI). We then analyzed bank data further to determine which two offices within each agency had the highest levels of purchase card spending with the FSSI vendor and selected cardholders from each office to interview. Specifically, we selected cardholders from Army Materiel Command, the United States Army Corps of Engineers, and two regional Veteran’s Health Administration offices. Each selected cardholder made purchases with this FSSI vendor as well as from other vendors. Bank data used to select cardholders were examined for duplicate records and invalid information and were found to be sufficiently reliable for the purposes of this work. We interviewed cardholders and collected transaction documentation to understand the extent to which these individuals consider price options prior to making a purchase and are cognizant of contracts or other vehicles meant to provide a savings to government buyers. While the results based on interviews with the selected purchase card holders cannot be projected to all cardholders, their experience provides insight into how cardholders consider price and strategic sourcing options when making purchase card buys. We conducted this performance audit from April 2015 to May 2016 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. In addition to the contact named above, Tatiana Winger (Assistant Director), Pete Anderson, Ji Byun, Virginia Chanley, Lorraine Ettaro, Robert Heilman, Mitch Karpman, Ralph Roffo, Sylvia Schatz, and Thomas Twambly made key contributions to this report. | The purchase card program was designed to streamline relatively small dollar value acquisitions of goods and services. In fiscal year 2015, the government spent approximately $19 billion using purchase cards. GAO was asked to review whether agencies are effectively leveraging their buying power when using purchase cards. This report assesses the extent to which selected (1) agencies analyze purchase card data to identify opportunities to leverage buying power agency-wide and (2) purchase cardholders seek opportunities to achieve cost savings when using purchase cards. GAO analyzed data from the three banks that work with the six selected agencies—selected in part on varying levels of purchase card spend volume—to manage their purchase card programs. GAO evaluated policies, reviewed strategic sourcing efforts related to purchase cards, and interviewed officials. GAO also interviewed officials from the General Services Administration who manage the government's purchase card contracts, and interviewed selected cardholders at the two agencies with the highest purchase card spend. The agencies in GAO's review—the Departments of Defense (DOD), Veterans Affairs (VA), the Interior (Interior), Homeland Security, and Energy (Energy), and the Environmental Protection Agency (EPA)—have made varied use of purchase card data, and additional opportunities exist to negotiate discounts and leverage buying power. As the chart below shows, spending with government purchase cards represents billions of dollars each year. The Office of Management and Budget (OMB) guidance that prescribes policies for agencies on how to manage their purchase card programs (1) requires agency officials to incorporate purchase card data into strategic sourcing analysis and (2) recommends that agencies review and analyze purchase card spending patterns for opportunities to negotiate discounts, improve buying processes, and leverage buying power. All the agencies in GAO's review incorporated purchase card data into overall spend analysis to support strategic sourcing efforts as required by OMB, but officials noted challenges that impede review of purchase card data. For example, purchase card data do not always include enough specificity to identify particular commodities to target for savings. Despite these challenges, four of the six agencies GAO reviewed took additional steps to independently analyze purchase card spending patterns as recommended by OMB. Two agencies—EPA and Interior—identified opportunities for savings through such analysis, demonstrating that savings can be found. However, Energy and certain DOD components, such as the Air Force and Navy, did not perform analysis of purchase card spending. Without more focused efforts, these agencies may be missing opportunities to find cost savings. GAO also found instances where regional VA offices were successful in identifying opportunities for local or agency-wide savings on items procured with purchase cards. For example, one office recognized an opportunity for savings when purchasing wheelchair ramps for disabled veterans, resulting in savings of $1.1 million and faster delivery. Federal internal controls state that management should communicate the necessary information to achieve objectives. Given the examples GAO found, developing guidance and sharing information may help agencies identify opportunities to leverage buying power with purchase cards. GAO recommends that Energy analyze purchase card data and DOD ensure its components do the same. GAO also recommends that each agency develop guidance to encourage local officials to examine purchase card spend patterns and share this information. Four agencies concurred, Interior partially concurred, and EPA did not comment. |
DOD’s health care system, costing over $15 billion annually, has the dual mission of providing medical care to 1.6 million military personnel during war or other military operations and offering health care to 6.6 million military dependents and retirees. Most care is provided in about 600 military medical facilities worldwide, including medical centers, community hospitals, and clinics. The system employs about 100,000 active duty military personnel. Military medical personnel include about 12,275 physicians, of whom about 3,000 are in GME programs in military facilities. The services view GME as the primary pipeline for developing and maintaining the required mix of medical provider skills to meet wartime and peacetime care needs. They also view GME as important to successful physician recruitment and retention. GME includes internships, residencies, and fellowships enabling medical school graduates to become specialists in such areas as internal medicine, radiology, and general surgery. Some of the military personnel GME training is done in civilian hospitals. The cost of GME is unclear. In May 1997, the DOD Inspector General reported that GME costs exceed $125 million annually, with per-student costs ranging from about $20,000 to $100,000, but reported also that military facilities did not accurately account for such costs. DOD’s Office of Health Affairs is responsible for developing overall GME policy guidance and promoting GME program coordination and integration among the services. The services are responsible for ensuring that GME goals are met and for individual GME programs. Civilian boards review DOD’s GME programs to ensure that they meet such medical standards as minimum numbers of trainees per program and can thus be accredited. GME is taught at the services’ facilities throughout the United States, as shown in figure 1. Several DOD policies directly affect the services’ GME program size, locations, and specialty types. In 1996, for example, DOD issued a requirement that medical force levels including GME trainee numbers be linked to each service’s wartime and operational support requirements.This was a major departure from when each service did as much GME training as it had capacity for or when it trained to the prior year’s level. DOD also defined GME trainees as nondeployable unless a full mobilization state has been reached. Deploying trainees would disrupt the specialty physician pipeline and would likely result in lost GME program accreditation. Thus, as defined, about 25 percent of active duty physicians are not deployable. A 1994 DOD strategic plan set forth the following added GME rightsizing principles: Base realignment and closure (BRAC) 1995 would determine whether further sites conducting GME training will close. GME programs having no new trainees for 2 years are to be phased out. Duplicate Washington, D.C., and San Antonio, Texas, GME programs should be integrated to the extent possible. The number of GME trainees in DOD medical facilities should not exceed their aggregate fiscal year 1994 proportion of all active-duty physicians. In response to the 1994 plan, BRAC 1995 identified two hospitals for closure that had GME programs, thus eliminating 177 GME positions. But BRAC legislative authority has expired, and any such future authority is uncertain. Also, ending programs lacking new trainees has resulted in few position reductions, according to Health Affairs officials. And the Washington, D.C., and San Antonio GME program integrations have also produced few trainee reductions, while no other GME locations appear to be susceptible to such integration. Maintaining a maximum ratio of GME trainees to active duty physicians is referred to as DOD’s “25 percent policy.” The aim is a proper mix of experienced specialists, supplemented by the flow of newly trained specialists needed to maintain that mix. The services’ actual GME percentages vary slightly, but in total they equal about 25 percent of active duty physicians. In the past, the GME ratio was met through BRAC actions and by reducing GME without closing programs, but DOD and service officials now agree that GME programs have been cut to levels below which accreditation would be lost. Thus, rather than basing GME size on training capacity, the services are shifting toward basing their reductions of GME on wartime requirements. Beyond trimming programs, moreover, the services are now seeking to close GME programs in specific locations. The Navy Surgeon General’s GME closure attempts at the Portsmouth, Virginia, and Bremerton, Washington, medical facilities would have made far larger trainee reductions than any such prior Navy efforts had made. But the closure decisions were withdrawn when those affected strongly objected. Clearly at issue was (1) the guidance that the Navy had followed in making the closure decisions, (2) whether DOD had properly deliberated and agreed upon the decisions, and (3) whether those who were affected both within and outside the Navy were aware of the bases for the decisions and whether they had been consulted when the decisions were being made. DOD’s lack of a policy framework for formulating and implementing such decisions will likely spawn continued resistance and thwart the Navy’s and other services’ attempts to reduce GME positions when they are no longer needed to meet wartime needs. The Navy’s GME closure efforts began in November 1996. The Navy Surgeon General concluded that the then-current military force downsizing and DOD policy necessitated reducing GME training—such that GME training would be limited to projected wartime requirements. On November 5, 1996, the Navy Surgeon General directed his advisers, the Navy Medical Education Policy Council (MEPC), to recommend appropriate GME training reductions, and this effort resulted in targeted reductions of 162 positions, or 16 percent. In February 1997, the MEPC recommended making most of the GME reductions by closing the Navy’s Bethesda Medical Center’s programs while preserving GME at the Navy’s other major centers at San Diego and Portsmouth. Lacking specific guidance on how to select closure sites, the MEPC primarily focused on meeting the Navy sizing model’s needed medical specialist estimates and complying with the Surgeon General’s past statements about the importance of having GME where the active duty personnel are concentrated—which today is in San Diego and Portsmouth. Records indicate that MEPC considered such other factors as civilian GME accreditation standards and the population, particularly active duty, to be served but did not comparatively analyze how well the areas’ available patient mix would support GME—believing that Bethesda and Portsmouth were more than sufficient on both scores. While the MEPC weighed the potentially adverse effects of closing Bethesda’s GME programs on the GME integration efforts, it concluded that preserving GME at Portsmouth and San Diego, where active duty personnel are more concentrated, was still preferable. Otherwise, the MEPC viewed essentially all current GME programs to be of equal merit. Notwithstanding the MEPC’s recommendations for closing GME programs at Bethesda, the Navy Surgeon General decided to close programs at Portsmouth. The Surgeon General informed the MEPC that his decision resulted from an agreement made the previous week among Health Affairs and the surgeons general that the national capital area, including the Bethesda center, was to be one of four areas where the services would begin concentrating GME. Other such areas would be San Antonio, San Diego, and Madigan Army Medical Center near Tacoma, Washington. In further justifying his decision, the Surgeon General later announced that integrated national capital area GME programs would be maintained. The Surgeon General told us that while the MEPC had acted in the Navy’s interests, broader DOD interests were also at stake. Moreover, about 5 months after announcing the Portsmouth GME closure decision, the Navy Surgeon General’s office completed a study of health care demographics and workload covering the Bethesda, San Diego, and Portsmouth areas, where it has major health care concentrations. That study concluded that, on the basis of population, workload, and other factors, GME should be preserved at Bethesda and San Diego rather than Portsmouth. Along with his Portsmouth GME closure decision, the Surgeon General announced plans to close the Bremerton, Washington, naval hospital’s GME family practice program. But the MEPC had specifically recommended against family practice program closures, concluding that such residencies were needed services. The Surgeon General, however, had opted for closure based on the Bremerton program’s proximity to the Madigan Army Medical Center’s GME family practice—a key factor that the MEPC did not consider. Surprised by the Portsmouth decision, medical center officials and their supporters, including a local active duty forces commander and congressional members, disagreed with the Navy’s basis for the Portsmouth GME closure decision, arguing that GME trainee losses would reduce services to active duty personnel and their dependents and other beneficiaries and would harm readiness. The Surgeon General’s office responded that it would monitor the effect on Portsmouth’s workload and would add resources if needed. Portsmouth Medical Center officials also argued that their center was as rich a GME environment as any of the four locations apparently selected for GME concentration. Taking particular issue with Navy study findings supporting Bethesda, Portsmouth officials told us that they have comparable or better facilities, workload, patient mix, and other GME support advantages. MEPC officials told us that while both locations have more than enough to support GME, Bethesda has the greater workload for supporting GME. And while the Surgeon General agreed that Portsmouth is an attractive GME environment, he told us that Bethesda is preferable because of greater available population and patient mix and the overriding need to continue the national capital area GME program integration efforts. Regarding the Surgeon General’s reliance on the apparent agreement for a four-area GME concentration, Health Affairs officials told us that such an agreement was not made formal or otherwise published. Rather, these officials said the policy aim now is for the services to size their GME programs by requirements-driven analyses rather than by dictating some fixed number of GME centers. Nonetheless, they said that in today’s environment having perhaps three to five GME teaching centers with populations and other characteristics best supporting GME would be a worthwhile, overall program outcome. Local Portsmouth officials were not included in or adequately informed about the Navy Surgeon General’s GME closure decision, and thus they were surprised by it and strongly resisted it. The local Navy command authorities, for example, learned of the decision upon its being made public, which, as Health Affairs officials told us, increased the difficulty of overcoming their objections. While the Surgeon General’s office later offered clarifications and reassurances about the decision, the initial impressions were not overcome. Paralleling this outcome was the Navy’s announcement of the Bremerton family practice GME closure. Along with local resistance came local publicity and misunderstanding that the family practice clinic would be closed. Health Affairs officials told us that while the facilities generally know that GME must be downsized, those affected, regardless of the service or medical center targeted, will object. The officials also agreed that the communication of such GME decisions has been inadequate but must be delivered convincingly to those within the services who are affected, including line commands, as well as to beneficiary groups and affected congressional members, since such decisions affect them just as BRAC decisions do. In April 1997, while still trying to reassure all concerned, the Navy suspended its Portsmouth GME closure decision pending the outcome of a then-in-progress DOD-wide quadrennial defense review and further Navy analysis. The Navy expected the quadrennial review’s results to add GME reduction pressure but, as DOD reported in May 1997, it did not. And the Navy’s further analysis, completed in July 1997, supported the Portsmouth closure. But the 1998 National Defense Authorization Act prohibited the Navy from making any GME changes until we complete our review. As with the general response at Portsmouth, those affected locally objected to the decision to close Bremerton’s family practice GME program. They argued that the Navy significantly lacked such specialists and that Bremerton’s health care would be markedly reduced with the loss of GME trainees. Initially offering reassurances about maintaining Bremerton’s health care levels, the Surgeon General eventually deferred the decision—which occurred at about the same time as he deferred the Portsmouth GME decision. However, the Surgeon General still considered the reasons for closing Bremerton’s family practice GME to be valid. While the Army’s GME sizing efforts—and the Air Force’s for that matter—are independent of the Navy’s, the services are subject to the same general policies and downsizing pressures. A few months after the Navy’s closure attempts, the Army Surgeon General acted on an internal recommendation to close all remaining GME programs at the Army’s William Beaumont Medical Center in El Paso. A representative from the Surgeon General’s office told us that the apparent proposal to concentrate GME in four geographic locations was not a factor in choosing William Beaumont. The official told us that essentially the Army projected a need to eliminate about 50 GME trainee positions, and William Beaumont’s remaining 64 positions met that requirement. Like the Navy’s efforts, the Army’s closure attempt was met with surprise and resistance by medical center, line command, and congressional representatives, who took issue with the decision’s basis. The Army decided not to proceed with the closures, but like the Navy it still faces the need to close programs to achieve GME reductions. Upon learning that the William Beaumont closure decision was based almost entirely on the need to decrease GME trainee numbers to an extent that the Beaumont numbers would meet, medical center officials argued that the basis was arbitrary and unfair and that they had already scaled back their GME programs. Medical center officials and their local supporters argued that the care level for active duty personnel and their dependents and other beneficiaries in El Paso’s medically underserved community would be devastated and that most El Paso physicians trained in certain specialties are at William Beaumont. The officials also argued that when a military hospital loses its GME training, either the service relocates its best teaching specialists or civilian markets attract them away. An Army Surgeon General’s office representative told us that while the plan was to redistribute William Beaumont teaching faculty to other locations, the center’s full patient care capability was to be maintained. Like the Navy, moreover, the Army had not involved those most directly affected by their closure deliberations in the initial decision process. And after William Beaumont officials and a local congressional member appealed for the decision’s reconsideration, the Army conducted further analysis of such factors as patient demographics, workload, and quality indicators among the Army’s teaching centers and GME programs but then suspended GME reduction decisions for the coming training year. The Air Force has not recently attempted major GME program closures. But it has been gradually reducing GME trainee numbers in ongoing programs, and soon it too will need to close programs to comply with wartime sizing requirements. The Air Force is subject to the same general closure policies, and we believe that its future attempts to formulate, communicate, and sustain major GME closure decisions will be as controversial as the Navy’s and Army’s recent experiences. Air Force officials told us that they are uncertain how such future reduction processes will work. Air Force officials told us that if future GME closures were driven by the four GME geographic centers concept, the Air Force would stand to lose one-third of its programs—including all programs in certain medical specialties. These officials also told us that they were unaware of any formal policy on the four GME center approach. The Navy’s and Army’s recent attempts to reduce their GME programs were resisted by those who were affected, and they were otherwise unsuccessful because DOD and the services lack accepted criteria on such matters as what factors to weigh in deciding which programs to close, including who should participate when and how in the decisions. In the absence of such criteria, DOD, the services, and we cannot appropriately judge the merits of closing one GME program rather than another. Such criteria would also need to account for other DOD initiatives’ possible effects on GME; developing a framework for the criteria might be facilitated by DOD’s review of lessons learned with private sector GME programs. The services’ GME decisions can be affected by other DOD initiatives that have to be taken into account for the GME reduction process to work effectively. For example, DOD has two studies that could affect GME’s size and location. One is an ongoing, long overdue study of the medical personnel required to meet wartime requirements, commonly referred to as the 733 Update, originally scheduled for completion by the end of March 1996. The other is the Defense Reform Initiative, announced in November 1997, that recommended reorganizing the DOD health care program. Related actions are expected to strengthen program oversight and thus will likely affect the way GME decisions are guided and made. Another influence on GME is the nationwide implementation of TRICARE, DOD’s managed health care program. TRICARE requires military hospitals to be more cost effective, focus on primary care, and share the care workload with support contractors. Such health care management shifts under TRICARE may reduce funding and, according to DOD officials, reduce or otherwise change the workload support for military facilities’ GME. Further, DOD and the services are engaged in joint efforts toward more integrated GME management, including collective oversight over DOD’s GME strategic plan, joint evaluation of GME applicants, and planned efforts to consolidate GME administrative functions. Also, DOD is working toward standardizing the application of medical force sizing models. In 1996, we reported that while the services’ respective modeling approaches to estimating medical strength requirements appeared to be reasonable, the models’ results were largely affected by input data and judgmentally assigned values and assumptions. Because the services differ somewhat in their modeling applications, DOD is examining and seeking to reconcile the differences—such as the relative effects of the Army’s inclusion of a “peacetime mission” component that the other services’ models do not include. Differences in sizing model applications are also expected to be addressed in the 733 Update report. (Appendix II provides more information on the services’ models.) The private medical sector has faced and continues to face the need to reduce, close, or otherwise modify its GME programs at medical schools and hospitals. Growth in managed care, physician oversupply, care delivery changes, and reduced funding to support civilian GME have altered the demands on GME. In October 1997, an Association of American Medical Colleges workgroup representing more than 140 medical schools and 400 major teaching hospitals and health systems published a resource document to assist teaching hospitals and medical schools in developing institution-specific approaches to analyzing and, if need be, modifying their GME programs. Synthesizing case studies and best practices, the work group identified a number of elements it termed “critical success factors” for rightsizing GME programs that we believe also have general applicability for future DOD GME sizing efforts. The factors include starting the GME resizing process well in advance of a critical need to reduce the number of residents; establishing clear guiding principles and ground rules; ensuring a proper time period for the resizing; securing top management’s support, mindful that appropriate information to make a case for resizing can enhance the plan’s acceptance; ensuring an inclusive process to minimize anxiety and identify and address concerns; affirming an institution’s commitment to residents currently in training; assessing the financial effect of the resizing; and reengineering an institution’s patient care processes where significant reductions in residents will occur. The work group also pointed out that a resizing effort’s success depends largely on minimizing its effects on patient care and fully engaging the institution’s leaders in the decisions. To attain DOD’s overall GME policy goal of training to wartime requirements, the services need the ability to make GME reductions now and in the future. Recent Navy and Army GME program closure efforts, however, have not been successful, and the Air Force may face similar problems when it attempts closures. DOD and the services lack policy guidance and criteria governing site and program selection, including collaboration among decision makers and those affected. In deliberating closure alternatives, for example, the Navy’s MEPC did not know that (1) a change in position had occurred on preserving GME where active duty personnel are concentrated, (2) ongoing GME integration efforts were to be preserved, (3) there apparently were to be only four GME concentration centers, or (4) study results would be produced later in support of either Bethesda or Portsmouth. Along with disputes about decision criteria, a key omission in the Navy’s and Army’s closure attempts was that of not involving medical and line commanders and others most directly affected by the decisions. Unsuccessful closure efforts dissatisfy those making and affected by the decisions and reduce the credibility of the process but they also may result in too many GME trainees, who are not readily deployable, and too few deployable physicians ready when needed. Thus, we believe that with commonly accepted GME sizing criteria, DOD and the services could make the program consolidations and closures needed to meet readiness goals. And we believe DOD and the services should have an opportunity to collaboratively develop and implement the criteria. But because the programs are highly prized and protected by the service hospitals and areas that have them, achieving criteria and closure decision agreement may not be easy. Moreover, if unsurmountable differences surface in developing or later applying the criteria, DOD may need to resort to forming a group independent of it and the services tasked with developing criteria or recommending and overseeing the implementation of specific closure or consolidation decisions. Other DOD initiatives, including TRICARE, ongoing sizing studies, and medical modeling application differences can bear on GME decisions, and they need to be taken into account in the development of GME program closure guidance for the closure process to be effective. In this regard, the Association of American Medical Colleges study of critical success factors in GME resizing efforts could prove helpful to DOD in its future resizing activities, particularly with respect to establishing downsizing principles and ground rules, securing top management support, and ensuring the inclusion of all who are affected. We recommend that the Secretary of Defense direct the Assistant Secretary of Defense for Health Affairs and the services’ surgeons general to collaboratively develop GME closure policy guidance and implementing criteria and processes covering such matters as key factors in identifying and winnowing potential sites, how to project and mitigate potentially adverse effects on beneficiary health care and readiness, how and when to involve those affected in the services and local areas in the decision-making process, how to reach program closure agreement, and how to communicate and implement the resulting decisions; provide in the guidance for the potential effects of such DOD and service initiatives as TRICARE, with its emphasis on cost control and primary care, that can affect GME decisions; and develop, obtain agreement on, and publish such policy guidance before any further GME closure decisions are made. In its written comments on a draft of this report, DOD agreed with the report and its recommendations, characterizing our work as objective in addressing the aborted GME closure attempts and the need for clear downsizing criteria. DOD stated, without further elaborating, that the Navy and Air Force also concurred with the report and recommendations but that the Army did not. Nonetheless, DOD stated that Health Affairs would develop a draft DOD directive providing GME program closure and consolidation guidance that takes into account managed care exigencies. DOD and the Navy, Air Force, and Army would be bound by such a directive once it is made final. We continue to believe that with commonly accepted GME sizing criteria, DOD and the services could make the program consolidations and closures needed to meet readiness goals. And we continue to believe that DOD and the services should have an opportunity to collaboratively develop and implement the criteria. But, as exemplified by the Army’s singular nonconcurrence with our recommendations, getting agreement on the criteria and implementing closure decisions likely will not be easy. The programs are highly prized and hence protected by the service hospitals and areas that have them. Thus, in the event that insurmountable differences surface in developing or later applying the criteria, DOD may need to resort to forming a body independent of it and the services tasked with developing criteria or recommending and overseeing the implementation of specific closure or consolidation decisions. We have added this matter to the report’s conclusions section. We are sending copies of this report to the Secretary of Defense and will make copies available to others upon request. Please contact me at (202) 512-7101 or Dan Brier, Assistant Director, at (202) 512-6803 if you or your staff have any questions concerning this report. Other GAO staff who made contributions to this report are Elkins Cox, Beverly Brooks-Hall, and Allan Richardson. To assess the services’ experiences in downsizing their graduate medical education (GME) programs, particularly the Navy’s experiences, we examined the role of the Navy Medical Education Policy Council (MEPC) and the guidance and data the MEPC considered, evidence of the Navy’s need for GME reductions and of the expected advantages and disadvantages of closing GME programs at one location versus another, and evidence that the Navy can still achieve needed GME reductions in ways that comply with DOD guidance and that overcome the kinds of objections raised in their recent closure attempts. For comparison, we examined comparable guidance, processes, and data used by the other services in their GME decisions. Information sources included Department of Defense (DOD) Health Affairs, the MEPC, the Navy Surgeon General’s office, and other cognizant organizations within the Navy, along with comparable units in the other services. We interviewed (1) representatives of the Navy MEPC; (2) other Navy officials responsible for sizing and managing GME; (3) Health Affairs officials who provide GME guidance and oversight; (4) officials of the other services in Washington, D.C., and San Antonio, Texas, who direct and coordinate GME policy and programs; (5) officials at selected medical centers—particularly the Navy center in Portsmouth and the Army center in El Paso—where recent GME sizing decisions have become an issue; and (6) officials of DOD’s TRICARE Northeast and Southwest regions, headquartered in Washington, D.C., and San Antonio, which also included officials of military medical centers in those areas. We also reviewed their policy statements, briefing documents on GME requirements, data on population and workload, studies of GME placement, and other records and reports. We evaluated the Navy council’s recommendations and subsequent GME sizing decisions by the Navy Surgeon General in light of available policy guidance, relevant available data, and other influential factors that were or should have been considered. We compared the Navy’s GME approach to decisions with that of the other services for possible lessons from successful efforts and for any common problems that need to be solved for all the services. We also considered the effects on GME of larger DOD initiatives, including the quadrennial defense review, the Defense Reform Initiative, update of the 733 study, and managed care under TRICARE, as well as the services’ use of different sizing models to determine overall military medical readiness requirements, including GME. While we noted differences of opinion about the application of the overall sizing models, resolving those differences was beyond the scope of our work; the differences are expected to be addressed in the update of the 733 study. We also researched efforts by private sector medical schools and hospitals to alter the size of their GME programs, including a recent study by the Association of American Medical Colleges, representing medical schools and teaching hospitals, including the Department of Veterans Affairs medical centers. Each service has its own sizing model for adjusting military medical forces to meet its requirements. Health Affairs offers a sizing model also and has been promoting a more standardized sizing approach for the services. However, while the models can reveal overall medical force requirements, they do not indicate where medical forces should be located or where GME training should be done. In response to budgetary and legislative pressures to properly size Navy medical force structure, the Navy Surgeon General completed a requirements model in March 1994, called Total Health Care Support Readiness Requirements (THCSRR), to determine and project its active duty medical force readiness requirements. In November 1996, the Surgeon General decided to apply THCSRR, which resulted in attempts to significantly reduce GME. The THCSRR model defines readiness requirements as supporting three missions, including (1) a wartime mission meeting the demands of two nearly simultaneous major regional conflicts, including mobilizing hospital ships, supporting Navy fleet and Marine Corps operations ashore and afloat and numerous fleet hospitals, and maintaining military treatment facilities outside the United States; (2) a day-to-day operational support mission for the Navy fleet and Marine Corps that allows Navy personnel to rotate between the United States and operational Navy platforms and overseas assignments and that includes GME; and (3) a peacetime health benefit mission providing health care benefits in military treatment facilities in the United States. While the Navy views all three missions as imperative to Navy medicine under the THCSRR model, the first two are to determine the number of needed active duty personnel. It is only because of the first two missions of wartime readiness and day-to-day operational support that active duty Navy personnel are to be available to support the third mission of providing peacetime health care benefits. Pressure to develop a model such as THCSRR came from a study by the Office of the Secretary of Defense of the overall military health services system and the system’s wartime medical force requirements; commonly referred to as the 733 study, it was required by section 733 of the 1992 National Defense Authorization Act and was completed in 1994. The 733 study examined the total medical care requirements needed to support all three services during a post-cold war wartime scenario along with peacetime health care requirements. The study concluded that the three services’ medical force requirements for the two major regional conflict scenarios would be significantly reduced from earlier global wartime scenarios. However, the Navy saw a need for further study on its own to adequately determine its medical force requirements for day-to-day operational support and to combine those requirements with the wartime requirements to define the minimum number of fully trained active duty personnel required to accomplish both missions. The determinations for operational support requirements include the needed flow of trained physicians from GME. The Army and Air Force have independently developed sizing models to project their readiness needs, including GME requirements, and Health Affairs has presented a DOD medical sizing model to all three services to promote the standardization of requirements determinations and has used that model to compare requirements projections by the three services. A comparison in March 1997 showed that the Army’s model included consideration of GME requirements beyond readiness to include what the Army defined as “peacetime mission,” thus projecting more needed training positions than did the DOD model. Health Affairs used the Navy’s THCSRR model as the starting point for the DOD model, specifying the same three critical DOD health care missions of readiness, day-to-day operational support, and peacetime health care and providing that only the first two missions are to determine the required number of active duty personnel. Also, use of the DOD medical sizing model is to be reflected in an ongoing update to the 733 study, which was initially to be completed by the end of March 1996 and may lead to a more standardized sizing approach. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a legislative requirement, GAO reviewed a Navy advisory council's recommendations for restructuring Navy graduate medical education (GME), focusing on: (1) why the Navy did not accept its council's recommendations for Bethesda GME closures and why its other closure attempts did not succeed; (2) whether the other services already have faced or may face similar experiences; and (3) what improvements may be needed if the services are to successfully make and implement their GME sizing decisions. GAO noted that: (1) in early 1997, the Navy Surgeon General decided to eliminate 162 GME positions to comply with lower projected wartime requirements and with Department of Defense (DOD) restrictions on the ratio of physicians in training to those deployable; (2) a Navy advisory council, lacking specific guidance but responding to the Navy Surgeon General's indications that GME should occur where active duty personnel are concentrated, recommended that such training be dropped at the Bethesda Medical Center; (3) the Navy Surgeon General, however, instead decided to close some of the Navy's Portsmouth Medical Center's programs following a then newly discussed agreement among DOD and the services' surgeons general to concentrate GME in four geographic locations that included Bethesda and San Diego but not Portsmouth; (4) lacking site selection guidance, the council submitted its recommendation to the Surgeon General without taking account of the agreement, which has never been formalized or acted on by the other services; (5) when announced, the Portsmouth closure decision surprised Navy command and medical center officials there, as well as local congressional representatives; (6) publicized arguments ensued that Portsmouth was as advantageous as Bethesda for concentrating GME and that losing Portsmouth's GME would reduce trainee-provided health care to active duty personnel and other beneficiaries and would harm Navy readiness; (7) although it was unsuccessful, the Surgeon General's office tried justifying the decision and later withdrew it for further study; (8) shortly thereafter and for the same ends, the Army Surgeon General's office sought to eliminate the 64 GME positions at the William Beaumont Medical Center in El Paso, Texas, also without site selection guidance and likewise failing to involve those who were affected; (9) while the Air Force also foresees the need for GME program closures, it has not yet attempted to make them; (10) but in the absence of closure policies and criteria and judging from the Navy's and Army's closure attempt experiences, GAO has no reason to believe that the Air Force would be any more successful in bringing about required GME program adjustments; and (11) while not a direct parallel to DOD GME with its readiness dimension, private-sector medical schools and hospitals have been downsizing their GME programs and in doing so have documented success factors that may provide a useful reference for DOD in developing guidance for its future sizing efforts. |
BOP was established in 1930 to provide progressive and humane care for federal inmates in the 11 federal prisons in operation at the time. Since then, BOP’s mission has evolved into protecting society by controlling offenders in the controlled environments of prisons and community-based facilities that are safe, humane, cost-efficient, and appropriately secure and that provide work and other self-improvement opportunities to assist offenders in becoming law-abiding citizens. At the end of fiscal year 2006, there were over 114 federal prison facilities located throughout the country at four primary security levels—minimum, low, medium, and high. BOP facilities are given a security designation based on the level of security and staff supervision the facility is able to provide. According to BOP, minimum security facilities, also known as Federal Prison Camps, have dormitory housing and limited or no perimeter fencing; low security Federal Correctional Institutions have double-fenced perimeters and mostly dormitory or cubicle housing; medium security Federal Correctional Institutions have strengthened perimeters (often double fences with electronic detection systems) where inmates are mostly confined to prison cells; and high security institutions, also known as United States Penitentiaries, have highly secured perimeters (featuring walls or reinforced fences) and multiple- and single- occupant cell housing. BOP also maintains administrative facilities, which are institutions with special missions, such as the detention of pretrial offenders; the treatment of inmates with serious or chronic medical problems; or the containment of extremely dangerous, violent, or escape- prone inmates. Administrative facilities are capable of holding inmates at all security levels. According to BOP population data, at the end of fiscal year 2006, BOP’s total inmate population was approximately 193,000 inmates, of which about 43 percent, or 83,000, were long-term, adult male inmates confined in BOP, private, or IGA low and minimum security facilities. About 52,000 (27 percent) of the total inmates were confined in medium security facilities, and approximately 18,000 (about 9 percent) were in high security facilities. Additionally, approximately 21 percent of the 193,000 total inmates, or 40,000 inmates, were females, juveniles, inmates in halfway houses, inmates in home confinement, or inmates confined in BOP’s administrative facilities. See figure 1 for a breakout of these populations. A methodologically sound cost comparison analysis of BOP and private low and minimum security facilities is not currently feasible because BOP does not gather data from private facilities that are comparable to the data collected on BOP facilities. BOP is not required under federal contracting regulations to gather data that would enable a comparison, and although BOP has not evaluated the cost of collecting additional information, BOP officials maintain that it could increase the price contractors charge BOP for contract services. However, without comparable data, BOP is not able to analyze and justify whether confining inmates in private facilities would be more cost-effective than other confinement alternatives such as constructing new BOP facilities or renovating existing BOP facilities. Such an analysis would be consistent with OMB requirements, which call for agencies to identify and evaluate various alternatives when making decisions about the acquisition of capital assets (e.g., office buildings, hospitals, schools, and prisons). We determined that it is not currently feasible to compare the cost of confining male federal inmates in low and minimum security BOP and private facilities because data needed for a methodologically sound comparison are not currently available. Our review of BOP documentation showed that BOP collects basic cost data on a per inmate basis across BOP and private facilities. For BOP-owned and -operated facilities, BOP maintains per inmate costs that include salaries, employee benefits, equipment, and utilities. For private facilities, BOP maintains the negotiated per inmate contract price, award fees, and deductions made as a result of the performance-based contract terms. However, these cost data are not sufficient for doing a methodologically sound cost comparison. As we reported in 1996, any comparative study of private and public prisons should not only be based on operational costs but also on an analysis of similar facilities—including the design, capacity, security level, and types of inmates and quality of service—and on sufficient statistical controls to measure and account for any differences among facilities. Otherwise, any comparative analysis of operational costs could be skewed. For example, one study we reviewed as part of our 1996 report did not assess quality of service as part of the cost comparison between private and public facilities and, as a result, could not conclude whether the levels of service affected the differences in costs. According to BOP officials and private contractors, BOP and private facilities have different characteristics and provide different levels of service. Thus, statistical methods would need to be used to account for these differences once cost data were collected to determine the impact they have on the operating cost of the facilities. Using guidelines established in our previous work, we sought to compare facilities with similar characteristics to ensure results of a comparison would not be skewed. However, we were unable to do so because the data needed to do the comparison were not available. BOP and private contracting officials reported that there are numerous differences among BOP and private facilities, including inmate population, program requirements, and economic differences within the different geographic locations of the facilities. According to BOP officials, private contractor facilities have fewer contractual requirements for programming, such as vocational training and release preparation courses, than BOP facilities, in part, because of the different types of inmates confined in the facilities. In general, BOP facilities confine U.S. citizens and programs are designed to teach inmates skills that they can use when they are released, such as job training skills, so as to help avoid their return to prison. By contrast, private facilities primarily confine criminal aliens—non-U.S. citizens or foreign nationals, who are serving time for a U.S. federal conviction. Programs that focus on preventing returns to prison are not required of private facilities because criminal aliens are released for removal from the country and are not expected to return to U.S. communities or BOP custody. Given the differences with regard to facility characteristics, statistical techniques such as analyzing the extent to which characteristics— including program differences—vary among facilities, would have to be applied to strengthen conclusions of a cost comparison analysis. For example, if BOP facilities provide more programs for inmates than contractors do, then comparable data on the number and types of programs across all facilities would be needed to adjust for this difference in order to conclude how the difference in programs affect operating costs. BOP maintains data on its own low and minimum security facilities and collects some similar facility data on private facilities, including the age of the facility, the citizenship status of inmates, and inmate population. However, BOP does not maintain comparable data on various aspects of private facilities, such as inmate-to-staff ratios, size of the facility, specific programs available to inmates, and whether inmates in private facilities are completing those programs. Because BOP does not maintain comparable data for private facilities on the differing facility characteristics that could affect costs, we could not determine the extent to which these facilities differed nor use statistical methods to determine the impact of these differences on costs. Since we could not control or adjust for such differences, the results of a cost comparison analysis conducted at this time would be skewed. With regard to quality of service, BOP also lacks sufficient data on measurements of safety and security for inmates, staff, and the general public for a methodologically sound cost comparison of BOP and private facilities. As we reported in 1996, a cost comparison analysis should include not just operational costs but also an assessment of quality to ensure that if a contractor is operating at lower costs than BOP, it is providing the same or a better level of service. We attempted to review numerous quality of service data—such as data that measure safety and security—so that differences could be accounted for by comparing data on what is achieved by these services. However, according to officials in BOP’s Office of Research and Evaluation, BOP does not maintain data on private facilities that we could use to compare quality of service across the different facilities. This includes the number of grievances submitted by inmates, the number of inmates attended to by health care professionals due to misconduct, staff turnover rates, and the experience level of the staff. As a result, we could not assess the trade-offs between the levels of services being offered and the costs of operating the facilities. While the contract requirements for the private facilities direct contractors to maintain some data on inmates in BOP’s central database system called SENTRY, according to BOP officials, the data private contractors enter are not necessarily consistent with those data collected on BOP facilities, and BOP officials stated that they cannot attest to the reliability or validity of the private contractor data. For example, BOP officials and private contractors we spoke with stated that although private contractors are required to report incidences of misconduct to BOP, neither could confirm if the private contractor system for categorizing or tracking incidences of misconduct is consistent with BOP’s misconduct categories. BOP further reported that program data were not comparable. For example, according to BOP officials, private contractors reported that inmates completed the U.S. General Educational Development program, when the program actually completed by the inmates was a Mexican equivalent of the program. Additionally, private contractors we spoke with told us that they maintain some facility characteristic and quality of service data, but the data are not maintained in the same format as BOP facility data and are not readily available because they are only maintained in hard copies at some of the facilities contractors manage. BOP officials provided two reasons why they do not collect or require contractors to collect comparable data that would facilitate a comparison of the cost of confining inmates in low and minimum security BOP and private facilities: (1) federal regulations do not require such data as a means for selecting among competing contractors, and (2) BOP believes collecting comparable data from contractors could add costs. However, BOP officials had not evaluated the probable amount of added costs. When choosing among private contractors, federal regulations do not require BOP to collect comparable facility characteristic or quality of service information from private facilities. According to BOP officials, all BOP private contracts in our review are firm-fixed price and, under federal regulations for competing contracts, BOP does not need this information for technical evaluations of the proposals. BOP officials added that during the acquisition process, BOP maintains data needed to evaluate proposed contract prices, such as the price to manage and operate each facility and the government’s estimate of the price, in accordance with the Federal Acquisition Regulation (FAR). The FAR requires the contracting official to determine if proposed prices are fair and reasonable and further states that the performance of a cost analysis is not needed if there is adequate price competition. In general, adequate price competition is established when two or more responsible parties independently submit prices for the solicitation that meet the government’s requirements. The award is made to the party whose proposal represents the best value and there is no finding that the price of the other parties is unreasonable. In addition to price, the FAR recommends agencies evaluate one or more nonprice criteria, such as past performance and prior experience. However, agencies have broad discretion in the selection criteria and in determining the relative importance of each criterion. Consequently, the regulation does not require BOP to collect comparable data on various facility characteristics and quality of service measures needed to conduct a methodologically sound cost comparison. Additionally, while BOP is concerned that the cost of contracts could increase if it were to require comparable data from private contractors because it would be beyond the scope of existing contract requirements, it has not evaluated the costs or benefits of acquiring the additional data. BOP’s Senior Deputy Assistant Director and other BOP officials said they suspect that it is likely that private contractors would charge BOP a higher contract price if it required private contractors to meet additional requirements, such as providing data similar to those collected by BOP for its facilities. However, because BOP has not requested such data during the contract process or estimated the incremental costs and benefits of requiring comparable data from private facilities, BOP officials could not speak to the extent of the potential cost increase. Although in the Department of Justice Fiscal Year 2003-2008 Strategic Plan BOP identified several alternatives for space acquisition, such as expanding or renovating existing facilities, acquiring military properties for prison use, contracting with private companies, and constructing new facilities, BOP officials stated that they do not consider all of these alternatives for confining inmates in low and minimum security facilities because they are committed to contracting with nonfederal entities for low and minimum security bed space. Our past work has shown that over the long term, it is usually more cost- effective for an agency to own a facility than to lease one. For example, we previously reported that for nine major operating lease acquisitions proposed by the General Services Administration—the central leasing agent for most federal agencies—construction would have been the least expensive option in eight cases and would have saved an estimated $126 million compared to two leasing options that spread payments out over time. However, when funds for ownership are not available, leases become a more attractive option from the agency’s budget perspective because they add much less to a single year’s appropriation total than other alternatives. According to BOP officials, they consider alternatives for space acquisition only for medium and high security facilities, because medium and high security facilities are BOP’s priority based on capacity needs. In addition to capacity needs, from BOP’s perspective, inmates in medium and high security facilities are at higher risk in terms of their behavior (i.e., rates of misconduct, assaults, and history of violence) and private contractors have yet to demonstrate the ability to handle these higher security populations, so BOP has chosen to continue to confine the higher security inmates in BOP-owned and -operated facilities. As a result, BOP officials stated that they have not considered nor do they plan to consider alternatives besides contracting for low and minimum security facilities. Because BOP is not able to compare the cost of BOP and private facilities in a methodologically sound manner, it cannot determine if confining inmates in private facilities is more or less cost-effective than other confinement alternatives such as constructing and operating new BOP facilities, acquiring and using excess properties (i.e., former military bases), or expanding or renovating existing BOP facilities. OMB requires agencies to follow capital planning principles set forth in its Capital Programming Guide. OMB’s guide identifies the need for effective planning and management of investments. Among other things, this guide articulates key principles agencies should follow when making decisions about the acquisition of capital assets such as prisons. The Capital Programming Guide requires that agencies consider as many alternatives as possible because, according to the guide, whenever the government lacks viable alternatives, it may lack a realistic basis to manage contract costs. Once a list of alternatives is established, the guide requires that agencies then compare those alternatives based on a systematic analysis of expected benefits and costs. The fundamental method for formal economic analysis is a benefit-cost analysis. OMB guidance on benefit-cost analyses can be found in OMB Circular A-94—a circular that helps agencies conduct a study on the benefits and costs of whether to acquire a new capital asset, undertake a major modification to an existing asset, or use some other method such as contracting for services. More specifically, the goal of the circular is to promote efficient resource allocation through well-informed decision making by the federal government. The circular provides general guidance for conducting benefit-cost and cost-effectiveness analyses, and serves as a checklist of whether an agency has considered and properly dealt with all elements of a sound analysis. OMB’s Capital Programming Guide reports that credible cost and benefit analyses, such as those described in OMB Circular No. A-94, are the basis of sound management decision making, enabling agencies to determine the best investment option for meeting their goals and making them better equipped to evaluate alternatives. OMB’s guide states that data are the most important piece of such analyses, including various procurement or contract data. Consequently, to do the analyses described in OMB Circular No. A-94, BOP would have to first collect and maintain comparable BOP and private facility data. BOP senior officials acknowledged that they have not done any such analyses to assess alternatives for confining inmates in low and minimum security facilities, and they were unable to explain why such analyses have not been done. Nonetheless, according to the OMB guide, selecting alternatives to meet space requirements without adequate analysis by federal agencies has resulted in higher costs than anticipated. Consequently, without such an analysis, it is difficult to know whether BOP is deciding on the most cost-effective alternative for acquiring low and minimum security facilities to confine inmates, including whether to contract, build, or expand. The results of any analysis conducted by BOP consistent with OMB requirements would be important because BOP officials expect inmate populations in low and minimum security facilities to rise. Inmates in low and minimum security facilities made up approximately 43 percent of BOP’s total population in fiscal year 2006, and according to BOP officials, this population will continue to grow. As a result, there would be an increase of inmates requiring confinement in low and minimum security facilities. BOP also projects about a one-third increase in its long-term criminal alien population, or approximately 5,700 more criminal alien inmates between fiscal years 2005 and 2008, which could further strain BOP resources as these inmates are confined primarily in low security facilities. While the private sector has additional capacity to accommodate at least some of this expected growth in inmate populations, BOP cannot determine whether private contracting is or would be the most cost- effective alternative because of the data limitations discussed above. While there are costs associated with gathering data needed to compare costs across BOP and private facilities, without the data to conduct benefit-cost or cost-effectiveness analyses, BOP is not able to compare alternatives for confining inmates in a methodologically sound manner. Additionally, the absence of data also has potential long-term costs because BOP managers, OMB staff, and congressional decision makers do not have the information needed to weigh alternatives and make the best investment decisions. Although OMB staff told us that BOP provides several documents in accordance with the Capital Programming Guide, such as information about facilities in BOP’s inventory and weekly reports about inmate population, OMB staff stated that it would be useful to have more and better comparison information on the cost of confining inmates in BOP and private low and minimum security facilities. They said that without such data, it is difficult to understand how BOP is making decisions on the most cost-effective way to manage and confine future inmates sentenced to low and minimum security facilities. OMB staff added that they consider contracting a viable option because it gives BOP the flexibility to immediately deal with population changes. However, according to OMB staff, they would not expect contracting to always be cheaper because owning a facility may be more cost-effective in the long run. As a result, comparative analyses would be beneficial to help them better understand the long-term costs and benefits of owning versus the short-term costs and benefits of privatization. Because of projections of future growth of inmate populations, BOP will need to continue to acquire additional capacity. However, deciding what to do in response to this need will be difficult because BOP does not have the data necessary to do a methodologically sound cost comparison of its various alternatives for confining inmates in low and minimum security facilities. Because contracting regulations do not require BOP to collect private facility data comparable to BOP facility data, BOP has not gathered or maintained data needed to conduct a methodologically sound cost comparison. Additionally, BOP is concerned with increased contract costs. However, BOP has not assessed the cost of collecting the data or whether the estimated costs would outweigh the benefits of having it. As a result, BOP is not in a position to meet OMB’s capital planning requirements and evaluate whether contracting is more cost-effective than other alternatives, such as building new low and minimum security facilities, buying existing facilities that may be available, or expanding facilities already operated by BOP. Without such data, BOP cannot determine whether procuring prison confinement and services from private firms costs the government more or less than other confinement alternatives, as required by OMB. To help BOP evaluate alternatives for confining inmates in low and minimum security facilities, and recognizing that there is a cost associated with gathering and analyzing data needed to compare costs across BOP and private facilities, we recommend that the Attorney General direct the Director of BOP to develop a cost-effective way to collect comparative data on low and minimum security facilities confining inmates under BOP’s custody and design and conduct methodologically sound analyses that compare the costs of confining inmates in these facilities in order to consider contracting among other alternatives for low and minimum security confinement, consistent with OMB requirements. We requested comments on a draft of this report from the Director of the Office of Management and Budget and from the Attorney General. While OMB did not provide comments, in a September 17, 2007, letter, BOP provided written comments, which are summarized below and included in their entirety in appendix II. BOP disagreed with our recommendation and stated that it does not own or operate facilities to house solely criminal aliens. BOP also said it does not expect to receive funding to construct such low security facilities. Therefore, BOP does not believe there is value in developing data collection methods to compare costs of confining these inmates in private facilities versus other alternatives for confining inmates. BOP stated that, through open competition, it has been able to determine a fair and reasonable price for its contracts. In a related comment, BOP stated that our report does not reference that Congress has provided funds to contract out for inmate bed space but has not provided funding for new construction of low and minimum security facilities. BOP also noted that it does not currently have the capacity to confine low security criminal aliens and is dependent on private contractors to fill the gap, and, if construction funds were available for low and minimum security facilities, it would take several years before the bed space would become available. In addition, BOP noted that it is committed to contracting, in part, because OMB has directed BOP to take greater advantage of state and local governments and the private sector to meet its space requirements to confine inmates in low and minimum security facilities. With regard to the recommendation, BOP also stated that gathering data from contractors to aid in a cost comparison would have the potential to increase current contract costs at a time when BOP is facing budget constraints. Finally, BOP pointed out that an independent review conducted in 2005 which compared the operational cost of a BOP-owned, contractor-operated facility in Taft, California, with other low security BOP facilities meets the intent of our recommendation. We agree that full and open competition can establish fair and reasonable costs for services provided by contractors. However, our recommendation is about selecting the most cost-effective alternative for confining inmates, not about selecting among contractors as the only alternative. We believe that developing data collection methods to determine the costs of confining inmates in low and minimum security facilities—regardless of whether those facilities are owned and operated by BOP or a contractor and regardless of whether the facility confines criminal aliens, U.S. citizens, or both—is critical to BOP’s ability to evaluate the cost- effectiveness of contracting compared to other alternatives for confining inmates, such as constructing a new facility, modifying an existing facility, or acquiring military properties for prison use. OMB’s Capital Programming Guide requires agencies to undertake the kind of comparison we are recommending in order to consider alternatives when making decisions about the acquisition of capital assets, such as prisons. Adhering to OMB requirements better ensures that key decision makers, including OMB and Congress, have the information needed to make the most cost-effective investment decisions. We recognize that BOP has not received funding to construct new low and minimum security facilities, but this does not mean that funds will not be appropriated in the future, especially if data demonstrate that this option is more cost-effective. Without these data, BOP is not in a position to justify funding for new construction or other alternatives because BOP cannot do a methodologically sound comparison among low and minimum security facilities. With regard to BOP’s comment that it currently does not have the capacity to confine criminal aliens and must rely on contracting to address capacity issues, our report noted that, according to OMB staff, contracting may be a viable option because it provides BOP the flexibility to immediately deal with population changes. Nonetheless, OMB staff also said that they need more and better cost comparison information to help them understand the long-term costs and benefits of owning versus the short-term costs and benefits of privatization. OMB staff also stated that they would not always expect contracting to be cheaper because owning a facility may be more cost-effective over the long run, which is consistent with our past work. With regard to BOP’s concern that requiring comparable data from contractors could raise the cost of current contracts, our report recognized that there is a cost associated with gathering and analyzing additional data needed to compare costs across BOP and private facilities. However, BOP has not determined the cost of collecting the data or whether the estimated costs would outweigh the benefits of knowing the most cost-effective alternative for confining inmates. Without a cost- effective way to collect comparable data, BOP cannot conduct a methodologically sound cost comparison analysis that takes into account factors, such as facility characteristics and quality of service, which can differ from facility to facility. Collecting and analyzing these data would provide key decision makers the information needed to make the most cost-effective investment decisions. We disagree with BOP’s assertion that it has met the intent of our recommendation via the 2005 study by the Center for Naval Analysis. In citing this study, BOP failed to recognize that this study does not compare the costs of various alternatives for confining inmates in low and minimum security facilities. Rather, it compares BOP-owned and -operated facilities with one BOP-owned and contractor-operated facility in Taft, California. In addition, BOP stated it had provided detailed cost information and that it believed we would obtain comparable data from the private sector in order to conduct a methodologically sound cost comparison. As discussed throughout our report, the cost data BOP provided were not sufficient to conduct a methodologically sound cost comparison. As our report states, any comparative study of private and public prisons should not only be based on operational costs, but should also account for facility characteristics and the quality of services provided. We requested this information from the private sector. As our report notes, private contractors do not maintain similar data, because BOP does not require them to report or collect the data it requires of its own facilities. BOP also provided technical comments, which we considered, and we have amended our report to incorporate these clarifications, where appropriate. We are sending copies of this report to the Attorney General and the Director of OMB. Copies will also be made available to others on request. 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 regarding this report, please contact me at (202) 512-6510 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors are listed in appendix III. Our work focused on the comparative cost of confining federal inmates in low and minimum security facilities owned by the Federal Bureau of Prisons (BOP) and privately managed facilities under contract to BOP. Specifically, our objective was to assess the feasibility of comparing the costs for confining inmates in low and minimum security facilities owned and operated by BOP with the cost to confine these inmates in private facilities and the implications this has for making decisions on low and minimum security confinement. Our work was initially designed to address Conference Report 109-272, accompanying the Science, State, Justice, Commerce, and Related Agencies Appropriations Act of 2006, which directed GAO to compare the costs of confining federal inmates in low and minimum security facilities owned by BOP, privately managed facilities under contract to BOP, and local facilities or jails via intergovernmental agreements (IGA) with BOP. However, during the course of our review, BOP did not renew IGAs for four facilities in Western Texas—in the cities of Big Spring and Eden, Texas, and Garza County and Reeves County, Texas—that confined 83 percent of federal inmates in IGA facilities. Although BOP has, over time, used hundreds of IGAs across the country to confine inmates on a short term basis—45 days or less—the four Texas facilities had evolved into facilities confining inmates on a long-term basis, similar to BOP-owned and -operated low and minimum security facilities. In January 2007, BOP awarded five contracts to confine inmates in facilities with approximately 10,000 beds, which are about 3,000 more beds than the capacity provided under the four IGAs. According to BOP officials, BOP chose to compete the bed space associated with these agreements partly because the four Texas facilities outgrew their original purpose of confining small populations for short periods of time. BOP officials also stated that acquiring bed space via contracts rather than IGAs enhances their ability to oversee operations at the facilities. Because BOP no longer plans to use IGAs to confine inmates on a long-term basis, we shifted the focus of our review to BOP and private facilities only. We did our work at BOP headquarters and the Office of Management and Budget (OMB) in Washington, D.C. We reviewed applicable laws, regulations, and studies on BOP programs, prison management, and contracting requirements. We also examined available BOP and private contractor documents on the management of low and minimum security facilities. In addition, we met with BOP officials and worked with them to identify potential BOP and private facilities that could be compared considering basic criteria including inmate gender (male or female inmates, assuming that costs for programs and services might be different depending on gender) and whether cost data might be available on the individual facility level for a 5-year period covering fiscal years 2002 through 2006. In selecting low and minimum security facilities, we met with BOP officials to identify potential BOP and private facilities that could be compared over a 5-year period covering fiscal years 2002 through 2006. Our discussions with BOP officials resulted in the identification of 34 low and minimum security facilities operated by BOP and private contractors that confined federally sentenced male inmates over the 5-year period. Specifically, we focused on (1) 27 BOP-owned and -operated low and minimum security facilities, and (2) 7 facilities operated by private firms under contract to BOP. Table 1 lists the 34 facilities we selected. Several facilities were excluded from our scope because of issues with the availability of cost data for fiscal years 2002 through 2006. We excluded from our analysis those BOP low and minimum security facilities that are co-located with other facilities in a prison complex, since BOP does not isolate the costs of operating individual low and minimum security facilities located on the same campus with high and medium security facilities. Additionally, the Federal Correctional Institutions Miami, Oakdale, and Terminal Island are excluded from the list, as between November 2004 and June 2005 they were converted from medium to low security facilities so they do not have a comparable low security cost history. We did not include the competitive, private contract Reeves County Detention Center III in our study because the facility did not begin receiving federal inmates until 2007 and consequently did not have cost data associated with confining federal inmates. We also excluded the privately operated facility in Eloy, Arizona, as BOP chose to not exercise its option to continue contracting with the private operator at this facility in February 2006 and it became an Immigration and Customs Enforcement detention facility exclusively. In addition, because the private facilities do not confine female inmates or juveniles, we excluded all female and juvenile BOP facilities from our analysis, assuming that costs might be different depending on these inmate characteristics. Once we selected facilities, we interviewed BOP procurement officials; budget officials; and officials from the Office of Research and Evaluation, Office of Policy Development and Planning, and Office of Design and Construction. We interviewed accounting, contracting, and operations officials as well as general counsel representing the seven individual prisons of the private firms. Over the course of our review, we used numerous studies as well as data from the Bureau of Justice Statistics to put together a list of variables that might affect a cost comparison analysis. We coordinated with BOP officials from the Office of Research and Evaluation to generate a list of comparable variables for BOP and private facilities. Later, we were told by BOP officials that data for many variables needed for a cost comparison analysis are not collected or maintained for private facilities. Given the current status, we focused our efforts on whether a methodologically sound cost comparison was feasible. Where possible, we gathered and reviewed available data on the facilities and examined whether the data would be suitable for a comparison based, in part, on key factors—such as similar facility characteristics and levels of service—needed to do a methodologically sound comparison as outlined in our 1996 report and Office of Management and Budget (OMB) Circular No. A-76: Performance of Commercial Activities. Some studies in our 1996 report, for instance, used a variety of quality measures or outcomes such as safety, incident data, and the extent of programs available to inmates. In order to determine if the selected BOP and private facilities were sufficiently similar to allow a methodologically sound comparison, we attempted to analyze facility characteristics data. In addition, we analyzed the historical costs to the government including direct (i.e., salaries, supplies, and cost of services) and indirect costs, such as support costs and operating and maintenance costs for buildings, equipment, and utilities and cost-related data between fiscal years 2002 and 2006 associated with operating low and minimum security BOP and private facilities. Additionally, we met with prison experts from Florida State University College of Criminology and Criminal Justice and from the JFA Institute—a nonprofit agency conducting justice and corrections research for effective policy making—to further our understanding about prisons and the complexities of comparing the costs of operating private and public prisons. We reviewed documentation on how BOP evaluates and assesses contract proposals to determine what data are used to make contracting decisions. In addition, we reviewed the Federal Acquisition Regulation to determine what requirements were applicable to BOP with respect to cost data and cost comparisons. Finally, we examined studies done to compare the cost of operating one BOP facility in Taft, California, that is owned by BOP but operated by a private contractor, as well as a study conducted by the National Academy for Public Administration on the feasibility of using low and minimum security BOP facilities to confine federal medium and high security inmates. To assess the implications a cost comparison has for making decisions on low and minimum security facilities, we met with BOP officials and reviewed BOP population data, population projection data, and data on short-term and long-term facility planning. We also examined BOP documents within the context of OMB requirements on capital planning and space acquisition. In addition, we met with OMB staff responsible for BOP budget review and preparation to discuss BOP efforts to acquire space to confine inmates in low and minimum security facilities in order to determine the information BOP provides OMB on capital investments and how this information is used to inform decisions. We also met with officials from the National Institute of Justice (NIJ) to discuss NIJ’s current and past work on prison privatization and NIJ’s role within the Department of Justice. We conducted our work from May 2006 through August 2007 in accordance with generally accepted government auditing standards. In addition to the contact named above, John Mortin, Assistant Director; David Alexander; Ben Bolitzer; Billy Commons; Katherine Davis; Maria Edelstein; Erin Henderson; Carol Henn; Jeff Isaacs; Charles Johnson; Dawn Locke; Michele Mackin; Jan Montgomery; Don Neff; Bill Sabol; David Sausville; John Stambaugh; Stephanie Toby; Lacy Vong; and Michelle Zeidman made key contributions to this report. Federal Capital: Three Entities’ Implementation of Capital Planning Principles Is Mixed, GAO-07-274. Washington, D.C.: February 23, 2007. Federal Real Property: Reliance on Costly Leasing to Meet New Space Needs Is an Ongoing Problem, GAO-06-136T. Washington, D.C.: October 6, 2005. Federal Real Property: Further Actions Needed to Address Long-standing and Complex Problems, GAO-05-848T. Washington, D.C.: June 22, 2005. Courthouse Construction: Overview of Previous and Ongoing Work, GAO-05-838T. Washington, D.C.: June 21, 2005. Budget Issues: Agency Implementation of Capital Planning Principles Is Mixed, GAO-04-138. Washington, D.C.: January 16, 2004. Federal Drug Offenses: Departures from Sentencing Guidelines and Mandatory Minimum Sentences, Fiscal Years 1999-2001. GAO-04-105. Washington, D.C.: October 24, 2003. Justice Impact Evaluations: One Byrne Evaluation Was Rigorous; All Reviewed Violence against Women Office Evaluations Were Problematic. GAO-02-309. Washington, D.C.: March 7, 2002. Standards for Internal Control in the Federal Government. GAO/AIMD-00-21.3.1. Washington, D.C.: November 1999. Executive Guide: Leading Practices in Capital Decision-Making. GAO/AIMD-99-32. Washington, D.C.: December 1998. Courthouse Construction: Improved 5 Year Plan Could Promote More Informed Decisionmaking. GAO/GGD-97-27. Washington, D.C.: December 31, 1996. Private and Public Prisons: Studies Comparing Operational Costs and/or Quality of Service. GAO/GGD-96-158. Washington, D.C.: August 16, 1996. Federal Courthouse Construction: More Disciplined Approach Would Reduce Costs and Provide for Better Decisionmaking. GAO/T-GGD-96-19. Washington, D.C.: November 8, 1995. State and Federal Prisons: Factors That Affect Construction and Operations Costs. GAO/GGD-92-73. Washington, D.C.: May 19, 1992. Designing Evaluations. GAO/PEMD-10.1.4. Washington, D.C.: March 1991. Private Prisons: Cost Savings and BOP’s Statutory Authority Need to Be Resolved. GAO/GGD-91-21. Washington, D.C.: Feb. 7, 1991. | Over the last 10 years, the cost to confine federal Bureau of Prison (BOP) inmates in non-BOP facilities has nearly tripled from about $250 million in fiscal year 1996 to about $700 million in fiscal year 2006. Proponents of using contractors to operate prisons claim it can save money; others question whether contracting is a cost-effective alternative. In response to Conference Report 109-272, accompanying Pub. L. No. 109-108 (2005), this report discusses the feasibility and implications of comparing the costs for confining federal inmates in low and minimum security BOP facilities with those managed by private firms for BOP. GAO reviewed available data on a selection of 34 low and minimum security facilities; related laws, regulations, and documents; and interviewed BOP and contract officials. A methodologically sound cost comparison analysis of BOP and private low and minimum security facilities is not currently feasible because BOP does not gather data from private facilities that are comparable to the data collected on BOP facilities. GAO's past work has shown that generally accepted evaluation criteria for comparing private and public prisons calls for the comparison to be based on a variety of factors, including selection of facilities with similar characteristics (i.e., staffing levels and educational programs offered) and quality of service (i.e., levels of safety and security for staff, inmates, and the general public). However, according to BOP officials, BOP and private facilities differ in characteristics and quality of service, and BOP does not collect or maintain sufficient data on private facilities to account or adjust for these differences in a cost comparison. According to private contractors, some characteristics data are maintained for their own purposes, but at present the data are not in a format that would enable a methodologically sound cost comparison. BOP officials stated that there are two reasons why they do not require such data of contractors. First, federal regulations do not require these data as a means for selecting among competing contractors. Second, BOP believes collecting comparable data from contractors could increase the cost of the contracts, but BOP officials did not provide support to substantiate these concerns. Without comparable data, BOP is not able to evaluate and justify whether confining inmates in private facilities is more cost-effective than other confinement alternatives such as building new BOP facilities. The Office of Management and Budget (OMB) requires agencies to consider and weigh various alternatives using analyses that help determine the benefits and costs of making decisions about the acquisition of assets, such as prisons. According to OMB requirements, selecting alternatives to meet capacity needs without adequate analysis by federal agencies has resulted in higher costs than expected. OMB provides guidance to help federal agencies analyze and weigh the costs and benefits of alternatives, which is important for BOP because BOP officials stated that the population for low and minimum security facilities continues to grow. OMB staff also added that they need more and better cost comparison information on the various alternatives for BOP's low and minimum security facilities to help them better understand the long-term costs and benefits of owning versus the short-term costs and benefits of privatization. Without analyses consistent with OMB requirements, it is difficult to know whether BOP is deciding on the most cost-effective alternative for acquiring low and minimum security facilities to confine inmates, including whether to contract, build, or expand. |
A reverse mortgage is a loan against the borrower’s home that the borrower does not need to repay for as long as the borrower meets certain conditions. These conditions, among others, require the borrower to live in the home, pay property taxes and homeowners’ insurance, maintain the property, and retain the title in his or her name. Reverse mortgages typically are “rising debt, falling equity” loans, in which the loan balance increases and the home equity decreases over time. As the borrower receives payments from the lender, the lender adds the principal and interest to the loan balance, reducing the homeowner’s equity. This is the opposite of what happens in forward mortgages, which are characterized as “falling debt, rising equity” loans. With forward mortgages, monthly loan payments made to the lender add to the borrower’s home equity and the borrower’s home equity and decrease the loan balance. (See fig. 1). decrease the loan balance. (See fig. 1). The Housing and Community Development Act of 1987 (Pub. L. No. 100- 242) authorized HECMs as a demonstration program in HUD. It was the first nationwide reverse mortgage program—available in all 50 states, the District of Columbia, and Puerto Rico—that offered the possibility of lifetime home occupancy to elderly homeowners. Homeowners aged 62 or over with a significant amount of home equity are eligible, as long as they live in the house as the principal residence, are not delinquent on any federal debt, and live in a single-family residence. If the borrower has any remaining balance on a forward mortgage, this generally must be paid off first (typically, taken up-front from the reverse mortgage). In addition, the condition of the house must meet HUD’s minimum property standards, but a portion of the HECM can be set aside for required repairs. The borrower makes no monthly payments, and there are no income or credit requirements to qualify for the mortgage. The amount of money that a lender can advance to a HECM borrower (loan amount) depends on three main factors. First, the loan amount is based on the “maximum claim amount,” which is defined as the lesser of the appraised value of the house or the Federal Housing Administration (FHA) loan limit (the highest mortgage value HUD will insure). In the past year, Congress has raised the FHA loan limit for HECMs twice, to the current limit of $625,500 nationwide. Second, the age of the borrower affects the borrower’s loan amount—the older the borrower, the higher the loan amount. However, if there is more than one homeowner, the loan amount is based on the age of the youngest borrower. Third, the interest rate also affects the loan amount. Typically, the lower the interest rate, the higher the loan amount. Since the inception of the HECM program, Congress has mandated that borrowers receive information about the financial implications of these loans, allowing consumers to make informed decisions. In response, HUD developed a counseling program, working with nonprofits, such as the AARP Foundation, to develop training courses and with a network of qualified counselors. Counselors may conduct counseling sessions face-to- face or by telephone. HUD has stated that upon the completion of HECM counseling, prospective borrowers should be able to make an independent, informed decision on whether this product would meet their needs. While a lender may order a preliminary title search before the prospective borrower receives counseling, the lender may not process a loan application until the counseling has been completed. Furthermore, HUD requires lenders to provide prospective borrowers with a list of HUD- approved counseling agencies from which to choose. A number of federal and state agencies have roles in overseeing the reverse mortgage market. FHA administers the HECM program and issues mortgagee letters to HECM lenders to communicate or clarify HUD requirements. HUD’s four Home Ownership Centers (HOC) perform a number of insurance processing and quality control functions and conduct evaluations of HECM counseling providers. In addition, FTC, federal and state banking regulators, and state insurance regulators are involved with various aspects of consumer protections for HECM borrowers. Table 1 summarizes the agencies’ responsibilities in this area. While HECMs can provide senior homeowners with multiple types of benefits, including the flexibility to use the money received and protection against owing more than the value of the house when the loan comes due, HECM costs can be substantial. In addition, how borrowers draw down the loan, as well as changes in house values and interest rates, can affect the HECM borrowers’ remaining home equity. Consumer advocates and others have expressed concern that some borrowers may not fully understand the complexities of HECM terms and costs, but some regulators have taken actions to promote better consumer understanding. Congress established the HECM program as a way to alleviate economic hardship caused by the increasing costs of health, housing, and subsistence needs at a time in life when income is reduced. Consistent with this goal, HECMs allow senior homeowners to convert their home equity into cash advances, while maintaining ownership of their homes. HECM borrowers have indicated that the mortgages have helped them to meet their financial needs. According to a 2006 AARP survey of reverse mortgage borrowers, including HECM borrowers, 83 percent of respondents said their loans had completely or mostly met their financials needs, and another 12 percent said the loans partly met their needs. In addition, we interviewed 18 randomly selected HECM borrowers, 11 of whom said their loans completely met their financial needs and 6 of whom said the loans partly met their financial needs. The money that borrowers receive from a HECM can be used for any purpose, and the loan does not have to be repaid until the borrower dies, sells the house, moves, or violates other conditions of the mortgage. Because there are no restrictions on how the money received from a HECM can be used, borrowers can choose to use the funds for necessities, such as housing, medication, or groceries, or for other purposes, such as vacations. Borrowers surveyed by AARP cited “paying off an existing mortgage,” “home repairs/improvements,” and “improved quality of life” as the most common “main uses” of reverse mortgage funds. In our interviews with HECM borrowers, borrowers cited additional reasons for looking into a reverse mortgage, including making insurance payments, providing money to children and grandchildren, paying off nonmortgage loans, and supplementing limited retirement income. Furthermore, some borrowers also may use HECM money to address issues associated with failing health. For example, a National Council on Aging report discusses the use of reverse mortgages to fund in-home services to allow seniors to age in place. In addition to unrestricted use of the money, HECM borrowers are not required to make monthly interest or principal payments to the lender as long as the borrower lives in the house. However, borrowers must continue to pay property taxes and homeowners’ insurance, and they must maintain the condition of the house. Borrowers also can choose different ways to receive money from a HECM—as monthly payments, a line of credit, or a combination of both. Monthly payments can be received for a fixed period (term payments) or for as long as the borrower has the loan (tenure payments), and lines of credit can be accessed at any rate the borrower chooses (including receiving all of the money up front). Borrowers who obtained HECMs in fiscal year 2008 mostly chose the line-of-credit payment option. According to HUD data, 89 percent of these borrowers chose to receive their money solely as a line of credit, and an additional 6 percent chose to receive a line of credit in combination with term or tenure monthly payments. Generally, those choosing a line of credit withdraw about 60 percent of their funds at the loan’s inception. Another benefit of HECMs is the potential growth over time in the amount of funds available to the borrower under each of the payment plans. For example, for borrowers who choose a line of credit but do not draw down all of the funds up front, any remaining line of credit grows by the same rate as the interest rate on the mortgage, plus 0.5 percent. To illustrate this HECM feature, consider a borrower who receives a line of credit of $100,000, withdraws $20,000 up front, and keeps the remaining $80,000 in the line of credit. If the borrower does not draw down any additional funds during the next year, and the interest rate plus 0.5 percent mortgage insurance premium were equal to 3 percent, the borrower’s credit line would grow to $82,400 at the end of 1 year. FHA mortgage insurance benefits borrowers in several ways. First, lenders can provide borrowers with higher loan amounts than they could without the insurance. Second, the insurance guarantees that HECM borrowers will have access to the full amount of promised loan funds, regardless of how long the borrower lives in the house, of changes in the home value, or of changes in the circumstances of the lender. For example, the lender may assign the loan to FHA once the loan balance reaches 98 percent of the maximum claim amount, and FHA will continue making payments to the borrower if the borrower has remaining funds in a line of credit or still is receiving monthly payments. According to HUD, program experience thus far suggests that lenders assign to FHA about 25 percent of HECMs made in any given year. Similarly, if a lender goes out of business, the lender can assign the HECM to FHA, protecting the borrower from any risk of losing promised loan funds. Finally, FHA insurance protects borrowers from owing more than the value of the house when the loan becomes due. When a HECM becomes due, the borrower or heir to the borrower can retain ownership of the home and repay the loan in full, including all accumulated principal and interest charges. However, if the borrower or heir sells the home, he or she will not be responsible for any loan amount above the value of the house. Finally, HERA authorized a “HECM for Purchase” program for seniors who want to use a HECM to buy a new home. Unlike a traditional HECM, a HECM for purchase is made against the value of the home to be purchased, rather than against the value of a home the borrower already owns. Before the HECM for purchase program was available, seniors wanting both to buy a new home and obtain a HECM would have had to conduct two transactions—first to buy the home with a forward mortgage, then to obtain a HECM to pay off the balance of that forward mortgage. The HECM for purchase program allows a senior to simultaneously buy a new home and obtain a HECM in a single transaction with a single set of closing costs, thereby reducing the cost to the senior. For example, with the HECM for purchase program, a senior who wants to buy a $300,000 home could use a HECM to partially finance this purchase. In this example, the senior qualifies for an $180,000 HECM on the basis of his age, the interest rate, and the value of the home to be purchased—the same factors used to determine the amount of a traditional HECM. The senior would combine the $180,000 in loan funds with $120,000 of his own—for example, from personal savings or money from the sale of his current home—to fully purchase the new home. He then would have no monthly mortgage payments and would avoid the closing costs of first obtaining a forward mortgage. As with a traditional HECM, the loan would become due when the senior died, sold the house, or permanently moved out of the house. While HECMs can provide many benefits, the up-front insurance premiums and origination fees of HECMs can be substantial. HUD permits borrowers to finance these costs in the mortgage. Mortgage insurance premium: FHA charges insurance premiums to cover the potential cost of paying insurance claims. FHA assesses a one-time, nonrefundable initial mortgage insurance premium equal to 2 percent of the maximum claim amount. The maximum claim amount is always higher than the amount a borrower can receive in HECM payments from the lender. However, because the HECM loan balance (with accumulated interest and fees) will exceed the amount a borrower receives in payments and potentially reach the maximum claim amount, FHA charges the mortgage insurance premium on the basis of the maximum claim amount. Origination fee: At the time of closing, lenders can charge an origination fee equal to the greater of $2,500 or 2 percent of the maximum claim amount, up to $200,000 plus 1 percent of any portion of the claim amount greater than $200,000, with the total origination fee not to exceed $6,000. To illustrate these up-front costs, consider a HECM borrower with a home value of $300,000. In this case, the borrower would pay (either out of pocket or financed through the mortgage) total up-front insurance and origination costs of $11,000 ($6,000 for the mortgage insurance premium and $5,000 for the origination fee). HECMs also have other up-front closing costs, such as appraisal and title search fees. In addition to the up-front premiums and fees, lenders add monthly servicing fees, interest charges, and monthly premiums to HECM balances. Servicing fee: A lender’s monthly servicing fee may not exceed $30 per month for fixed-rate or annually adjustable loans, and $35 for monthly adjustable loans. To finance this fee with the loan, FHA requires lenders to determine a prescribed dollar amount and deduct that amount, called the servicing fee set-aside, from the amount of loan funds available to the borrower. Each month, the lender deducts the servicing fee from this set- aside and adds it to the borrower’s loan balance. Interest charges: Monthly interest charges are also added to the borrower’s loan balance. Most HECMs have adjustable interest rates. Monthly mortgage insurance premium: Finally, in addition to the up- front mortgage insurance premium that we have previously described, FHA charges a monthly mortgage insurance premium based on the loan balance. FHA has set the monthly premium at an annual rate of 0.5 percent, and lenders also add this premium to the borrower’s loan balance each month. Because HECM borrowers do not make monthly payments to the lender, borrowers are responsible for the total amount of servicing fees, interest charges, and monthly mortgage insurance premiums accrued over the life of the loan, as well as any financed origination fees and up-front insurance premiums, when the loan becomes due. Therefore, the longer the borrower has the loan, the longer the borrower benefits from access to home equity without experiencing any of the costs. Multiple factors, including borrower decisions, interest rates, and home values, can affect the amount of home equity remaining—that is, the value of the home minus any debt against it—when a HECM comes due. The contingent nature of remaining equity could have implications for borrowers who may hope to have equity left over—whether for themselves or their heirs—after the HECM is repaid. According to AARP Foundation consumer education materials, prospective HECM borrowers should consider the amount of home equity that might be left at the end of the loan. Most of the borrowers with whom we spoke said that having remaining equity was very or somewhat important to them, citing various reasons, such as wanting to leave remaining equity to children or grandchildren or to have money left over to fund their retirement. As we have previously noted, the “rising debt, falling equity” nature of reverse mortgages means that over time, the amount of equity the borrower has in the home decreases as the loan balance increases (unless the home appreciates at more than a moderate rate). Several factors affect the rate at which equity changes and, therefore, the amount of equity the borrower will have to keep or pass on to heirs when the loan becomes due: Borrower decisions: The amount of the available funds borrowed will affect the amount of the remaining home equity. The more the borrower draws from the loan, the less remaining home equity the borrower will have. Interest rates: As we have previously discussed, because most HECMs have interest rates that vary, economic factors that determine interest rates also will affect the remaining home equity over the long term. Home values: The amount of home equity remaining for the borrower or heirs will be the value of the home, minus the amount owed on the HECM. Thus, whether and how much the value of the home appreciates also will affect the amount of remaining home equity. Figure 2 illustrates how interest rates and home values can affect remaining home equity over a 10-year period. The figure reflects three different interest and house appreciation rate assumptions for a borrower who draws down the HECM funds in a manner consistent with historical average borrower profiles: 1. Economic forecasts: Interest and appreciation rates follow economic forecasts for 2008 through 2017. 2. Constant rates: Interest rates remain constant at the starting rate, and houses appreciate at a constant 4 percent per year. 3. Historical patterns: Interest and house appreciation rates repeat the pattern seen from 1998 through 2007. As shown in figure 2, if interest and appreciation rates were to vary monthly on the basis of economic forecasts for 2008 through 2017, the sis of economic forecasts for 2008 through 2017, the borrower would have about $11,750 of remaining home equity—after borrower would have about $11,750 of remaining home equity—after repaying the HECM—at the end of 10 years. However, if interest rates repaying the HECM—at the end of 10 years. However, if interest rates were to stay constant at the initial rate, and house values were to were to stay constant at the initial rate, and house values were to appreciate by 4 percent annually, the borrower would have more than appreciate by 4 percent annually, the borrower would have more than $102,000 in remaining home equity. Finally, if interest and appreciation $102,000 in remaining home equity. Finally, if interest and appreciation rates were to repeat the pattern seen from 1998 through 2007, the rates were to repeat the pattern seen from 1998 through 2007, the borrower would have the most remaining equity of the three scenarios— borrower would have the most remaining equity of the three scenarios— that is, more than $191,000. that is, more than $191,000. HUD and industry officials indicated that the complex nature of HECMs may make them difficult for some borrowers to understand. Specifically, officials expressed concern about some borrowers’ understanding of the nature and costs of the loan. HECM is a loan product: AARP officials told us that some borrowers were not aware that they were borrowing money, rather than drawing directly from the equity in their homes. Similarly, the president of NRMLA provided an example of a consumer who did not understand why she owed more than the amount she borrowed, not realizing that her loan was accumulating interest and fees. In our interviews with borrowers, 2 of the 18 borrowers with whom we spoke did not understand that the money they were drawing was accumulating interest, indicating that they may not have understood that their HECM was a loan. Costs of HECMs: Some borrowers may not readily understand some of the costs of a reverse mortgage. For example, 1 borrower we interviewed said he was surprised by the $35 monthly servicing charge, and another borrower said she had not known how high the fees would be and was surprised by the amount of servicing fees the lender charged in a year. Similarly, some borrowers may understand the concept of interest charges, but may not understand that their HECM interest rate is variable and can increase over time. For example, several borrowers with whom we spoke did not know the type of interest rate they had, and 1 borrower said he was surprised that his interest rate varied. Effect of a HECM on remaining home equity: AARP representatives told us that some seniors may not understand that reverse mortgages result in “rising debt and falling equity,” which differs from the “falling debt, rising equity” result of a forward mortgage. Furthermore, our interviews with HECM borrowers illustrate how some may not be aware of all of the factors that can affect how much home equity they will have remaining after the reverse mortgage is repaid. For example, when we asked if changes in house values could affect their remaining home equity, several borrowers responded that they could not. Regulators and others have taken some actions to promote better consumer understanding of the costs and terms of HECMs. For example, as we discuss later in this report, HUD has taken some steps to improve the types and quality of information provided to prospective HECM borrowers during the required HECM counseling sessions. In addition, various entities, including FTC, the Financial Industry Regulatory Authority (FINRA), state agencies, and consumer groups have issued fact sheets and tips for consumers interested in reverse mortgages. For example, FTC has issued a fact sheet on reverse mortgages to help borrowers understand the product, and the Federal Deposit Insurance Corporation (FDIC) has included information on reverse mortgages in its consumer financial education program. In addition, Massachusetts has a Web site on “What Borrowers Need to Know” about reverse mortgages. Various state and federal agencies have some responsibility for assessing marketing for mortgage products, including FTC, federal and state banking regulators, and HUD. Agency officials indicated that while complaints are one factor that could trigger more extensive assessments of marketing materials, they have received few complaints about reverse mortgage marketing. Our review of selected advertisements found examples of marketing claims that were potentially misleading because they were inaccurate, incomplete, or used questionable sales tactics. Federal agency officials agreed that some of these advertisements raised concerns. Several federal and state agencies have a role in assessing and enforcing standards for the marketing of mortgage products. These agencies have responsibility over different segments of the mortgage market and may focus on different aspects of marketing claims. However, the federal and state agencies involved with assessing reverse mortgage marketing have not specifically focused on this product. FTC has responsibility for protecting consumers against unfair or deceptive practices originating from nonbank financial companies, such as mortgage brokers. Specifically, FTC enforces section 5 the FTC Act, which broadly prohibits unfair or deceptive acts or practices in commerce. Section 5(n) of the FTC Act defines “unfair” to mean practices that cause or are likely to cause substantial injury that cannot be reasonably avoided by consumers and is not outweighed by countervailing benefits to consumers or to competition. FTC has defined “deceptive” to mean any material representation or omission of information, or practice that is likely to mislead consumers who are acting reasonably under the circumstances. Misleading information is “material” to consumers if it is likely to affect the consumer’s decision to purchase a product or service. For some products, including forward mortgage products, FTC officials stated that they have conducted systematic searches of all forms of media, including Internet, print, and television advertisements for potential violations of the FTC Act. Violators of the FTC Act could be subject to actions ranging from warning letters to cease-and-desist orders. For example, in 2007, FTC sent warning letters to 200 forward mortgage lenders identifying potentially deceptive advertisements that the lenders had run and advising the lenders to review their marketing practices to ensure they complied with the law. FTC officials said they have not systematically searched for potentially misleading reverse mortgage marketing, and have not brought any law enforcement actions related to reverse mortgage marketing. However, FTC officials did note that they are maintaining an awareness of the potential risks associated with reverse mortgage marketing. For example, FTC staff said that they monitor their consumer complaint database for complaints about reverse mortgage marketing. In addition, FTC formed a task force of state and federal regulators and law enforcement agencies, in part to learn about complaints related to reverse mortgages that may not be captured by FTC’s database. The FTC officials said the task force will allow them to take early action if problems related to reverse mortgages begin to surface. In addition, FTC has developed educational materials for reverse mortgage counselors, which include information on identifying deceptive claims related to reverse mortgages. The FTC officials noted that because counselors are informed about the product, they may be well- positioned to help consumers identify questionable marketing claims and practices. Furthermore, FTC officials told us that they plan to speak about marketing issues at an upcoming reverse mortgage industry conference. HECM lenders that are regulated by one of the federal banking regulators—the Board of Governors of the Federal Reserve System (Federal Reserve), Office of the Comptroller of the Currency (OCC), Office of Thrift Supervision (OTS), FDIC, or the National Credit Union Association (NCUA)—are subject to compliance examinations that could include a review of HECM marketing materials. Each of the banking regulators with whom we spoke said that reverse mortgages have been included in compliance examinations of lenders, but because few of their regulated lenders offer reverse mortgages, they have not conducted many examinations that have included these loans. In addition, among lenders who offer the product, reverse mortgages do not make up a significant portion of bank activity—by one estimate, 1 percent of mortgage portfolios. Federal regulators said when compliance examinations are conducted, they could include an assessment of whether the materials comply with FTC Act standards. In addition, OTS prohibits the thrifts that it regulates from using marketing materials that contain inaccurate information or misrepresents the services offered—a standard that an OTS official described as being broader than that set by the FTC Act. Officials at each of these federal banking regulators noted that they are not aware of any violations related to reverse mortgage marketing. As FTC has been doing, federal banking regulators are maintaining an awareness of the potential risks associated with reverse mortgages, which could include those associated with reverse mortgage marketing. Specifically, the Consumer Compliance Task Force of the Federal Financial Institutions Examination Council—the interagency body that includes the federal banking regulators and develops guidance for federal bank examiners— recently formed a working group on reverse mortgages. Some HECM lenders are regulated at the state level, with HECM marketing materials subject to state compliance examinations. We obtained information on state agency efforts to review reverse mortgage marketing materials through the Conference of State Bank Supervisors (CSBS), which sent a set of standardized questions we developed to all 50 states and the District of Columbia. Of the 35 state banking regulators that responded to the questions, 22 said they routinely examine marketing materials as part of compliance examinations. However, only 1 state banking regulator—the Idaho Department of Finance—reported taking action against a lender because of reverse mortgage marketing. In addition, we learned that the Massachusetts Division of Banks issued a HECM lender a cease-and-desist order for marketing HECMs as “government benefits.” State banking regulators also are maintaining an awareness of the potential risks associated with reverse mortgages. For example, these regulators also formed a task force to examine consumer protections for reverse mortgages, including those related to reverse mortgage marketing. In addition, CSBS and the American Association of Residential Mortgage Regulators recently developed reverse mortgage examination guidelines for state regulators conducting reverse mortgage compliance examinations. These guidelines contain items that state regulators could review, including whether the institution uses any form of solicitation that appears to be generated by the government or can be interpreted to be misleading to the consumer. HUD also exercises limited regulatory authority over the marketing activity of HECM lenders to ensure that lenders’ advertisements do not imply endorsement by HUD or FHA. Actions that HUD could take range from asking for the removal or clarification of a marketing claim to a referral to the Mortgagee Review Board. HUD officials cited one instance in which they referred a lender to the board for misrepresenting the HECM as a “government rescue loan.” HUD may also make a referral to the Department of Justice, which has jurisdiction over criminal prosecution. Of the federal regulators, HUD is the only agency that has taken action against an entity as a result of misleading reverse mortgage marketing. However, HUD officials said they do not actively monitor HECM marketing, and do not review HECM marketing materials as part of routine assessments of HECM lenders. Some agencies with whom we spoke indicated that while complaints could trigger more extensive assessments of marketing material, they have received few, if any, complaints about reverse mortgage marketing. For example, FTC officials said that they have not conducted systematic searches for misleading reverse mortgage advertisements as they have for products about which they have received many complaints. In addition, an FDIC official explained that consumer complaints related to a lenders’ marketing are one of several factors that could cause compliance examiners to review marketing materials. Similarly, OTS officials said a consumer complaint could trigger an examination of a reverse mortgage lender. However, FDIC and OTS officials told us that they have received few complaints related to reverse mortgage marketing. Consistent with these examples, FTC, the Federal Reserve, OCC, OTS, FDIC, and HUD all reported receiving few HECM marketing complaints from calendar year 2005 through 2008. FTC officials said they received 50 complaints related to reverse mortgage marketing in this period, out of more than 4 million complaints in their database. Of these 50 complaints, 8 involved a reverse mortgage lender implying an affiliation with a government agency; 9 involved other questionable marketing tactics, such as a mailing appearing to be from a personal friend; and the others were not directly related to inaccurate claims within the marketing materials. OTS officials reported 1 HECM marketing complaint over this period, and officials at the Federal Reserve and FDIC did not report any complaints related to HECM marketing in this period. In addition, OCC officials said a review of reverse mortgage complaints in this period did not reveal any concerns with marketing. Similarly, among the 123 HECM complaints that HUD received from calendar year 2005 through 2008, only a few related to HECM marketing. In addition, representatives of state banking regulators told us that they have not received many complaints related to reverse mortgage marketing. However, while the low volume of complaints could indicate few problems with reverse mortgage marketing, FTC officials noted that it also could be a result of consumers not being aware that they have been deceived, consumers not knowing to whom to complain, or elderly consumers being less likely to complain. While the extent of misleading HECM marketing is unknown, our limited review of marketing materials found some examples of claims that were potentially misleading because they were inaccurate, incomplete, or employed questionable sales tactics. We reviewed Internet marketing material from the 12 HECM lenders that originated at least 1,000 loans in fiscal year 2008, and reviewed mailed material from 11 of these 12 lenders. In addition, we reviewed mailed, Internet, information seminar, and DVD materials from other entities that advertised HECMs, for certain potentially misleading claims (discussed in the following paragraphs). We found few such claims among the materials from the top 12 HECM lenders, and some examples in the materials from the other entities. Some of the potentially misleading marketing claims we found raised concern among officials at FTC, HUD, and the federal banking regulators. Among the materials we reviewed, we found 26 different entities that made potentially misleading claims in their HECM marketing materials. This group includes entities regulated by each of the federal banking regulators with whom we spoke, as well as FTC and state regulators; it also includes both members and nonmembers of NRMLA. NRMLA members are expected to adhere to the association’s Code of Ethics, which contains specific rules on ethical advertising. We selected seven advertisements that represented these claims and submitted them to FTC, HUD, the Federal Reserve, OCC, FDIC, and OTS for review. We asked officials at each of these agencies for their views on these claims and whether they would take any action if such advertisements were the subject of a complaint or surfaced as part of an examination. In general, the officials with whom we spoke agreed that the claims in six of the seven advertisements raised some degree of concern and might prompt further investigation. In commenting on the advertisements, the officials indicated that the claims ranged from being confusing to false. Several of the officials noted that they would need to consider the fuller context of the advertisement to determine if the claims were misleading and the level of action they would take if these six advertisements were the subject of complaints or compliance examinations. For example, an official at FTC said that if its staff were to follow typical investigative procedures, they would request more information from the advertisers, such as data on the number of consumers who responded to the advertisement. Similarly, officials at OTS noted that an assessment of consumer reactions to the advertisements might be needed to determine if the advertisements violated the FTC Act. An FTC official also said that the counseling requirement for HECMs would factor into their assessment of HECM marketing. He said that the counseling requirement would not, as a matter of law, prevent FTC from taking law enforcement action against a HECM lender for deceptive marketing. However, FTC would consider the likelihood that counseling would mitigate the effect of the potentially misleading information. In addition to the regulators, we spoke with the president of NRMLA to obtain his views on these seven advertisements. He generally agreed with the regulators’ assessment that these claims raised concerns. The six potentially misleading claims that we identified and agency officials generally agreed raised concerns were as follows: “Never owe more than the value of your home”: The claim is potentially misleading because a borrower or heirs of a borrower would owe the full loan balance—even if it were greater than the value of the house—if the borrower or heirs chose to keep the house when the loan became due. This claim was made by HUD itself in its instructions to approved HECM lenders; however, in December 2008, HUD issued a mortgagee letter to HECM lenders explaining the inaccuracy of this claim. This was the most common of the potentially misleading statements we found in the marketing materials we reviewed. Of the potentially misleading statements found among the top 12 HECM lenders, variations of this statement were the most prevalent. Implications that the reverse mortgage is a “government benefit” or otherwise not a loan: While HECMs are government-insured, the product is a loan that borrowers or their heirs must repay, not a benefit. Examples of this type of claim include the following: “You may be qualified for this government-sponsored benefit program” and “Access the equity in your home without having to sell, move, or take out a loan.” An FDIC official noted that consumers might be confused about the reverse mortgage being a loan because there are no monthly payments, and this claim plays on this confusion. “Lifetime income” or “Can’t outlive loan”: Although borrowers can choose to receive HECM funds as monthly tenure payments, even under this option, payments will not continue once the loan comes due (e.g., when the borrower moves out of the house or violates other conditions of the mortgage). HUD officials noted that this claim could be particularly harmful when paired with the claim that the reverse mortgage is a government benefit. In addition, claims that a HECM borrower cannot outlive the loan are inaccurate because a line of credit can be exhausted during the borrower’s lifetime, and term monthly payments do not continue once the specified term has ended. “Never lose your home”: This claim is potentially misleading because a lender could foreclose on a HECM borrower’s home if the borrower did not pay property taxes and hazard insurance or did not maintain the house. HUD officials told us that they were aware of cases in which borrowers obtained a reverse mortgage without understanding these requirements and did not have the means to meet these obligations. Misrepresenting government affiliation: Figure 3 illustrates an example of this type of claim, including the use of government symbols or logos and claims implying that the lender is a government agency. HUD officials said that among the advertisements we asked them to review, this would be the only one they would refer to the Mortgagee Review Board. Officials at FDIC and OTS noted that in 2007, the federal banking regulators jointly issued an alert to warn consumers about similar advertisements that suggested that consumers could receive cash grants from a “Community Reinvestment Act Program” endorsed by the federal banking regulators. In addition, as we have previously noted, FTC has received consumer complaints about advertisements for reverse mortgages that appear to be from a government agency. Claims of time and geographic limits: These claims falsely imply that HECM loans are limited to a certain geographic area, or that the consumer must respond within a certain time to qualify for the loan. Examples include “must call within 72 hours” and “deadline extended,” as well as the claim that a consumer’s residence is “located in a Federal Housing Authority qualifying area.” An OCC official said that he would consider these to be high-pressure tactics against which he would caution banks, even if they do not rise to the level of unfair or deceptive practices. As we discuss in this report, federal agencies have mechanisms to identify and address specific cases of misleading marketing. They also have various means, such as conferences and educational materials, for communicating more generally with mortgage industry participants and the public about consumer protection issues. However, our research showed that potentially misleading claims exist in the marketplace, which suggests that some HECM providers may not be sufficiently considering federal marketing standards in designing their marketing materials. We referred the claims we identified to FTC or the appropriate federal banking regulator for further review. Concerns exist that reverse mortgage borrowers could be vulnerable to inappropriate cross-selling, a practice involving the sale of financial or insurance products that are unsuitable for the borrower’s financial situation using the borrower’s reverse mortgage funds. While the federal role in addressing this practice has been limited, recent legislation includes provisions to restrict inappropriate cross-selling in conjunction with HEMCs, and HUD is in the early stages of developing regulations to implement these provisions. Although the full extent of inappropriate cross-selling is unknown, state regulators have identified some instances of this practice in enforcing insurance laws. Because reverse mortgages allow borrowers access to a large amount of money at once, consumer advocates have expressed concern that reverse mortgage borrowers may be vulnerable to the sale of financial and insurance products that may be unsuitable for some borrowers. According to an AARP survey of reverse mortgage borrowers, 4 percent of respondents said they used a reverse mortgage to make investments or purchase an annuity or long-term care insurance. Some consumer advocates, including representatives of AARP and the National Association of Consumer Advocates, have expressed concern that these products are sometimes sold inappropriately to reverse mortgage borrowers. In particular, consumer advocates worry that reverse mortgage borrowers could be sold some annuity products that may be inappropriate to the borrower’s circumstances. For example, there is concern that elderly reverse mortgage borrowers may be sold deferred annuities, where payments may not begin for many years and high fees may be charged for early access to the money. Inappropriate cross-selling could take different forms. For example, an individual who has financial incentive to sell an elderly client a reverse mortgage as well as another product, such as a deferred annuity, could sell both products to a senior without informing the client of the costs and potential implications. Multiple parties, such as HECM originators and insurance agents, also could work together for their financial gain. For example, an insurance agent could compensate a HECM originator for referring HECM borrowers to him, even if using the HECM money for an insurance product is not in the borrower’s best interest. While certain annuity products may be suitable for some HECM borrowers, such as those who want to receive payments for life regardless of where they live, HUD has noted that HECM borrowers should be fully informed of the advantages and disadvantages of using HECM funds to purchase these products. HECM counselors are instructed to inform prospective borrowers who are also interested in purchasing annuities that HECMs also offer monthly payment options, and while these monthly payments only last for a specified time or as long as the borrower lives in the house, they may be more suitable to the HECM borrower’s needs. Because cross-selling typically involves the sale of insurance products generally regulated at the state level, the role of federal agencies in addressing the issue of cross-selling in conjunction with HECMs has been limited and largely has been focused on consumer education and disclosures. For example, federal agencies have had some role in informing HECM borrowers about the risks and costs of purchasing other financial products using HECM funds. As we discuss later in this report, HUD’s HECM counseling protocol requires the provision of certain consumer education materials to counselees interested in purchasing an annuity with their HECM funds. Additionally, pursuant to Truth in Lending Act provisions, the Federal Reserve developed a disclosure, known as the total annual loan cost (TALC) to illustrate the short- and long-term costs of reverse mortgages. Lenders must provide reverse mortgage borrowers with this disclosure, and if the lender is aware that the consumer is purchasing an annuity with reverse mortgage funds, these costs must be accounted for in the TALC as part of the total mortgage costs. In addition, the Securities and Exchange Commission (SEC) is the federal regulator for variable annuity products—annuities that are tied to the stock market or other investments—and so has responsibility for ensuring the appropriate sale of these products. In May 2006, the three following entities began an initiative to protect seniors from the sale of unsuitable securities: SEC; FINRA, which is a nongovernmental regulator for securities firms; and the North American Securities Administrators Association. As part of this effort, SEC and other regulators conducted a review of 110 information seminars, many of which were targeted to seniors, where attendees were offered a free meal. These officials found that products sold at these seminars included annuities and reverse mortgages, and, in some instances, those holding the seminars recommended products that did not appear to be suitable for the consumers. In addition, in September 2007, SEC approved a FINRA rule, which includes suitability standards for deferred variable annuities. As with the state suitability laws we discuss in the following text, these standards may limit the sale of unsuitable deferred variable annuities to seniors, whether purchased with HECM funds or not. As we have previously noted, Congress passed HERA in 2008, which includes provisions intended to curb the sale of unsuitable financial products to consumers using HECM funds. According to the provisions of the act, a borrower cannot be required by the lender or any other party to purchase an insurance, annuity, or similar product as a condition of obtaining a HECM. In addition, the lender either must not be associated with any other financial or insurance product or must maintain firewalls and other safeguards to ensure that its employees originating the HECMs do not also sell other financial or insurance products. Finally, HUD must conduct a study to determine appropriate consumer protections and underwriting standards to ensure that the purchase of other financial products is appropriate for the consumer. HUD has responsibility for enforcing the cross-selling provisions in HERA, but the department is in the preliminary stages of developing regulations to implement them. According to HUD officials, HUD is drafting a Federal Register notification to solicit feedback on this issue. HUD officials noted that the draft notification poses a number of questions concerning several issues, including HUD’s ability to monitor and enforce the provision; the usefulness of disclosures, education, and counseling in preventing inappropriate cross-selling; what would constitute “appropriate” firewalls; and what types of financial products should be covered. To further inform development of the new regulations, HUD also met with HECM lenders, some of which already have cross-selling policies. For example, one large HECM lender requires that loan officers follow up with HECM borrowers before and after closing to confirm that the borrower has not been sold any insurance products. Meanwhile, HUD has issued a mortgagee letter instructing HECM lenders that until HUD issues more definitive guidance, lenders must not condition a HECM on the purchase of any other financial or insurance product, and should strive to establish firewalls and other safeguards to ensure there is no undue pressure or appearance of pressure for a HECM borrower to purchase another product. While HUD is considering regulations to implement the HERA cross- selling provisions, the reverse mortgage industry is also discussing the implications of these provisions. NRMLA representatives have noted that while HERA could prevent inappropriate cross-selling, it also could prevent seniors from purchasing beneficial products. In particular, the president of NRMLA noted that although some seniors who obtain reverse mortgages do so to cover everyday living expenses, others are financially sophisticated individuals who may desire to use their reverse mortgages as part of long-term financial and insurance strategies. He said that for the latter group of borrowers, purchasing other products in conjunction with a reverse mortgage may be beneficial. For example, some insurance products may be suitable if they still allow seniors some access to the funds when needed. NRMLA has submitted its legislative interpretation to HUD. According to the NRMLA General Counsel, this interpretation allows companies to sell multiple products to reverse mortgage borrowers, as long as (1) the company has separate sales forces for reverse mortgages and other products, and there is no compensation for referrals between the sales forces; or (2) the reverse mortgage transaction is separate from the sale of other products, and the sale of the reverse mortgage and other products is separated in time. The president of NRMLA also indicated that in any event, borrowers should receive a clear disclosure, informing them that they are under no obligation to purchase any other product or service with their reverse mortgage funds. Many states have passed suitability laws that are designed to protect consumers from being sold unsuitable insurance products, including annuities. At least 26 states have adopted the National Association of Insurance Commissioners (NAIC) model regulation for suitability in annuity transactions. In addition, at least 10 other states have adopted other legislation or regulations related to the suitability of insurance products. The NAIC model regulation states that in recommending to a consumer the purchase of an annuity, the insurance producer shall have reasonable grounds for believing that the recommendation is suitable for the consumer on the basis of the facts disclosed by the consumer. In addition, a few states allow citizens to cancel policies of individual life insurance or individual annuity contracts within a certain period from the date of purchase, regardless of whether these products were purchased with reverse mortgage funds. Furthermore, certain states have enacted laws specific to reverse mortgages. For example, according to the California Civil Code, a reverse mortgage lender cannot offer, or refer the borrower to any other party who will offer, an annuity to the borrower before closing on a reverse mortgage. A number of state insurance regulators reported recent examples of violations of their state insurance laws that involved HECM funds. Through NAIC, we sent a set of standardized questions on cross-selling practices to insurance commissioners from all 50 states and the District of Columbia. Of the 29 state insurance regulators that responded to our questions, 8 said that from 2005 through January 2009, they had at least one case of an insurance agent selling an unsuitable insurance product that a consumer had purchased using reverse mortgage funds. Of those 8 regulators, 4 said their states took formal or informal action against the companies that sold these products. Cross-selling cases that involved actual or potential violations of state insurance laws included the following: An official at the Insurance Division of the Hawaii Department of Commerce and Consumer Affairs described a case in which an independent mortgage broker was prosecuted for misrepresentation of an annuity product. The broker, who also owned his own insurance company, deceived 15 clients by including paperwork for an annuity in their HECM closing documents without their knowledge. The clients did not realize they were signing to purchase an annuity in addition to a reverse mortgage, and the broker collected fees from the HECM sale and commission from the annuity. A sales manager of an insurance company violated the Maine Insurance Code by allowing transactions that were not in the best interest of the customer. The sales manager had arranged for a representative of a large reverse mortgage lender to speak with his sales agents about reverse mortgages. The agents then referred 14 clients to the reverse mortgage lender, all of whom obtained reverse mortgages. One particular client, an 81-year old widow, was contacted continually until she obtained her reverse mortgage funds, and was then sold a deferred annuity. The interest rate accruing on the reverse mortgage was 4.12 percent, and the deferred annuity earned only 3.25 percent. In California, two insurance agents are accused of designing a seminar to teach licensed insurance and real estate agents how to sell reverse mortgages to senior citizens in conjunction with annuities. It is further alleged that they were teaching agents to convince senior homeowners that purchasing an annuity with reverse mortgage funds is a condition of obtaining the loan. The California Department of Insurance is currently investigating this case. While state insurance laws have captured some cases of inappropriate cross-selling to HECM borrowers, regulators may not always be aware when suitability violations involve inappropriate cross-selling. For example, a FINRA representative noted that the source of funds used to purchase an unsuitable annuity may not be relevant for determining a violation of FINRA’s suitability standards, so examiners may not always know if HECM funds were used. Consumer complaints also could indicate the potential extent of inappropriate cross-selling; however, federal and state agencies do not specifically track complaints related to this practice. For example, an NAIC official told us that while NAIC’s complaint database contains a code for annuity complaints, it does not track whether these complaints involved reverse mortgages. In addition, of the 29 state insurance regulators who responded to our questions, 14 indicated that their agency does not have a searchable database for complaints. HUD’s internal controls for HECM counseling do not provide reasonable assurance of compliance with HUD requirements. The results of our limited testing of HECM counseling sessions found that counselors omitted information required by HUD, particularly on alternatives to HECMs and the financial implications of these loans. We also found that HUD records did not always accurately reflect the content and length of counseling sessions, thereby undermining the usefulness of HUD controls that rely on these records. As a result of these control weaknesses, some prospective borrowers may not be receiving the information needed to make informed decisions about obtaining a HECM. HUD has a range of internal control mechanisms to help ensure that HECM counselors comply with counseling requirements. GAO’s guidance entitled Standards for Internal Control in the Federal Government states that internal controls should provide reasonable assurance that agency objectives—in this case, ensuring that prospective HECM borrowers are well-informed—are being achieved. According to HUD officials, HUD’s internal controls include the following: 1. counseling standards as set forth in regulations, mortgagee letters, and 2. a counselor training and certification program; 3. a Certificate of HECM Counseling (counseling certificate) that, once signed by the counselor and the counselee, should provide HUD with assurance that counselors complied with counseling standards and that prospective borrowers were prepared to make informed decisions; 4. a monitoring process in which HOC staff oversee the performance of counseling agencies and HUD headquarters staff oversee grant agreements with HECM intermediaries; and 5. pre- and post-insurance checks by contractors and HUD field staff of HECM loan files to ensure that a signed counseling certificate is present for each loan. Although GAO’s internal control standards encourage agencies to test the effectiveness of their internal controls, HUD has not done so for the controls we have previously described. HUD officials told us that they recognize the importance of such testing and have pursued methods to determine whether HECM counseling clients were receiving required information. For example, HOC staff survey small samples of clients for all types of housing counseling about their counseling sessions, but staff from two of the HOCs told us that they receive few responses. While this survey does not currently contain any questions specific to HECM counseling, HUD staff have drafted a new survey that will focus exclusively on HECM counseling. Additionally, HUD funded the development of an AARP project to independently observe HECM counseling sessions and provide feedback to the counselors. However, a HUD official indicated that the project will not be implemented until fiscal year 2010 due to a transfer in project leadership from AARP to NeighborWorks® America, another nonprofit organization involved in the HECM counseling program. Representatives from Money Management International, Inc. (MMI), a national intermediary that received HUD fiscal year 2008 grant funds for HECM counseling, told us that they record and review recordings of counseling sessions as part of their quality control process. However, HUD officials said that they do not see the overall results of those reviews. HUD staff also advised us that HUD had recently revised the review checklist used by its staff to evaluate counseling agency performance to include a section specifically on HECM counseling. Our independent evaluation of HECM counseling sessions found that counselors did not consistently comply with HECM counseling requirements. To test counselor compliance with key HECM counseling requirements, GAO staff posed as prospective HECM borrowers for 15 counseling sessions offered by 11 different agencies. We scheduled these sessions with HECM counselors who were employed by agencies that have provided some of the highest numbers of HECM counseling sessions. These agencies included branches or affiliates of two national intermediaries—MMI and the National Foundation for Credit Counseling, Inc. (NFCC)—that received HECM counseling grant money in fiscal year 2008, as well as other HUD-approved agencies. For each session, we determined whether the counselors covered required topics, primarily those referenced in HUD’s counseling certificate, which counselors are required to complete. The certificate identifies or refers to counseling requirements originally set forth in statute, HUD regulations, or mortgagee letters. (See app. II for a copy of a blank counseling certificate.) Our undercover counselees participated in telephone counseling sessions because HUD estimated that about 90 percent of all HECM counseling sessions were conducted in this manner. Our assessment primarily focused on whether counselors conveyed basic information on required topics, not whether counselors exhaustively covered each topic. In addition, we assessed limited aspects of how the counselors presented the information (see app. III). The counselor for each session sent our undercover counselee a signed counseling certificate certifying compliance with HUD requirements. Although none of the 15 counselors covered all of the required topics, all of them provided useful and generally accurate information about reverse mortgages and discussed key program features. For example, in discussing the financial implications of the loan, most counselors provided information on the growth in the HECM line of credit and explained that the loan balance would increase over time. In addition, most counselors also explained that the loan would become due and payable when no borrower lives in the property, and that borrowers must pay taxes and insurance. Counselors also often supplemented their discussions with useful information, such as a description of factors that affect available interest rates and the fact that borrowers would receive monthly statements from the lender, even though this information is not specifically referred to on the counseling certificate. When our undercover counselees specifically asked for help in finding a lender, or asked directly for a recommendation, the counselors appropriately explained that they were not permitted to do so and some referred the counselees to the HUD Web site for a listing of lenders. At the end of the sessions, all of the counselors informed the undercover counselees that they could call back with additional questions. However, despite certifying on the counseling certificate that they had covered, in detail, all of the information HUD requires, all of the counselors omitted at least some required information (see fig. 4). The required information that counselors most frequently omitted included the following: Other housing, social service, health, and financial options: Seven of the 15 counselors did not discuss options, other than a HECM, that might be available to a homeowner, such as considering other living arrangements, meal programs, or health services that local social service agencies might provide. Our findings are consistent with findings in AARP and HUD Office of Inspector General reports suggesting that counselors may not always be discussing alternatives to a reverse mortgage with clients. Although the other 8 counselors did present options, most did so broadly, referring our undercover counselees to a nationwide, toll-free telephone number for the National Association of Area Agencies on Aging for more information, rather than providing specific information about local resources. However, 1 counselor did provide our agents with specific telephone numbers or Web sites for specific programs, such as those sponsored by a state’s department of aging and organizations that assist senior citizens with meeting home energy needs and obtaining prescription drugs. Although HUD guidance on this point is not explicit, HUD officials told us that they expect counselors to be knowledgeable about local resources, even if the counseling sessions were conducted by telephone. Other home equity conversion options: The same 7 counselors likewise did not discuss other types of (and potentially lower-cost) reverse mortgages that state or local governments might sponsor for specific purposes. For example, some state governments provide reverse mortgages for payment of taxes or for making major repairs that do not need to be repaid until the house is sold. These loans, which also could be contingent on the income of the applicant, may be appropriate for borrowers who need to cover specific types of costs. The financial implications of entering into a HECM: Fourteen counselors only partially met this requirement, and 1 did not, because they omitted information that HUD directs counselors to convey. For example, 6 of the counselors did not provide estimates (using computer software) of the maximum amount of funds that might be available to the counselee under the HECM payment plan options. According to a HUD official, the purpose of providing these estimates is to help prospective borrowers understand how reverse mortgages would address their financial situations. For example, if a potential borrower needs to pay off an existing mortgage, receiving HECM funds in monthly payments might not be appropriate. Additionally, 14 counselors did not tell counselees that they could elect to have the loan provider withhold funds to pay property taxes and insurance, and 9 counselors omitted basic information about the advantages and disadvantages of each payment plan (i.e., they usually did not address the term plan). A disclosure that a HECM may affect eligibility for assistance under other federal and state programs: While most counselors discussed the tax consequences of a HECM, 6 of 15 did not indicate that eligibility for some federal and state programs could be affected if borrowers had more money in their bank accounts than allowed under such programs’ terms. For example, eligibility for a means-tested program, such as the federal government’s Supplemental Security Income (SSI), could be affected if borrowers deposited in their bank accounts an amount of money that exceeded the program’s threshold for countable resources by the end of the month. Asking if a homeowner had signed a contract or agreement with an estate planning service: HUD implemented this requirement on the basis of a statutory provision intended to protect HECM borrowers from paying excessive fees for third-party services that are of little or no value. To illustrate, an estate planning service might charge a fee, unauthorized by HUD, because it “arranged” for borrowers to obtain a HECM. However, 14 of the 15 counselors did not ask this question, although of the 14, 4 cautioned the undercover counselees that such services were unnecessary to obtain a HECM. If a counselee responds affirmatively to this question, HUD requires the counselor to discuss the extent to which services under the contract may not be needed or may be available from other sources at no or nominal costs. The results of our review indicate that signed counseling certificates are not a reliable indicator that the counselors complied with HUD requirements. Nevertheless, HOC staff (consistent with their procedures for reviewing counseling agencies) consider the presence of a signed certificate in a counseling agency’s files to be a key compliance indicator. Additionally, HUD requires a signed certificate as a condition of insuring a HECM and performs checks to ensure compliance with this requirement. Thus, the fact that we observed a substantial amount of noncompliance despite the existence of a signed counseling certificate for each undercover session raises questions about the effectiveness of HUD internal controls that rely on the validity of the certificate. In addition, HUD considers having a network of examination-certified counselors as an internal control that helps ensure compliance with counseling requirements. HUD expects to issue regulations in 2009 that will require all HECM counselors to pass a written examination, establish a roster of eligible HECM counselors, require counselors to meet continuing education requirements, and allow HUD to remove counselors for cause. HUD believes that this proposed rule will help improve the quality of HECM counseling. However, all but 1 of the counselors who conducted our counseling sessions were examination-certified, and they all omitted required information but still signed the counseling certificate. These results suggest that examination certification by itself does not ensure high levels of compliance. In addition to requiring HECM counselors to convey certain information, HUD requires them to record the length of each counseling session on the counseling certificate. Although HUD has not issued guidance on the subject, HUD officials told us that the recorded time should reflect only the time spent counseling the client. HUD does not prescribe how long a counseling session should last, but the department uses this as a factor in monitoring the performance of counseling providers and awarding counseling grant funds. For example, HUD officials told us that HOC staff responsible for overseeing HECM counseling providers examine the times on the counseling certificates to identify those sessions that are unreasonably short, to help identify potential performance problems. Staff from two of the HOCs noted that unusually short counseling times or discrepancies between actual and recorded times would prompt follow-up actions. AARP’s 2007 study indicated that counseling provided by examination-qualified counselors, who were obligated to follow the HECM counseling protocol in effect at the time, typically lasted over 1.5 hours. Six of the 15 counselors for our undercover sessions overstated the length of the counseling sessions on the counseling certificates. All 6 worked for counseling agencies that received or were eligible to receive HUD HECM counseling grant funds in 2008. In 3 of these cases, the sessions ranged from 22 to 30 minutes, but the recorded times ranged from 45 minutes to 1 hour. In a 4th instance, the session lasted about 20 minutes, but the counselor recorded 30 minutes. These 4 sessions, for which our undercover counselees were charged customary fees of $75 to $125, were the shortest we observed and omitted much of the required information, particularly the discussion of options and various aspects of the financial implications of a HECM. An intake staff person from 1 of the counseling agencies told us that the agency’s counselors generally conducted 3 to 4 HECM counseling sessions every 2 hours, and a counselor from this agency indicated that a session likely would last no more than 10 minutes. The counselors for the remaining 2 sessions (1 of which was more comprehensive than many others) also overstated the time on the certificate, recording the sessions as lasting 2 hours, when 1 lasted 45 minutes and the other 57 minutes. For the other 9 sessions, which typically lasted anywhere from about 30 minutes to about 1 hour (see fig. 4), the counselors recorded the entire length of the session on the counseling certificate and did so in a generally accurate manner. However, the times they recorded included the amounts of time they took to obtain and process credit card information and, in some cases, to read a disclosure statement describing the agency’s counseling policies. The amounts of time differed by agency, but in one instance, the noncounseling time totaled about 13 minutes (out of a 39-minute session). While HUD has not issued specific guidance regarding what activities should be recorded as part of the counseling time, times recorded on the certificate do not necessarily reflect the amount of time that counselors spent on supplying HUD-required information. The considerable variation both in the length of the sessions (ranging from 20 to 66 minutes) and in how counselors recorded time on the certificates raises questions about the consistency of HECM counseling and the reliability of the information that HUD uses to monitor counseling providers. The lack of a mechanism to ensure that counselors record counseling times more accurately and uniformly undermines HUD’s ability to identify and act on performance problems and ensure that counselees are getting their money’s worth. In May 2008, HUD issued instructions allowing counseling agencies to charge a fee of up to $125 for HECM counseling, as long as the fee did not create a financial hardship for the client. The instructions require counseling agencies to make a determination of the client’s ability to pay (means test) by considering factors, including, but not limited to, the client’s income and debt obligations. The instructions also stress that the client should be informed of the fee before receiving counseling, and that no client should be turned away due to an inability to pay. These requirements are particularly significant because federal resources dedicated to fund HECM counseling have been limited and lenders are prohibited from paying for counseling services. As a result, prospective HECM borrowers are more likely to pay for the counseling themselves, either up front or by financing the fee in the mortgage. Consistent with HUD requirements, 12 of the 15 counseling agency staff responsible for charging the fee, whether intake staff or counselors, informed our undercover counselees of the fee in advance of the session and charged $125 or less. However, staff at most of the agencies did not collect the minimum amount of information that HUD requires to perform the means test. More specifically: For 4 of the 15 sessions, agency intake staff took the counselee’s credit card information up front, without obtaining any information about income and debt obligations, although counselors for 3 of these sessions later asked for the person’s income but not their debt. The counselor for the other session did not ask for any additional financial information. Four other counselors asked about the undercover counselees’ income, but not their debts. Four counselors, all from MMI, did not ask directly about income and debts, but asked a series of screening questions to identify certain types of potential financial hardship. Specifically, these counselors asked whether the undercover counselees were in a hospice or had declared bankruptcy, or whether the home was in foreclosure. The counselors also indicated that they could waive the fee if the counselee did not have the ability to pay. MMI confirmed that this approach was consistent with their screening policies and noted that should a counselee feel unable to afford the fee, qualification for a fee waiver would be determined by completion of a debt and income analysis during the counseling session. NFCC representatives indicated that many of their affiliates use these types of screening questions, as well, to determine if the counseling fee should be waived. Two counselors did not collect any financial information from the undercover counselees. Two other counselors did not collect any financial information from the undercover counselees. One counselor did collect information about the undercover counselee’s income and debt, but did so to analyze the counselee’s budget. Although HUD has instructed counseling agencies to consider a client’s debt and income, it has not developed criteria or thresholds for using this information. Additionally, HUD guidance states that agencies may use “objective criteria” in assessing a client’s ability to pay, but does not specify what types of criteria are appropriate. Officials from the two national intermediaries told us that HUD’s guidance could use clarification. In the absence of clear guidance, similarly situated counselees could be treated differently, and those facing financial hardships may be paying for counseling when they should not have to pay. The HUD HECM counseling protocol, which HUD adopted in 2006 and plans to issue in a substantially expanded version in 2009, summarizes counseling requirements and identifies procedures that HUD Network Counselors, which include counselors employed by the national counseling intermediaries, must follow. While much of the protocol summarizes counseling requirements referenced in the housing certificate, it also requires counselors to (1) send clients information packages about the financial implications of reverse mortgages before or after the counseling session, (2) discuss an estimated TALC disclosure with the client, (3) collect specific information about the client’s financial needs and goals, and (4) send certain educational materials to clients who express an interest in purchasing an annuity. HUD expects to issue regulations in 2009 that will make compliance with a revised protocol mandatory for all HECM counselors. The revised protocol, currently in draft, expands on some of these requirements and requires counselors to ask a series of questions to determine whether the counselees understand the essential features of a reverse mortgage. The counselors for all of our 15 undercover counseling sessions were required to follow the protocol because they were HUD Network Counselors. However, we found significant noncompliance with the protocol requirements that we previously cited. The protocol requires that the information package on financial implications be sent to the client before or after the counseling session. Among other things, the package should contain customized information, including estimates of cash advances that would be available to the counselee under the different payment options, an estimated TALC disclosure and estimates of projected loan costs, and a loan amortization table. However, only 1 of the 15 counselors sent an information package containing all of the required information (see fig. 5). Additionally, 8 counselors sent our undercover counselees a package that did not contain any customized information, and 3 others sent only some of the customized information. Furthermore, although the protocol requires counseling agencies to offer the client the option of receiving the information package before the counseling session, our undercover counselees received no such offer in 13 cases. Of the 2 counseling agencies that offered to send the package, only 1 actually did so. NFCC officials told us that sending an information package beforehand is important, especially before telephone counseling, so that the counselor and counselee can reference the same documents during the session. Our evaluation of the packages we received also suggests that the ability to refer to written material during the counseling session can enhance counselees’ understanding of HECMs (see fig. 5 and app. III for additional information). The protocol requires that HECM counselors discuss an estimated TALC disclosure that HECM borrowers must sign at loan closing, but 8 counselors did not describe the disclosure or its implications during the sessions. The estimated TALC, which shows the average annual costs of a reverse mortgage at different points in time, is important because it illustrates that from a cost perspective, reverse mortgages are generally not a good choice for borrowers who plan on having the loan for only a few years. However, because the TALC is fairly complex, borrowers could have difficulty understanding it without assistance. Furthermore, Federal Reserve officials indicated that this disclosure also allows borrowers to compare costs across lenders and should be explained at the time of counseling. The protocol also directs counselors to collect specific information about the client’s needs and goals—such as why the client would like to obtain a HECM, their financial situation, the condition of their home, and how long they plan to stay in the home—because these factors can affect the suitability of a reverse mortgage. While almost all of the counselors asked why the undercover counselees wanted a reverse mortgage, none asked for all of the financial information (income, assets, liabilities, and debt) prescribed in the protocol. Furthermore, although the protocol instructs counselors to ask if the counselee has any unpaid federal debt (which would render a person ineligible for a HECM until the debt was paid), 13 did not ask this question. Six counselors did not ask how long the undercover counselees planned to stay in their homes or if the homes needed repairs. Finally, if counselees indicate that they are considering purchasing an annuity with their HECM funds, the protocol requires counselors to send them specific information, including comparisons of the costs and benefits of HECMs to those for different types of annuities. For 3 different counseling sessions, our undercover counselees indicated that they were considering such a purchase. Consistent with the protocol, the counselors provided information and observations about taking this step, and 2 of the 3 counselors also sent the required information. In addition, although required in the protocol, none of the 3 counselors annotated the counseling certificate with a note indicating that discussions about annuities took place. Despite the importance of the protocol requirements, we also found that HOC staff responsible for assessing the performance of counseling agencies were not always familiar with the protocol and had not incorporated the protocol standards in their performance reviews. For example, the standard checklist that HOC staff use to conduct their reviews does not include protocol requirements, such as offering to send a package before the counseling session and providing information about annuities. HUD officials acknowledged this shortcoming and told us that they were planning to update the checklist to reflect a forthcoming revision of the protocol. HUD lacks controls to ensure that lenders comply with the counseling agency referral process, which HUD designed to prevent lenders from steering potential borrowers to particular counselors. HUD requirements state that when first contacted by a prospective HECM borrower, a lender must provide the individual with a list of entities that perform HECM counseling. At the time of our fieldwork, HUD’s written instructions required that the list contain six references, including no fewer than five HUD-approved counseling agencies in the local area or state (except in cases in which fewer than five agencies serve a particular state). One of those agencies had to be located within reasonable driving distance so that the prospective borrower had the option of receiving face-to-face counseling. In addition, the list was to include a toll-free telephone number to reach a network of counselors approved to conduct telephone counseling nationwide. In March 2009, HUD increased the required number of references from 6 to 10 and restated the importance of lenders providing prospective borrowers with such a list. Despite HUD’s renewed emphasis on the requirement, HUD officials told us that they do not have internal control procedures in place to check lenders’ compliance. One official noted that it would be challenging to create such a control because a prospective borrower could obtain a list of counselors from one lender, receive the counseling, and then decide to get the HECM from a second lender. In that situation, HUD would have no way of knowing what the first lender provided the borrower because there would be no loan case file from that lender for HUD to examine. However, the frequency of this situation is unknown, and without a control procedure, HUD lacks assurance that its referral requirements are being followed. Furthermore, while some HECM borrowers may obtain a list of counselors from one lender and get the loan from another, this scenario does not rule out taking reasonable steps to assess the compliance of the lender ultimately selected. For example, HUD could require lenders to place the lists of counselors they provide to prospective borrowers in the loan files. HUD’s periodic examination of loan files could include a check for these lists. Furthermore, the results of our undercover work at reverse mortgage information seminars sponsored by seven HECM providers and the results of a HUD Inspector General audit suggests some noncompliance with the referral requirement. Our staff, posing as prospective HECM borrowers, asked representatives of the seven providers for referrals to counselors. However, none of the five to whom this requirement applied and replied to our request, complied fully with HUD requirements. More specifically: One representative provided the telephone number typically used to set up telephone counseling sessions with one of the two national intermediaries. Two representatives said that when our undercover staff were ready to speak with a counselor, they would make the appointment for them. Two California-based HECM representatives provided a list of counselors, but each list identified only five counseling agencies, and did not provide the minimum number of five state or local agencies. HECMs have the potential to play a key role in meeting the needs of seniors facing financial hardship or seeking to improve their quality of life. However, the product is relatively complex and costly and the population it serves is vulnerable. These factors, combined with the increasing number of borrowers and lenders participating in the HECM program, underscore the need for federal agencies to be vigilant about emerging consumer protection risks. Our work identified risks that require further attention, particularly in the areas of HECM marketing and counseling. Although the extent of potentially misleading HECM marketing is unknown, the types of marketing claims discussed in this report are causes for concern, particularly in a market with potential for substantial growth. HUD, FTC, and the federal banking regulators have processes to address misleading marketing practices and have reported few problems. Nevertheless, the potentially misleading marketing claims we identified suggest that some HECM providers may not be maintaining sufficient focus on or awareness of federal marketing standards. Furthermore, consumers who have not been cautioned about such claims could pursue HECMs with misunderstandings about the product. Counseling is a critical feature of the HECM program because the information provided can increase prospective borrowers’ understanding of a complex product and help them make informed decisions. Although HUD is in the process of expanding and strengthening its counseling requirements, it lacks sufficient internal controls to ensure that counseling providers are complying with these requirements. HUD’s controls rely to a significant degree on the presence of one document, the signed counseling certificate, as an assurance of compliance. However, our work indicates that HUD cannot rely on this certificate without additional verification of the content and length of the counseling session. In the absence of a verification process, HUD’s counseling program is vulnerable to three main problems. First, and most importantly, counselees may not be receiving the information they need to make informed decisions. Second, HUD’s information on the amount of time that counselors are spending with clients may be inaccurate and, therefore, of limited value to HOC staff responsible for monitoring counselor performance. Third, HUD lacks assurance that counseling agencies are consistently applying the means test for counseling fees, if at all; as a result, financially distressed individuals who are eligible for fee waivers may be paying for counseling that they could obtain without a fee. Additionally, HUD lacks detailed guidance on how to record counseling times and apply the means test, which may be contributing to counseling providers’ noncompliance in these areas. Finally, because HUD lacks effective controls over the counselor referral process, it cannot ensure that prospective borrowers are receiving the required range of counseling choices, including options for face-to-face and telephone counseling. To enhance consumer protection from potentially misleading marketing, we recommend that the Secretary of the Department of Housing and Urban Development; Chairman of the Federal Trade Commission; Chairman of the Federal Deposit Insurance Corporation; Chairman of the Board of Governors of the Federal Reserve System; Comptroller of the Currency, Office of the Comptroller of the Currency; and Director of the Office of Thrift Supervision, take steps, as appropriate, to strengthen oversight and enhance industry and consumer awareness of the types of marketing claims that we discuss in this report. These steps might include developing guidance, potentially through the Federal Financial Institutions Examination Council, to help bank examiners identify these types of claims; incorporating discussion of these claims in consumer education materials; and reviewing each advertisement we identified and referred to the appropriate agency and taking the appropriate follow-up actions. To improve HUD’s oversight of HECM counseling, we recommend that the Secretary of HUD improve the effectiveness of the agency’s internal controls so that they provide reasonable assurance of compliance with HECM counseling requirements. In doing so, HUD should take the following steps: implement methods to verify the content and length of HECM counseling sessions; issue detailed guidance for HECM counseling providers about how to record the amount of counseling time on the counseling certificate; issue detailed procedures for HECM counseling providers on how to assess prospective counselees’ ability to pay for HECM counseling; and implement internal controls to ensure that HECM providers comply with counselor referral requirements. We provided a draft of this report to the Department of Housing and Urban Development, Federal Trade Commission, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and Office of Thrift Supervision. We received written comments from these agencies, which are summarized below. Appendixes IV through VIII contains reprints of these letters. FTC provided technical comments, which we incorporated into this report, where appropriate. In their written comments, the federal banking regulators agreed with, or indicated that they were taking actions consistent with, our recommendation to strengthen oversight and enhance industry and consumer awareness of the types of marketing claims discussed in our report. Consistent with our recommendation, each of the regulators reported that they were working with other members of the Consumer Compliance Task Force of the Federal Financial Institutions Examination Council to develop supervisory guidance on reverse mortgages. In addition, each of the comment letters referred to other initiatives concerning reverse mortgages that the agencies had under way or had planned for the future. In its written comments, HUD did not specifically address our recommendations but noted that our draft report cited changes that HUD has undertaken to address many of the deficiencies in HECM counseling. HUD’s letter also contained technical comments that we incorporated, as appropriate, in the body of the report. (See app. VIII for a copy of HUD’s letter.) We also provided draft sections of the counseling portion of this report to representatives from NFCC and MMI—two major counseling intermediaries—to obtain their viewpoints. NFCC conveyed to us its support of HUD’s initiatives to improve and ensure the overall success of the HECM program. NFCC expressed its belief that the release of the new HECM counseling protocol, as well as HUD’s recent revision of its counseling agency review checklist to include a section on HECM counseling, would address many of the issues highlighted in our report. In addition, NFCC indicated that HUD’s plans to have counselors meet continuing education requirements and be reapproved every few years would afford greater consumer protections for HECM borrowers. However, consistent with our findings, NFCC also recommended that HUD provide additional guidance on defining what activities should be included in the counseling time reported on the HECM counseling certificate. NFCC also recommended that HUD require all counseling sessions to last at least 45 minutes, consistent with the requirements NFCC has established for its affiliated counseling agencies. MMI expressed to us its belief that the findings in our report, as well as HUD’s planned independent observation of counseling sessions, will be useful to HUD in improving the effectiveness of its internal controls. MMI also commended HUD on its recent initiatives to improve the quality of the counseling program, specifically noting the development of a new counseling protocol and the revision of HUD’s counseling agency review checklist to include a section on HECM counseling. In addition, MMI provided suggestions for strengthening HUD’s oversight processes, specifying that HUD should more clearly define counseling session learning objectives and identify how key concepts may be addressed. While affirming the importance of covering alternatives to HECMs, as counselors are currently required to do, MMI also suggested that HUD consider what information might be best conveyed by an alternative source, such as by a local Area on Aging Office, at no cost to seniors. MMI also suggested that HUD review its counseling requirements for current relevance to the market place, for example, by considering whether cautions against new types of predatory practices are necessary. We are sending copies of this report to interested congressional parties, the Secretary of the Department of Housing and Urban Development; Chairman of the Federal Trade Commission; Chairman of the Federal Deposit Insurance Corporation; Chairman of the Board of Governors of the Federal Reserve System; Comptroller of the Currency, Office of the Comptroller of the Currency; and Director of the Office of Thrift Supervision, and other parties. The report also will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs are on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IX. This report focuses on the Home Equity Conversion Mortgage (HECM) program, which insures reverse mortgages and is administered by the Department of Housing and Urban Development’s (HUD) Federal Housing Administration. The objectives of this report were to examine (1) the potential benefits and costs of HECMs to borrowers, (2) federal agency responsibilities to protect consumers from misleading HECM marketing, (3) federal agency efforts to protect HECM borrowers from inappropriate cross-selling, and (4) HUD’s oversight of HECM counseling providers. To identify the potential benefits and costs of HECMs to borrowers, we reviewed HUD regulation, guidance, and consumer materials related to the program. To more specifically identify borrower experiences with HECMs, we analyzed AARP’s 2006 survey, which included HECM borrowers, and interviewed 18 borrowers selected at random from among the approximately 19,000 borrowers who obtained HECMs from fiscal years 2001 through 2003. We selected borrowers from these years to ensure that borrowers had sufficient experience with the costs and benefits of their loans. For 16 of the 18 HECM borrowers, we also reviewed information about the terms of their loans from files that HUD provided to us. (HUD was not able to locate the other 2 files.) The results of our interviews cannot be generalized to all HECM borrowers. To obtain additional viewpoints on the benefits and costs of HECMs, including their risks, we interviewed representatives from HUD and the HUD Office of Inspector General; consumer advocates, including AARP, the National Consumer Law Center, and the National Council on Aging; and an industry group, the National Reverse Mortgage Lenders Association. To understand how borrower choices and economic conditions could affect the amount of home equity that a HECM borrower might have after 10 years, we constructed scenarios for a hypothetical HECM borrower illustrating changes in the borrower’s loan balance, house value, and net equity under different circumstances. Using 2008 as our baseline year, we obtained information from HUD on the average age of HECM borrowers and the value of their homes. We used HUD HECM computer software to determine a HECM loan amount for a borrower with these characteristics. To illustrate how changing interest and house appreciation rates could affect the borrower’s remaining home equity over time, we constructed several scenarios using different assumptions. For example, using data on historical 1-year Treasury yields and the Federal Housing Finance Agency’s house price index, we determined the borrower’s remaining home equity after 10 years if interest and house appreciation rate assumptions repeated the patterns seen from 1998 through 2007. In another scenario, we determined how much equity would remain for the same borrower if interest and house appreciation rates followed IHS Global Insight’s projections for 2008 through 2017. We consulted with HUD to verify the accuracy of our calculations. To identify actions that federal agencies and others have taken to promote better consumer understanding of HECMs, we reviewed consumer guidance distributed by the Federal Trade Commission (FTC), federal banking regulators, HUD, the Financial Industry Regulatory Authority (FINRA), state agencies, and consumer groups. We also spoke with representatives of FTC and state and federal banking regulators about reverse mortgage task forces initiated by these agencies. To examine federal agency responsibilities to protect consumers from misleading HECM marketing, we identified authorities, standards, and processes that agencies use to identify and address misleading marketing practices. These agencies included HUD, FTC, and four federal banking regulators—the Board of Governors of the Federal Reserve System (Federal Reserve), the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation. We also interviewed officials from these agencies and obtained information about complaints they received about reverse mortgages from calendar years 2005 through 2008. These four banking regulators oversee and examine at least 1 of the 12 largest HECM lenders, which we define as lenders that originated more than 1,000 HECM loans in fiscal year 2008, based on HUD data. We also asked these regulators to provide information about any marketing violations found through compliance examinations. Finally, through the Conference of State Bank Supervisors, we sent a set of standardized questions to all of the state banking regulators, asking if they examine reverse mortgage marketing materials, have received any complaints about or come across any misleading reverse mortgage marketing materials, or have taken any actions against banks or other entities as a result of their reverse mortgage marketing. We received and reviewed responses from 35 states. In addition, to identify potentially misleading statements about the HECM program, we conducted a limited review of HECM marketing materials, including the following: Internet materials for the 12 HECM lenders that originated at least 1,000 HECMs in fiscal year 2008, and mailed material for 11 of these 12 lenders. Three DVDs from HECM lenders that advertised on television, including a DVD from 1 of the 12 lenders that we previously noted. Internet material from 5 other HECM lenders. Materials presented at seven HECM information seminars that GAO staff attended undercover from June 2008 through December 2008 in 4 states. More specifically, we attended seminars in Florida and California—states with among the largest number of HECMs—and seminars in Maryland and Michigan, for the purposes of geographic diversity. We identified eight types of claims that were inaccurate, incomplete, or employed questionable sales tactics and reviewed the materials we gathered for statements implying the following: 1. The borrower cannot owe more than the value of the home. 2. The borrower cannot foreclose on a HECM or cannot lose the home. 3. HECMs will not affect a federal benefit (e.g., Supplemental Security Income). 4. Costs are the same as those for a forward mortgage, or all HECMs have the same costs. 5. The borrower can access lifetime income or cannot outlive a reverse mortgage. 6. A reverse mortgage is a government “benefit” or “entitlement” or any implication that the HECM is not a loan. 7. Geographic or time limits for obtaining a reverse mortgage. 8. Government affiliation through the use of government language and symbols. In total, we identified 26 entities that made one or more of these potentially misleading claims, and we asked officials at the Federal Reserve to identify the regulators for each of these entities. Because our review was of a limited number of advertisements, the results of our work cannot be used to ascertain the extent of potentially misleading HECM marketing. We also submitted examples of each potentially misleading claim to officials at HUD, FTC, and the banking regulators to obtain their viewpoints on these claims (based on the regulatory standards they would apply to HECM marketing materials they review). In addition, we submitted these claims to the president of the National Reverse Mortgage Lenders Association for his opinion on these marketing claims. To examine the steps federal agencies have taken to protect consumers from inappropriate cross-selling, we reviewed HUD guidance and regulator actions to inform HECM borrowers about the costs and risks of purchasing annuities in conjunction with HECMs. We also reviewed the cross-selling provisions in the Housing and Economic Recovery Act of 2008, and spoke with HUD officials about their planned implementation of these provisions. In addition, we spoke with representatives of the National Reverse Mortgage Lenders Association to obtain their perspectives on these cross-selling provisions. We spoke with officials at the National Association of Insurance Commissioners (NAIC) and obtained information on state insurance laws related to the sale of insurance products, such as annuities. Through NAIC, we sent standardized questions to all of the state insurance regulators, asking if the state tracked complaints, had received any complaints or had any cases of inappropriate cross-selling with reverse mortgages, or had taken any action against entities for cross-selling practices. We reviewed the 29 responses received, and obtained additional information from the 8 respondents that reported the cross-selling of unsuitable products with reverse mortgages. We also reviewed FINRA suitability standards for deferred annuities, and interviewed a FINRA representative about these standards. In addition, we spoke with an official at HUD’s Office of Inspector General about investigations related to inappropriate cross- selling in conjunction with HECMs. To determine the steps HUD has taken to ensure compliance with HECM counseling requirements, we first identified the standards with which counselors and agencies must comply. We examined relevant statutes, regulations, the HUD’s HECM counseling protocol, and mortgagee letters for applicable standards and discussed them with HUD officials. To understand how the provisions of the HECM protocol might apply, we interviewed HUD officials and representatives from the two national intermediaries—MMI and NFCC—that received HECM grant funding from fiscal years 2006 through 2008. We also reviewed their fiscal year 2008 grant agreements to more fully understand their counseling obligations. Our interviews with AARP officials provided additional perspective on the historical development of the HECM counseling program with which AARP has been involved. To better understand HECM counselor training requirements, we also attended HECM training courses sponsored by NeighborWorks® Training Insititute. Second, we identified the range of internal controls that HUD uses to ensure compliance with HECM counseling requirements. As a basis for identifying activities that qualify as internal controls, we consulted GAO’s Standards for Internal Control in the Federal Government. To identify the types of internal controls that HUD applies to the HECM counseling program, we interviewed HUD headquarters and field staff and obtained relevant documentation. HUD headquarters staff have responsibility for general oversight of the grant agreements with the national intermediaries, and HUD field staff are responsible for conducting on-site performance reviews of counseling agencies. We interviewed HUD field staff at all four HUD Home Ownership Centers (HOC), which are located in Atlanta, Georgia; Denver, Colorado; Philadelphia, Pennsylvania; and Santa Ana, California, about the procedures they use to evaluate counseling agency performance, and obtained relevant documentation. We also interviewed MMI and NFCC staff to identify what internal controls they have to maintain the quality of their HECM counseling. To better understand the nature of these performance evaluations, we reviewed performance reviews conducted by each HOC for counseling agencies, including those that conduct high numbers of HECM counseling sessions. Third, to determine whether HUD’s internal controls provide reasonable assurance that counselors comply with HECM counseling requirements, GAO staff posing as potential HECM borrowers participated in 15 counseling sessions with 11 different counseling agencies during January and February 2009. For each session, the counselor sent our undercover counselee a signed counseling certificate that certified compliance with HUD requirements and recorded the length of the session. Because HUD estimated that about 90 percent of counseling takes place by telephone, we conducted the sessions by telephone. While our findings from the 15 counseling sessions cannot be generalized to all HECM counseling, the sessions allowed us to test compliance with HECM counseling requirements. For these sessions, which we recorded to facilitate our review of counselors’ performance and the length of the calls, we determined whether counselors covered key topics, particularly those referenced on the counseling certificate. Our assessment primarily focused on whether counselors conveyed basic information on these topics, not whether they covered them exhaustively. We also compared the time each counselor recorded on the counseling certificate with (1) the actual length of the session and (2) the amount of time they spent specifically on counseling. These sessions took place with counseling agencies that provided some of the highest numbers of HECM counseling. Of the counselors we contacted 4 were employed by MMI, 5 were employed by five different agencies affiliated with NFCC, and 6 were employed by five other agencies (three of these agencies also received HUD grant funding for HECM counseling). Since all of the counselors for our undercover sessions had been certified as HUD Network Counselors and passed the HECM examination, or were associated with MMI or NFCC, they were all required to comply with HUD’s 2006 HECM counseling protocol. Accordingly, we also determined whether the counselors complied with selected elements of the protocol, such as sending information packages to counselees and discussing an estimated total annual loan cost disclosure. To evaluate how counselors might adapt their presentations on the basis of the unique situation of prospective borrowers, we created five different borrower profiles, including borrowers who intended to stay in their house indefinitely and those who intended to move within a few years. Each borrower profile included a set of predetermined responses to questions a counselee might be asked, such as home value, existing debt on home, and length of time the person planned to stay in the home. The undercover agents were instructed to indicate that they had little preexisting knowledge of reverse mortgages, to provide counselors with the opportunity to speak comprehensively about the program. We also evaluated selected aspects of the counselor’s presentation, including the clarity of terminology, delivery (e.g., the rate of speed at which the counselors presented the information), and the use of visual aids (i.e., any information that counselors might have sent prior to the session). For this purpose, individuals from our Learning Center listened to the recordings of the sessions and independently evaluated the portion of the counseling sessions in which counselors presented information on HECM costs. See appendix III for more information on the Learning Center’s evaluation. Finally, to test compliance with HUD’s counselor referral requirements, GAO undercover staff who attended seven HECM information seminars (previously discussed) sponsored by HECM providers, asked for referrals to counseling agencies if the seminar presenters had not already provided them. We compared the number and type of referrals we received with HUD’s requirements in effect at the time of our fieldwork. For example, we identified whether the list of referrals included at least five agencies that were located in the local area or state. The results of our work cannot be generalized to all HECM providers. In addition, we interviewed HUD officials responsible for developing the counselor referral requirements. We conducted this performance audit from April 2008 through June 2009, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform our 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. Our investigative work was performed in accordance with standards prescribed by the Council of the Inspectors General on Integrity and Efficiency. OMB No. 2502-0524 (expires 2/28/2011) Provision of this information is required to obtain benefits. HUD may not collect this information, and you are not required to complete this form, unless the form has a currently valid OMB control number. Privacy Act Notice: The United States Department of Housing and Urban Development, Federal Housing Administration, is authorized to solicit the information requested in the form by virtue of Title 12, United States Code, Section 1701 et seq., and regulations promulgated at Title 12, Code of Federal Regulations. While no assurance of confidentiality is pledged to respondents, HUD generally discloses this data only in response to a Freedom of Information Act request. The U. S. Department of Housing and Urban Development (HUD) requires that homeowner(s) interested in pursuing a Home Equity Conversion Mortgage (HECM) receive information about the implications of and alternatives to a reverse mortgage. The HECM counselor must adhere to all of FHA’s guidelines regarding information that must be provided to the potential HECM mortgagor and must tailor the session to address the unique financial circumstances of the household being counseled. Counselor Certification: In accordance with Section 255 of the National Housing Act and 24CFR 206.41, I have discussed in detail the following items with the above referenced homeowner(s) 1. Options other than a Home Equity Conversion Mortgage that are available to the homeowner(s), including other housing, social service, health and financial options. 2. Other home equity conversion options that are or may become available to the homeowner(s), such as other reverse mortgages, sale-leaseback financing, deferred payment loans, and property tax deferral. 3. The financial implications of entering into a Home Equity Conversion Mortgage. 4. A disclosure that a Home Equity Conversion Mortgage may have tax consequences, affect eligibility for assistance under Federal and State programs, and have an impact on the estate and heirs of the homeowner(s). 5. Whether the homeowner has signed a contract or agreement with an estate planning service firm that requires, or purports to require, the mortgagor to pay a fee on or after closing that may exceed amounts permitted by the Secretary or in Part 206 of the HUD regulations at 24 CFR. 6. If such a contract has been signed, the extent to which services under the contract may not be needed or may be available at nominal or no cost from other sources, including the mortgagee. 7. The Home Equity Conversion Mortgage will be due and payable when no remaining borrower lives in the mortgaged property, or when any other covenants of the mortgage have been violated. (Borrowers are those parties who have signed the Note and Mortgage or Deed of Trust.) I hereby certify that the homeowner(s) listed above have received counseling according to the requirements of this certificate and the standards of the U.S. Department of Housing and Urban Development, as described in mortgagee letters, handbooks, regulations, and statute. This interview was held: above items was as follows: _______________. Address (City/State/Zip) HomeOwner Certification: I/we hereby certify that I/we have discussed the financial implications of and alternatives to a HECM with the above Counselor. I/we understand the advantages and disadvantages of a HECM and each type of payment plan, as well as the costs of a HECM and when the HECM will become due and payable. This information will enable me/us to make more informed decisions about whether I/we want to proceed with obtaining a HECM. Certificate Expiration Date: ________________ (180 days from date HECM counseling completed) HUD-92902 (9/2006) Given the potential challenges of conveying complex information to seniors by telephone, we undertook a limited assessment of the communication and presentation skills of the 15 counselors with whom we spoke. (See app. I for more information about the counseling sessions.) This evaluation was conducted by staff in GAO’s Learning Center with expertise in making oral presentations, who reviewed the recordings we made of the counseling sessions. Our analysis focused on the portion of each counseling session that explained HECM costs. We chose this portion because the subject matter can be complex and because all of the counselors explained costs to some degree, so this approach provided us with a basis for comparison. We found that most of the counselors—10 of 15—generally presented information in a manner that was reasonably clear and easy to follow, although many of the sessions might have been more effective if prospective borrowers had received reference materials beforehand. We assessed criteria in the following three categories: delivery of the presentation, clarity of information presented, and use of reference materials to convey technical content. Delivery of the presentation: To assess each counselor’s delivery, we evaluated rate of speech; whether the counselor varied intonation, pitch, and pace to sustain the listener’s attention; and whether the counselor’s speech had natural pauses, especially after an important point was made. We found that most (11 out of 15) generally did well in most dimensions of this category, although our evaluators felt that 2 spoke too quickly, 1 spoke too slowly, and 6 of the counselors only sometimes incorporated natural pauses into their speech patterns, especially after an important point was made. Although our assessment did not factor in hearing impairments that are sometimes associated with senior citizens, academic research has shown that older adults have more difficulty than younger adults understanding information as speech rate increases. Clarity of information presented: To assess the clarity of the presentations, we noted whether each counselor explained or defined cost-related concepts, terms, and principles when they were first introduced. We also evaluated the clarity of the counselor’s explanations, and we noted whether the counselor tried to determine if the listener understood the subject matter, for example, by asking questions to confirm understanding or by responding if the listener asked questions, started to interrupt, or sounded confused. We found that most (11 out of 15) counselors generally did well in most dimensions of this category, although 5 counselors were less clear than the others with respect to explaining cost-related terms. Use of reference materials to convey technical content: The HECM counseling protocol requires that counseling agencies give prospective borrowers the option to receive an information package on financial implications before or after the counseling session. As noted in the body of this report, only four counselors sent information packages with all the customized financial estimates, including the one counselor whose package contained all of the required information. Of these, only one counselor offered and sent the required information before the counseling session. For the 3 counseling sessions for which the information package came after the session, our evaluators agreed that for 2 of the sessions, it would have been easier to understand the presentation had they received the reference material beforehand. However, for the other session, the evaluators were uncertain if the presence of the reference materials would have helped, but then they also agreed that the counselor only “sometimes” explained or defined cost-related concepts and terms when they were first introduced. Our evaluators also agreed that for the 1 counseling session for which the reference material was available in advance, the presentation was easy to understand with the assistance of these reference materials. Although, according to HUD, about 90 percent of HECM counseling takes place by telephone, the HECM counseling protocol does not contain any specific procedures for telephone counseling. HUD officials indicated that HUD is considering developing such standards and is in discussion with one of their intermediaries. In addition to the contact above, Steven K. Westley (Assistant Director), Sonja J. Bensen, Christine A. Hodakievic, John T. McGrail, Marc W. Molino, Carl Ramirez, Barbara M. Roesmann, Jennifer W. Schwartz, Winnie Tsen, and James D. Vitarello made key contributions to this report. In addition, members of the GAO Learning Center contributed to this report, including Ann M. Commeree, Chris Dionis, Linda S. Garcia, and Carol E. Willett. | Reverse mortgages--a type of loan against the borrower's home that is available to seniors--are growing in popularity. However, concerns have emerged about the adequacy of consumer protections for this product. Most reverse mortgages are made under the Department of Housing and Urban Development's (HUD) Home Equity Conversion Mortgage (HECM) program. HUD insures the mortgages, which are made by private lenders, and oversees the agencies that provide mandatory counseling to prospective HECM borrowers. GAO was asked to examine issues and federal activities related to (1) the potential benefits and costs of HECMs to borrowers, (2) misleading HECM marketing, (3) the sale of potentially unsuitable products in conjunction with HECMs, and (4) oversight of HECM counseling providers. To address these objectives, GAO reviewed program rules; examined HECM advertisements; analyzed consumer complaint data; performed limited tests of HUD's internal controls; and interviewed HECM borrowers and agency, industry, and nonprofit officials. HECMs can provide borrowers with multiple benefits, but they also have substantial costs and are relatively complex. HECMs allow seniors to convert their home equity into flexible cash advances while living in their homes. Additionally, the borrowers or their heirs can fully pay off the HECM by selling the home, even if the amount owed exceeds the current home value. However, HECMs also have large insurance and origination costs. Furthermore, the long-term financial implications of a HECM can be difficult to assess because the borrower's remaining home equity depends on the amount of cash advances and interest rate and house price trends. Various federal agencies have responsibilities for protecting consumers from the misleading marketing of mortgages. Although these agencies have reported few HECM marketing complaints, GAO's limited review of selected marketing materials for reverse mortgages found some examples of claims that were potentially misleading because they were inaccurate, incomplete, or employed questionable sales tactics. Federal agency officials indicated that some of these claims raised concerns. For example, the claim of "lifetime income" is potentially misleading because there are a number of circumstances in which the borrower would no longer receive cash advances. Federal agencies have had a limited role in addressing concerns about the sale of potentially unsuitable financial products in conjunction with HECMs ("inappropriate cross-selling"). For example, an annuity that defers payments for a number of years may be unsuitable for an elderly person. HUD is responsible for implementing a provision in the Housing and Economic Recovery Act of 2008 that is intended to restrict inappropriate cross-selling, but the agency is still in the preliminary stages of developing regulations. Some of the states GAO contacted reported cases of inappropriate cross-selling involving violations of state laws governing the sale of insurance and annuities. HUD's internal controls do not provide reasonable assurance that counseling providers are complying with HECM counseling requirements. GAO's undercover participation in 15 HECM counseling sessions found that while the counselors generally conveyed accurate and useful information, none of the counselors covered all of the topics required by HUD, and some overstated the length of the sessions in HUD records. For example, 7 of the 15 counselors did not discuss required information about alternatives to HECMs. HUD has several internal controls designed to ensure that counselors convey the required information to prospective HECM borrowers, but the department has not tested the effectiveness of these controls and lacks procedures to ensure that records of counseling sessions are accurate. Because of these weaknesses, some prospective borrowers may not be receiving the information necessary to make informed decisions about obtaining a HECM. |
DOD’s lodging programs were established to maintain mission readiness and improve productivity, and were intended to provide good quality temporary lodging facilities and service for authorized personnel. They were also created with the goal of reducing official travel costs for DOD’s mobile military community by charging room rates lower than those of commercial hotels. Within the Office of the Secretary of Defense, the Office of the Under Secretary of Defense (Personnel and Readiness) has issued the majority of guidance governing TDY and PCS lodging program and resource management, although the Office of the Under Secretary of Defense (Acquisition, Technology and Logistics) has established some lodging room quality standards within its housing management guidance and is responsible for the housing privatization efforts. Further, while DOD Instruction 1015.11 states that the Principal Deputy Under Secretary of Defense (Personnel and Readiness) is to provide lodging oversight, guidance, and procedures to ensure proper administration and management of DOD lodging programs and monitor compliance with these procedures and guidance, DOD Directive 4165.63 states that DOD housing (the responsibility for management of which rests with the Under Secretary of Defense for Acquisition, Technology, and Logistics) “encompasses housing for accompanied and unaccompanied personnel and temporary lodging facilities.” Each of the services also has policies to guide the administration of its lodging programs. In 1999, the Office of the Under Secretary of Defense (Personnel and Readiness) developed the DOD Lodging Strategic Plan and DOD Lodging Program Standards, and neither have been revised or updated subsequently. The program goals established in the lodging strategic plan are to (1) promote customer satisfaction through exceptional service, (2) develop a professional management team and motivated workforce, (3) employ a corporate approach to enhance business-based methods of operation, (4) develop and manage the lodging facilities, (5) assure sound financial management and accountability reflective of the hospitality industry, and (6) pursue efficiencies through interservice cooperative efforts. The DOD Lodging Program Standards task the military services with applying these program standards and developing detailed operating standards as appropriate, so each of the services also has policies to guide the administration of its lodging programs. DOD has approximately 82,000 transient lodging rooms. The major differences between TDY and PCS lodges are the number of rooms in their inventory and the type of traveler they primarily serve. Table 1 shows the magnitude of DOD’s lodging programs. Transient lodging serves various military and civilian travelers. TDY lodges serve mainly individual military or civilian travelers who are temporarily assigned to a duty station other than their home station. PCS lodges mainly serve military personnel and their families who are changing permanent duty stations. On a space-available basis, TDY and PCS lodges can accommodate some kinds of “unofficial travelers,” such as military retirees and relatives and guests of service members assigned to the installation. Total occupancy rates vary by program, ranging from 75 to 92 percent for fiscal year 2005. In addition, lodging occupancy by official and unofficial travelers varies by service. The Army serves the highest percentage of official travelers, and the Marine Corps the lowest, as table 2 shows. Funds provided for lodging operations originate from two sources: appropriated funds and nonappropriated funds. DOD Lodging guidance provides specific guidelines on whether an expense should be paid for with appropriated or nonappropriated funding. DOD Instruction 1015.12 states that the military services have the authority to waive the fund source that will create higher nonappropriated expenses for TDY lodging and PCS lodging not run as an MWR program. Appropriated funds are typically used for operations and maintenance expenses, such as laundry services and utilities, and some kinds of minor construction. Nonappropriated funds are generated from room rate revenues, and each of the lodging programs sets room rates according to the amount of revenue needed to pay for expenses not covered by appropriated funds. Nonappropriated funds are used to pay for a wide variety of expenses, from some employee wages to certain kinds of replacement furnishings. Funds generated from room rates at TDY lodging and PCS lodging not run as an MWR program are considered to be nonappropriated because the traveler pays for the charge at the time of his or her stay. Most lodging patrons are on official TDY or PCS travel, however, and are reimbursed with funds appropriated to the military services for travel either from operations and maintenance or military personnel accounts. Thus, the majority of funding originates from appropriated dollars. However, to distinguish funding streams, revenues from room sales are referred to as nonappropriated funds. According to DOD financial data, the total amount of appropriated and nonappropriated funding support for operating the lodging programs was about $857million for fiscal year 2005. Room rates at these lodges are intended to be set at the lowest rate possible to reduce travel costs, yet generate enough revenue to cover expenses. Some services have added a surcharge to the nightly room rate, which they accumulate and use for lodge construction and major renovation. Revenues from TDY lodging must be maintained in a separate nonappropriated fund account, designated as lodging, or billeting, fund. DOD Instruction 1015.12 permits military services to operate PCS lodging either (1) through a lodging or billeting fund, or (2) through an MWR fund. PCS lodging that is built, maintained, or operated by other than the MWR program or exchange service must be maintained in a separate fund account, designated as a lodging, or billeting, fund, and is independent of the single MWR fund. When PCS needs are met by MWR operating funds, they are part of the single MWR nonappropriated fund instrumentality and are operated as a category C revenue generating activity. The Marine Corps operates its PCS lodging as part of its MWR program, which is operated as a Category C, revenue generating program. Thus, the lodging revenues are deposited into the Marine Corps’s single MWR nonappropriated fund account, which can be used to benefit any of the service’s MWR programs. The vast majority of transient lodging facilities are managed and operated by the military services with civilian workers paid by nonappropriated funds. Over the past decade, however, the Army, Air Force, and Navy have entered into limited public-private ventures to construct and operate lodging facilities on 10 installations with some degree of risk shared between the government and the private sector. Appendix II provides additional details concerning the 10 previous public-private lodging ventures. According to the Army, approximately 80 percent of Army lodging inventory needs replacement or major renovation because of persistent funding shortfalls and the lack of capital investment. The Army estimates that, absent privatization, it would cost about $1.1 billion and would take more than 20 years to renovate or build new lodging facilities. Given the cost and length of time associated with revitalization under the Lodging Wellness Plan, the Army considered the use of commercial loans and enhanced-use leasing, before deciding on privatization of lodging facilities in the United States. The Army is using the same legislation that allowed the department to privatize its family housing for its lodging privatization effort. Congress established the MHPI in the National Defense Authorization Act for Fiscal Year 1996. The MPHI legislation gives the Secretary of Defense the authority to (with certain restrictions) provide direct loans, rental guarantees, ground leases, and other incentives to encourage private developers to construct and renovate housing. Under the Army’s PAL program, the selected developer will receive a 50-year ground lease and will be responsible for asset, property, and maintenance management. The Army placed installations in the United States into one of three privatization groups. According to the Army, this was done to mitigate some of the risk associated with privatization, such as the developer choosing high-value properties over those in greater need of repair. The Army planned to select a developer for Group A during September 2006, and to transfer the lodging in this group to the developer by September 2007. The Army plans to transfer installations in Group B by September 2008 and those in Group C by September 2009. The Army anticipates that all lodging facilities will be renovated or replaced in 7 years, by 2014. Furthermore, the Army expects the developers to establish a lodging sustainment and recapitalization fund to maintain the lodging over the 50- year life of the project. On September 28, 2006, the Army selected a developer for Group A which must submit a lodging development and management plan (LDMP). According to the Army PAL program, after approval of the LDMP business plan by Headquarters, Department of the Army, OSD, and the Office of Management and Budget (OMB), Congress will have a 45-day period to review the plan prior to the Army transferring Group A to the developer. Each military service takes its own approach to manage and fund its lodging programs, but current DOD lodging guidance does not establish performance standards and measures needed to assess program effectiveness. Each of the military services uses a different approach to manage and fund its transient lodging programs. The Army and the Air Force each manage their TDY and PCS lodging under one organization, while the Navy and Marine Corps both opt to have one organization manage TDY lodges and another one for PCS facilities. The Army and Air Force believe using one management structure to serve both TDY and PCS travelers is the most efficient approach. Alternatively, the Navy and Marine Corps believe operating two separate programs, one for TDY travelers and one for PCS travelers, is the most efficient approach for meeting their service’s needs. Neither of the two military services currently has plans to merge management of the lodging programs. The Navy has operated its two programs separately since 1969 when the Navy PCS lodging program was established to be operated almost entirely with nonappropriated funds. The Marine Corps also operates its TDY and PCS lodging separately. PCS lodging operates almost entirely with nonappropriated funds through the Marine Corps’s MWR program and generates a profit, which is not allowed for TDY lodging. The room revenues from the Marine Corps’s PCS lodging are deposited in the Marine Corps Community Service account, which also contains funds from other MWR activities and the Marine Corps Exchange Service. In return, the PCS lodging program receives overhead services, such as personnel and accounting, and funds for major repairs or new construction projects. By contrast, all of the other lodging programs have a separate financial account that must at least “break even” on an annual basis, receiving and generating just enough revenues to operate and sustain the program and facilities. The military services’ lodging programs receive varying levels of appropriated and nonappropriated fund support. The level of appropriated fund support allocated influences the amount the programs charge for room rates. Nonappropriated funds are generated through room sales, and each of the lodging programs sets room rates according to the amount of revenue needed to pay for expenses not covered by appropriated funds. For example, the Navy and Marine Corps allocate very limited amounts of appropriated funding to their PCS lodging, so the room rates are higher to generate more nonappropriated funds for program expenses. Room rates are also influenced by surcharges that the Army and Air Force charge to raise revenue for room and facility improvements. As table 3 illustrates, average daily room rates vary considerably across the programs, ranging from $14 to $65. Navy PCS is the only program that accrues all future capital expenditures through room revenues, while the other programs benefit from other sources of support, such as appropriated funds, shared construction funds, or lodging surcharges. A Navy official explained that this is one reason why the Navy PCS average daily room rate is higher than other programs’ rates. For fiscal year 2005, five of the six programs’ room rates were lower than the $60 standard per diem lodging rate, and all were lower than the $89 average per diem lodging rate for nonstandard areas. The per diem rates are what a traveler could expect to pay, on average, and subsequently be reimbursed for, while staying off-base in a commercial hotel. The DOD room rates do not necessarily include all sources of program support. However, so comparing room rates to the per diem lodging rates is not an appropriate measure of cost efficiency or program value. The amount of appropriated funds and nonappropriated funds the services reported spending on lodging program expenses for fiscal years 2003 through 2005 varied considerably as seen in figure 1. The Air Force, Navy TDY program, and Marine Corps PCS program all experienced a decrease in appropriated fund support allocated for lodging program operations between fiscal years 2003 and 2005. The change in appropriated funds for the Navy’s TDY program was significant, falling from an estimated $48.7 million to $17.8 million, while nonappropriated funds provided for the program rose from $85.7 million to $109.9 million. Navy officials told us that appropriated funds allocated to this program decreased due to Navy-wide funding reductions. According to data from fiscal years 2003 through 2005, the Air Force allocates the greatest total amount of appropriated fund support for program operations among the military services, but it also has the largest number of rooms in its inventory. Current DOD lodging guidance does not establish detailed performance standards and measures needed for monitoring and assessing program effectiveness. The Office of the Under Secretary of Defense (Personnel and Readiness), in conjunction with the military services, developed the DOD Lodging Strategic Plan and the DOD Lodging Program Standards in 1999, but these documents have not been updated or revised since then. The lodging program standards provide minimum requirements for program services and amenities, but task the military services with developing detailed operating plans. While the strategic plan establishes a mission statement and a list of goals for the DOD lodging programs, the Office of the Under Secretary has not created performance measures to assess progress in achieving these goals. DOD lodging officials with work experience in private hotels told us that it is a common practice in the hospitality industry to use benchmarks to track progress and determine success. For example, Smith Travel Research annually publishes the Hotel Operating Statistics study, which provides an overview of U.S. lodging industry performance, drawing data from the operating statements of over 5,100 hotels. Some of the business- based measures reported in the study include room occupancy, average daily room rate, revenue per available room, and the number of rooms available and sold, among others. While DOD lodging programs are collecting and reporting some of these measures, lodging officials are unclear how the data is being used, since performance standards have not been established. In addition, some lodging officials expressed concerns about the reliability and consistency of the cost and program data, which will be discussed in greater detail below. Among the various reasons for this, the officials noted that DOD has not provided common definitions and guidance about how the data should be collected and reported. For consistent data collection and reporting, private hotels can use common definitions and calculations established in the Uniform System of Accounts for the Lodging Industry, issued by the Educational Institute of the American Hotel and Lodging Association. Each fiscal year the military services submit the following reports to the Under Secretary of Defense (Personnel & Readiness) for each lodging program: a financial report that includes income and expense information; a lodging standards status report, which shows the proportion of facilities and rooms that provide the required services and amenities; and a program report, which includes descriptive information and some summary statistics, such as the occupancy rate, average daily room rate, number of rooms sold, and room revenue. The data in these reports are primarily descriptive and are not linked to performance measures of program efficiency and effectiveness, which limits their utility. In previous work, GAO has found that developing measurable performance standards coupled with ongoing monitoring and reporting on program performance can help program managers and Congress determine whether goals are being achieved. Given the variety of approaches that the military services have taken to operate the lodging programs, it is difficult to evaluate and compare their respective efficiency and effectiveness without commonly defined measures of success. In the absence of performance measures and reports, we used our discussions with lodging program officials and available data to describe the steps that the lodging programs have taken to meet the program goals and objectives from the DOD Lodging Strategic Plan. The degree to which the military services’ lodging programs solicit customer feedback is limited. DOD guidance requires that lodging programs periodically measure customer demand, usage, and satisfaction and act upon these findings, but no other specific guidance is provided. The Navy PCS program provides a customer satisfaction survey to every guest, and in 2005, an independent contractor calculated a customer satisfaction rate of 95 percent. By contrast, none of the other lodging programs are systematically tracking customer satisfaction centrally, though some installations may be soliciting customer feedback. Annually, the lodging programs report their overall lodging occupancy rate for the year, but because no standard way to calculate occupancy has been defined or used by all of the military services, it is unclear whether the figures can be compared across programs. For example, some programs could calculate the figure using total rooms in their inventory, while other programs could exclude rooms undergoing service or renovation. DOD lodging was established with the goal of saving military travel funds by providing temporary lodging at a lower overall cost than paying for travelers to stay at commercial hotels. However, neither OSD nor the military services measure and report on cost effectiveness of their lodging programs. In addition, the cost data reported by the military services to OSD annually may not adequately reflect total lodging program costs, because lodging program officials stated that determining some appropriated fund support can be difficult. For example, some support services, such as snow removal, laundry, or fire and police protection, are paid for by the installation, and costs are not tracked by program. Therefore, lodging officials must estimate the value of the portion of the indirect appropriated fund support that was spent on lodging. For example, the Navy PCS program is the only lodging program that can determine actual electricity costs, while the other programs all estimate utilities expenses. During our review we identified the following issues with the lodging costs reported by the military services for fiscal year 2005. The Army reported a total of $6.2 million in appropriated funds support for fiscal year 2005 to OSD. However, the Army later collected data directly from every installation as part its privatization effort that indicated appropriated fund support for the same time period was actually about $27.9 million; this included increased costs for personnel salaries, utilities, repairs, laundry, and supplies. In addition, while gathering information at the installation level for its privatization initiative, Army officials found great inconsistencies in the way that cost data and other information, such as the average daily room rate, were collected and calculated across installations. The Marine Corps PCS program reported total expenses of about $9.6 million for fiscal year 2005, however this figure does not include support services paid for out of the Marine Corps Community Services account, which are reported to OSD in aggregate but are not tracked by program. Marine Corps officials estimate the value of the support services to the PCS lodging program was about $3.7 million for fiscal year 2005. The Navy’s TDY program does not use a consistent approach across installations to estimate utilities and collect other types of appropriated fund support, which raises questions about the reliability of the data. In addition, when following up on what appeared to be an unusual trend in program funding, we found that the Navy TDY program mistakenly overreported to OSD the amount of appropriated funds support the lodging program received in fiscal years 2003 and 2004 by approximately $120 million total, which it later corrected. Similarly, after GAO observed significant increases in the Air Force’s nonappropriated funds expenditures for fiscal year 2005, the Air Force realized it mistakenly overreported the amount of nonappropriated fund support by about $120 million. The Air Force attributed this to a clerical error and corrected the report. To compare estimated total program costs across the military services’ lodging programs, which vary considerably in size, we standardized financial data reported to OSD on a per room basis. Daily program expenses per room varied considerably across programs for fiscal year 2005, ranging from $13 to $47 as seen in figure 2. We also included the other estimated program expenditures identified by the Army and Marine Corps that were not included in the financial report to OSD, as previously discussed in this section of the report. DOD lodging guidance sets forth basic guidance on quality standards, such as minimum room size and specific amenities that must be provided. In addition, the military services report annually how many of their facilities have a furnishing replacement plan, and a short- and long-term maintenance plan. However, each lodging program determines its particular strategy for maintaining and upgrading its rooms, as well as planning for facilities upgrades, such as major renovations or construction. For example, the Army currently relies on its Army Lodging Wellness Plan to repair, renovate, and replace its outdated lodging facilities. According to the Army, approximately 80 percent of its lodging inventory is currently in need of replacement or major renovation. The lack of a recapitalization component for long-term facility sustainment is part of what led the Army to consider privatization. On the other hand, the Air Force has developed additional guidance on what amenities facilities and rooms should include. The Air Force estimates that 9 percent of its rooms are what it considers to be inadequate, and it has implemented a room surcharge to save for capital improvements. The Navy and Marine Corps’s TDY programs follow the DOD Lodging Standards, and maintenance and recapitalization plans are made at the installation level. Neither program has assessed the adequacy of room quality programwide. Meanwhile, the Navy and Marine Corps’s PCS lodging officials stated that there are no inadequate rooms in the PCS lodging inventory and all rooms meet DOD Lodging Standards. The Navy conducts annual inspections of each PCS facility, evaluating not only the physical condition, but also service standards, management responsibilities, and financial procedures. Moreover, an independent company rated the Navy’s PCS lodging the fifth cleanest hotel in the United States in 2005, based on customer interviews. Table 4 shows the amount the lodging programs reported spending on capital expenditures, which includes new construction and major renovations of facilities and major equipment purchases for fiscal years 2003 through 2005. These figures exclude operating funds spent on minor renovations, and repair and maintenance. As the table illustrates, the services have relied almost entirely on nonappropriated funds for capital expenses. The Army believes the lodging developer will renovate existing or construct new lodging facilities sooner—in 7 years by 2014—than otherwise planned by the Army, and provide for adequate sustainment of lodging facilities over the 50-year project life. While this should result in improved quality of facilities, it will also result in additional cost to the government through increased lodging fees and will not produce the savings suggested by earlier Army analysis. Our analysis indicates that the Army’s travel costs could increase by about $75 million per year if all lodging facilities in the United States are privatized. In addition, the Army could incur approximately $17.3 million in onetime costs associated with severance pay and discontinued service retirement annuities for nonappropriated fund lodging employees who would be let go if lodging is privatized. Furthermore, privatization of Army lodging may potentially affect occupancy levels and exacerbate rate disparities among bases and between official and unofficial travelers, as well as lead to inconsistencies in room rates among services at joint bases. The Army believes that the developer will renovate existing or construct new lodging facilities in 7 years (by 2014), and will provide for adequate sustainment of lodging facilities over the 50-year project life. In contrast, if the Army continues with its current Wellness Plan, it estimates that it would take until 2026 or later to bring all rooms up to adequate condition. Additionally, the Wellness Plan does not generate funds for adequate long- term lodging sustainment. In November 1999, the Army initiated the Army Lodging Wellness Plan to renovate and replace inadequate lodging. As part of the Wellness Plan, the Army collects a surcharge, the Lodging Capital Assessment (LCA), for each room night in Army lodging. The income from the surcharge collected on each room night is placed in the Army Lodging Fund and used to revitalize Army lodging facilities worldwide. This surcharge generated approximately $229 million over the last 6 years for the Army Lodging Fund. The Army spent about $75 million on lodging improvements. In addition, the Army used $40 million to reimburse the Morale, Welfare, and Recreation Fund for guest houses, which were transferred to the Army lodging inventory when PCS travel was recognized as official travel and guest houses as official government lodging facilities. In 2001, in preparation for a study by an independent consulting firm, the Army estimated that it would cost about $657 million to repair or renovate Army lodging worldwide. This study was conducted to facilitate the Army’s consideration of a private loan to finance the Army Lodging Wellness Plan. In 2004, the Army revised its estimate to about $1.1 billion for lodging revitalization in its U.S. facilities. Using the more recent 2004 estimate, GAO analysis determined that the Lodging Wellness Program would take approximately 20 years or more to bring all lodging facilities up to adequate standards. GAO calculations estimate that the lodging surcharge generates $52.2 million annually in income. Even though the Army Lodging Fund showed a positive balance of $133.6 million in fiscal year 2005, some of these funds are already committed to revitalize lodging facilities overseas. If the amount currently in the Army Lodging Fund is applied entirely to U.S. facilities, lodging revitalization could take about 17 years to complete. In either case, it would take at least 20 years to bring rooms and facilities worldwide up to an acceptable level using the Army Lodging Wellness approach. Table 5 shows a comparison of alternatives to improve Army lodging. In addition to the ability to revitalize lodging more quickly, the privatization of Army lodging will provide sustained recapitalization over the 50-year span of the project. According to the Army, a clause requiring a recapitalization lock box will be included in the lease with the private developer, to ensure that funds are available for recapitalization. The Army’s plan to privatize its lodging would permit it to leverage the resources of the private sector to recapitalize and replace its existing lodging facilities. However, this will likely increase costs to the government through increased lodging fees and it is unclear to what extent other savings would occur as suggested by earlier Army analysis. The Army’s initial cost analysis found that, over the 50-year life cycle of the proposed leasing of Army lodging to a private developer, the privatization scenario would result in a 16 percent cost savings to the Army within the 13 installations included in Group A, as shown in table 6. We found that the Army’s savings estimate was based on government “should costs,” which compared predicted costs under the privatization and the amounts it “should cost” the government to own, operate, upgrade, sustain, and recapitalize the same lodging assets as the private developer. According to the Army, the estimate was prepared in accordance with OMB and DOD guidelines, which required an estimate based on “should cost.” However, we believe, as we have reported in the past concerning cost estimates for military privatization projects, that it would be more appropriate to compare the cost of a proposed privatization initiative with the cost of continued government ownership on the basis of the real planned expenditures and the timing of these expenditures. The Army acknowledges that, in the event that lodging is not privatized, the Army would likely not operate, upgrade, sustain, and recapitalize its lodging operations and assets as represented in the “should cost” estimate. According to the Army, it is the lack of upgrades and maintenance to its lodging facilities that caused it to look to privatization as an option in the first place. Furthermore, based on its ongoing analysis of lodging expenses, the Army recently acknowledged that it will cost the Army more to privatize its lodging than to continue Army ownership. However, despite the additional cost, the Army believes privatization of lodging is the best solution because in 7 rather than nearly 20 years, it will result in better facilities, and have a sustainment and recapitalization component that is not built into the current rates. Our analysis indicates that Army travel costs would increase under lodging privatization, because the average room rate will increase from the current 57 percent of per diem to 75 percent of per diem. We estimate that this will result in an annual increase of about $14.4 million for the installations in Group A and $74.5 million if the Army privatizes all lodging in the United States. The Army agrees that travel costs will increase, but believes that the increased travel cost would likely be offset by reductions in other appropriated funding for lodging, for items such as utilities, laundry, and supplies. The Army estimated that appropriated fund support for the expenses associated with these items, across the United States, totaled about $27.9 million in fiscal year 2005. Utilities accounted for about $15.6 million, or 56 percent of the appropriated fund support, which was calculated based on national averages for utilities, since individual lodging facilities are not metered. The remainder of the appropriated support was for such items as laundry, supplies, and salaries. However, during GAO site visits to Army installations, lodging staff noted that appropriated funding for these items had diminished in recent years. For example, the lodging program at Fort Polk, Louisiana, is now responsible for services such as laundry and supplies, which were previously paid for by the installation with appropriated funds. At Fort Sam Houston, Texas, another installation scheduled for the first round of privatization, staff also stated that nonappropriated funds were used for things such as repairs, which appropriated funds should have covered. The Army noted that when the amount of appropriated funds used to support lodging expenses is reduced, more nonappropriated funds are needed to pay for the expenses. According to the Army, to generate more nonappropriated funds, generally room rates must be increased to cover expenses. According to Army officials, the Army would also incur a total of about $17.3 million in onetime costs for severance pay and discontinued service retirement annuities. The Army currently estimates that severance pay will cost approximately $12.7 million for about 2,000 employees (most of whom are paid with nonappropriated funds) who would be let go if lodging is privatized. Additionally, the Army estimates that about 59 of the 2,000 employees, in addition to receiving severance pay, may be eligible for a discontinued service retirement annuity. According to the Army, the most recent cost estimate for discontinued service retirement annuities is around $4.6 million. However, the exact amount of severance pay and discontinued service annuities will not be known until lodging at each installation is privatized and the Civilian Personnel Office calculates accurate severance pay, and where applicable discontinued service annuities, for each individual employee. According to the Army officials, the severance pay and discontinued service retirement annuities will be paid with nonappropriated funds from the centralized Army Lodging Fund. The privatization of Army lodging may potentially affect occupancy levels and exacerbate rate disparities among bases and between official and unofficial travelers, as well as promote more notable inconsistencies in room rates among services at planned joint bases. If the Army lodging facilities are privatized, the occupancy rates could decline because official travelers would not be required to stay in the privatized facilities. Under current regulations, when adequate quarters are available on the U.S. installation to which a service member is assigned TDY and the service member uses other lodgings as a personal choice, lodging reimbursement is limited to government quarters cost on the U.S. installation to which he was assigned. Army officials acknowledge that initially there may be a decline in demand for on-base lodging, as it will take some time for the currently inadequate rooms to be renovated and as some travelers may want to stay off-base simply because they can. However, Army officials believe that if a decline in demand does occur it would not last long, because travelers may have difficulties finding affordable lodging that is located at a reasonable distance from the post. Our work on DOD’s housing privatization efforts has shown that occupancy rates are below expectations for some projects. In April 2006 we reported that 16, or 36 percent, of 44 awarded housing privatization projects had occupancy rates below expectations. In an attempt to increase occupancy and keep rental revenues up, 20 projects began renting housing units to parties other than military families, including single or unaccompanied service members, retired military personnel, civilians and contractors who work for DOD, and civilians from the general public. Army officials believe that the housing and lodging markets are sufficiently different that they should not be compared too closely. For example, they noted that a TDY or PCS traveler generally stays in lodging for 1 or 2 weeks, while military housing is usually occupied for 2 or 3 years. Furthermore, privatization may lead to changes for unofficial travelers. Unofficial travelers, who account for 7 percent of those accommodated at Army lodgings, currently pay the same rate as official travelers. However, with privatization, the private entity managing Army lodging could charge unofficial travelers the market rate, which may be higher than the amount official travelers will pay. Army officials noted that unofficial travelers should pay market rates; however, the Army has not enforced this because it wants to minimize the out-of-pocket cost for unofficial travelers such as retirees or visiting family members. Privatization of lodging may also create some inconsistencies in lodging pricing as DOD implements its plans to establish joint bases as directed by the 2005 base realignment and closure recommendations. Under the approved recommendations, the management of installation support services, including lodging, would be consolidated under a single service at various installations throughout the United States. Two installations in the Army’s Group A, Fort Sam Houston and Fort Myer, are included in this recommendation. While the Army does not believe that privatization will affect plans for joint basing, we believe it could lead to inconsistencies in room rates among services at joint bases. For example, a service member on official travel to the San Antonio area would pay more for a room at Fort Sam Houston than at either Lackland or Randolph Air Force Bases. Using current per diem and the projected privatization pricing allowance, a room at Fort Sam Houston would cost $70 per night under privatization, while a room at either Lackland or Randolph Air Force Base would cost $27 per night. Officials in the Office of the Under Secretary of Defense for Personnel and Readiness and the Air Force question whether the Army should have included installations in the joint basing recommendation in their initial group of lodging facilities to privatize because of the uncertainty about how joint bases will operate. The Army is using the MHPI legislation as its authority to establish the lodging privatization program. The Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics provides oversight for MHPI-authorized projects and, according to officials from that office, will provide oversight for lodging privatization similar to that provided for military housing privatization. The MPHI legislation has several provisions that direct the Secretary of Defense to notify Congress of his actions under certain circumstances. For example, the Secretary of Defense must submit written notification to Congress before transferring appropriated amounts to certain kinds of funds, as well as submit a report describing the contracts that the Secretary proposes to solicit under the MPHI legislation at least 30 days before doing so. Additionally, OSD and the military services use the MHPI program evaluation plan to monitor the physical and financial health of awarded projects, and evaluate the costs and benefits of privatization. The program evaluation plan requires semiannual reporting to OSD for all awarded MHPI projects. According to OSD officials, since the Army is using the same MHPI legislation as authority to privatize its lodging, these reporting requirements should also be applicable, and would provide the Congress and OSD with a high-level of oversight as the Army begins to implement its program. The Army acknowledges that it is aware of the congressional reporting requirements for MHPI legislation projects and intends to comply with the requirements as it implements its lodging privatization plans. On October 6, 2006, DOD provided the military services with revised lodging guidance, which addressed some issues raised in prior GAO recommendations but does not provide clear program performance standards and measures. The new guidance requires the military services to (1) develop and maintain a 5-year recapitalization plan, (2) base the construction of lodging rooms on historical data and future mission changes, and (3) construct certain new lodging facilities to meet the demand of official TDY and PCS travelers. The revised guidance, however, does not specifically address or strengthen OSD’s ability to determine whether lodging programs use appropriated or nonappropriated funds to pay for specific program expenses. Some of the revisions in DOD Instruction 1015.11 improve guidance by clarifying requirements, but the revisions fall short of developing clear performance standards and measures. For example, the Instruction would require that services construct certain new lodging facilities to meet the demand of customers on official TDY or PCS travel. However, the customer data needed to justify construction is not sufficiently defined to ensure consistent collection across programs. Additionally, though the guidance states that DOD lodging programs should be professionally managed and business-based, it does not specifically define such methods or performance measures that could be utilized to demonstrate the lodging program’s efficiency or effectiveness. Furthermore, the revised lodging guidance does not address the role of the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics regarding privatized lodging. With the Army’s privatization efforts, the office of the Under Secretary of Defense for Acquisition, Technology, and Logistics has begun to play a more active role recently in conjunction with the Army’s privatization plans, given the OSD office’s experience with housing privatization. Officials from both offices said they plan to meet to clarify their respective roles and responsibilities for the Army’s privatized lodging facilities. Under a decentralized approach to lodging management, the military services have individual and somewhat dissimilar approaches to the management and funding of TDY and PCS lodging facilities. While some reporting to OSD on lodging operations occurs, without standard data collection and reporting methods and adequate oversight, the reliability of the data submitted to OSD is unclear. In addition, OSD and the military services lack information that would enable them to evaluate the effectiveness of their lodging programs and make comparisons across programs that would aid in future program management decisions. We do not see any reason why it would not be possible for OSD to promote consistent data collection and reporting, without unnecessarily requiring the military services to run their programs in exactly the same fashion. Most importantly, DOD and the military services lack but would benefit from greater use of performance measures to determine whether goals set forth in the lodging strategic plan are being achieved, and to provide adequate oversight of the Army’s lodging privatization initiative. Though one of the DOD lodging strategic goals is to utilize business-based methods of operation, the military services have not adequately sought out best practices and management methods commonly used in the private hotel industry. For example, they have not effectively utilized tools such as the Uniform System of Accounts for the Lodging Industry or the Smith Travel Research HOST study. Since DOD has established goals for its lodging programs that go beyond the private industry goal of profit generation, however, it would be insufficient to merely adopt performance standards and measures used by commercial counterparts. Additionally, as the Army moves forward with its plans to privatize lodging, it needs to provide the same level of accountability to the Congress and OSD for program costs and performance as it does for its housing privatization projects. Furthermore, DOD policy must address who will provide policy and oversight for privatized lodging. We recommend that the Secretary of Defense direct the Under Secretary of Defense for Personnel and Readiness in consultation with the Under Secretary of Defense for Acquisition, Technology, and Logistics to (1) clarify their respective roles for establishing policy and overseeing the lodging program, and (2) update the DOD lodging program strategic plan, to include developing performance standards and measures to ensure that the goals of the lodging program strategic plan and Army plans to privatize its lodging are being achieved. In commenting on a draft of this report, DOD concurred with both of our recommendations and indicated planned actions and timeframes for accomplishing them. The department’s response indicated that the Army’s analysis shows the life cycle costs are less under privatization than using the current system to achieve the same results. As we noted in our draft and this final report, privatization of lodging while providing faster recapitalization and sustainment of facilities will likely increase costs to the government by about $75 million per year through increased lodging fees. The department separately provided various technical comments which are incorporated where appropriate. The department’s written comments are presented in appendix III. We are sending copies of this report to the Secretary of Defense; the Under Secretaries of Defense for Personnel and Readiness, and for Acquisition, Technology, and Logistics; the Secretaries of the Army, Navy, and Air Force; and the Director, OMB. We will also make copies available to others upon request. 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 me on (202) 512-5581 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. The GAO staff members who made major contributions to this report are listed in appendix IV. To determine how the military services’ operate and assess their lodging programs, we reviewed Department of Defense (DOD) and military service lodging policy, analyzed data regarding program funding, room rates, and occupancy rates by type of traveler. We interviewed officials from: the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics; Office of the Under Secretary of Defense for Personnel and Readiness; and the Army, Air Force, Navy, and Marine Corps offices responsible for managing the temporary duty (TDY) and permanent- change-of-station (PCS) lodging programs. We obtained and reviewed financial statements; the military services’ annual reports submitted to the Office of the Secretary of Defense (Personnel and Readiness); and reports prepared by independent auditors, the DOD Inspector General, and military audit agencies on DOD lodging programs. We identified some discrepancies in each of the military services’ data, but we discussed and resolved these discrepancies. Therefore, we believe the military services’ data are sufficiently reliable for our purposes. We visited selected military installations to determine how lodges are managed and to observe their physical condition. Installations were selected to include each of the six lodging programs and a range of geographical locations. Specifically, we visited Fort Polk, Louisiana; Fort Sam Houston, Texas; Lackland Air Force Base, Texas; Randolph Air Force Base, Texas; Naval Air Station North Island, California; Naval Amphibious Base Coronado, California; Marine Corps Base Quantico, Virginia; and Marine Corps Air Station Miramar, California. To determine the potential effect of the privatization of Army lodging, we reviewed the Army’s life-cycle cost analysis that supported its decision to privatize lodging. We interviewed officials in the Office of Management and Budget, Offices of the Under Secretaries of Defense (Personnel and Readiness) and (Acquisition, Technology, and Logistics), and the Assistant Secretary of the Army (Installations and Environment) regarding the Army plans to privatize lodging. To determine the effect on Army travel costs, we compared the average daily room rate for Army lodging to the projected room rate under the privatization effort. For this analysis, we used the fiscal year 2005 occupancy rate for Army lodging and the Army lodging room rates and per diem rates for fiscal year 2006. Additionally, we reviewed analysis prepared by PricewaterhouseCoopers LLP, the Army Community and Family Support Center, and the Army Privatization Office regarding the projected cost and time frames for recapitalizing all Army lodging in United States. We also analyzed the amount of funds accumulated in the Army Lodging Fund as a result of the lodging surcharge to assess how much is available for lodging revitalization. Although we did not test reliability of these data, we did discuss the processes and procedures used by the Army to assure the reliability of the data they used and provided for our review. Therefore, we believe the Army’s data is sufficiently reliable for our purposes. Finally, we obtained information concerning the status of previous Army, Air Force, and Navy lodging public-private ventures. We interviewed appropriate military service officials and private developers/managers involved in these public- private ventures to gain insight into their experience and potential opportunities or challenges with privatization. To determine DOD’s progress in revising lodging policy guidance, we reviewed the lodging policy revisions proposed by the Office of the Under Secretary for Personnel and Readiness and conducted a comparative analysis to current DOD lodging program policies. We also interviewed Office of the Secretary of Defense and military service officials to determine the status of the draft revisions and their perspective on the proposed changes. We conducted our work from December 2005 through September 2006 in accordance with generally accepted government auditing standards. Between 1987 and 2001, the military services entered into 10 public-private ventures for lodges; however, only 7 are still operating. In two cases, at Fort Bliss, Texas, and Fort Drum, New York, the Army purchased the facilities from the developers. According to the Army officials, the Army always intended to resume ownership and operation of the Fort Bliss lodging facility. We were told that the public-private venture at Fort Drum was not successful because the occupancy never reached the anticipated levels because of a change in mission. The Army agreed to buy the facility from the developer and resume operations. Private developers, management personnel, and military personnel associated with these prior public-private ventures believe the programs are successful if there are well-written contracts that include specific provisions for rate setting, facility standards, revenue caps, and renegotiation of these provisions at specified intervals throughout the life of the lease. All but one noted that a positive ongoing relationship between the installation commander and lodging personnel and the developer and his or her management team is important. Table 7 summarizes the military services’ previous public-private ventures to provide lodging. Barry W. Holman, (202) 512-5581 ([email protected]) In addition to the person named above, Michael Kennedy, Assistant Director; Claudia Dickey, Kate Lenane, Leslie Sarapu, Julie Silvers, and Cheryl Weissman also made major contributions to this report. | The Department of Defense (DOD) transient lodging programs were established to provide quality temporary facilities for authorized personnel, and reduce travel costs through lower rates than commercial hotels. DOD has approximately 82,000 temporary duty (TDY) and permanent-change-of-station (PCS) rooms worldwide, and reported that it cost about $860 million in appropriated and nonappropriated funds to operate them in fiscal year 2005. While the Army plans to privatize its lodging in the United States, there are concerns as to whether these plans are cost-effective, and how they relate to DOD-wide lodging efforts. GAO was asked to address (1) how each military service and DOD manages, funds, and assesses the performance of its lodging programs to meet short- and long- term needs, and (2) the effect that lodging privatization would have on the costs to the Army and the ability to maintain and recapitalize facilities. GAO is also providing information on DOD's actions to implement prior recommendations regarding the lodging program. GAO obtained data from the Office of the Secretary of Defense, the military services and visited nine military installations. Each military service takes its own approach to manage and fund its lodging programs, but current DOD lodging guidance does not establish performance measures to assess program effectiveness. The Army and Air Force each manage their TDY and PCS lodging under a single organization, while the Navy and Marine Corps have separate organizations managing TDY and PCS facilities. The Marine Corps manages PCS lodging separately because it operates as a profit-generating morale, welfare, and recreation program. The services' lodging programs are provided varying levels of appropriated and nonappropriated fund support, which correlates with the room rates charged. For example, since the Air Force allocates more appropriated funds for program expenses, it charges less than does the Navy PCS program, which is sustained with the revenues generated from room rates. Determining total program costs across the services is difficult because some of the data reported are estimated or hard to collect. Though DOD has a lodging strategic plan, it has not been updated since 1999. DOD has not established lodging performance measures, and the services vary in their efforts to determine program effectiveness. Performance measures could help in assessing future program plans. The Army believes privatization will provide for faster improvement and long-term sustainment of lodging facilities and avoid costs. GAO recognizes these benefits, but its analysis shows privatization could increase costs through increased room rates and create operating challenges that have implications beyond the Army, such as uneven lodging occupancy and room rates where joint basing is planned. Under privatization, the Army projects that a developer will renovate existing or construct new lodging facilities in 7 years, and provide for their adequate sustainment over the 50-year project life. In contrast, the Army projects it would take over 20 years and cost about $1.1 billion to upgrade all lodging facilities under current plans, which do not provide for adequate long-term sustainment. GAO found that lodging privatization could increase costs to the government by about $75 million per year through increased room rates if all lodging facilities in the U.S. are privatized, with those costs borne by the operations and maintenance and military personnel appropriation accounts. The Army currently estimates it will also incur at least $17.3 million in onetime costs related to severance pay and discontinued service retirement annuities for lodging employees let go because of privatization. Privatization also may affect occupancy levels and exacerbate rate disparities among bases and between official and unofficial travelers, as well as lead to inconsistencies in room rates among services at future joint bases. Complying with relevant housing privatization legislation will allow congressional oversight of the Army's privatization of lodging. On October 6, 2006, DOD provided the military services with revised lodging guidance, but this guidance lacks performance standards and measures, and does not address which office within the Office of the Secretary of Defense is responsible for lodging policy and oversight of privatized lodging facilities. |
VA operates one of the nation’s largest health care systems to provide care to approximately 5.2 million veterans who receive health care through 158 VA medical centers (VAMC) and almost 900 outpatient clinics nationwide. The VA health care system also consists of nursing homes, residential rehabilitation treatment programs, and readjustment counseling centers. In 1986 Congress authorized VA to collect payments from third-party health insurers for the treatment of veterans with nonservice-connected disabilities, and it also established copayments from veterans for this care. Funds collected were deposited into the U.S. Treasury as miscellaneous receipts and were not made specifically available to VA to supplement its medical care appropriations. The Balanced Budget Act of 1997 established a new fund in the U.S. Treasury, the Department of Veterans Affairs Medical Care Collections Fund, and authorized VA to use funds in this account to supplement its medical care appropriations. As part of VA’s 1997 strategic plan, VA expected that collections from first- and third-party payments would cover the majority of the cost of care provided to veterans for nonservice-connected disabilities. VA has determined that some of these veterans, about 25 percent of VA’s user population in fiscal year 2002, were required to pay a copayment because of their income levels. In September 1999, VA adopted a fee schedule, called “reasonable charges,” which are itemized fees based on diagnoses and procedures. This schedule allows VA to more accurately bill for the care provided. To implement this, VA created additional bill-processing functions— particularly in the areas of documenting care, coding the care, and processing bills for each episode of care. To collect from health insurers, VA uses a four-function process with 13 activities to manage the information needed to bill and collect third-party payments—also known as the MCCF revenue cycle (see fig. 1). First, the intake revenue cycle function involves gathering insurance information on the patient and verifying that information with the insurer as well as collecting demographic data on the veteran. Second, the utilization review function involves precertification of care in compliance with the veteran’s insurance policy, including continued stay reviews to obtain authorization from third-party insurers for payment. Third, the billing function involves properly documenting the health care provided to patients by physicians and other health care providers. Based on the physician documentation, the diagnoses and medical procedures performed are coded. VA then creates and sends bills to insurers based on the insurance and coding information obtained. Finally, the collections, or accounts receivable, function includes processing payments from insurers and following up on outstanding or denied bills. See appendix II for a description of the activities that take place within each of the four functions. VA’s Chief Business Office utilizes a performance measure—an efficiency rating it refers to as “cost to collect”—that reflects VA’s cost to collect one dollar from first- and third-parties. To calculate the efficiency rating VA divides the costs of generating a bill and collecting payments from veterans and private health insurers by the actual revenue received from these sources. To measure the cost, cost data are extracted from two financial accounts, or cost centers, which are intended to capture field office costs and central office costs. Specifically, cost centers are used for classifying costs related to each of the 13 functional activities and the organizations that support these activities. According to an official with the Healthcare Financial Management Association, because business practices differ among entities, there are many variables that entities include in their calculations of the cost for collecting funds from first and third parties. Thus, a comparison of collection efficiency—the cost to collect one dollar—between different entities would be difficult. However, according to the official, it is reasonable to expect that business practices within the same organization such as the VA can be standardized, which would facilitate such a comparison internally. The VA health care system has unique rules and regulations governing its billing practices. For instance, VA is generally not authorized to bill Medicare or Medicaid for care provided to Medicare- or Medicaid-eligible veterans. VA must pay for all inpatient and outpatient care associated with a service-connected disability—it cannot collect copayments or bill third- party insurers for this care. VA uses third-party collections to satisfy veterans’ first-party debt. Specifically, if VA treats an insured veteran for a nonservice-connected disability, and the veteran is also determined by VA to have copayment responsibilities, VA will apply each dollar collected from the insurer to satisfy the veteran’s copayment debt related to that treatment. As we stated in a previous report to Congress, the statutes governing VA recoveries from private health insurers and veteran copayments do not clearly specify the relationship between the two provisions. In the absence of definitive guidance in the law, VA’s General Counsel has determined that insurance recoveries should be used to satisfy veterans’ copayment debt. The law and the relevant legislative history are not clear on whether third-party collections can be used for this purpose. VA has not provided guidance to the Chief Business Office or VISNs for accounting for the costs associated with collecting payments from veterans and private health insurers. As a result, we found that VA’s Chief Business Office and VISNs did not allocate certain costs associated with activities related to collecting first- and third-party payments to the two cost centers used in the calculation of cost to collect. In addition, we found inconsistencies in the way VISNs allocated these costs to the field office cost center. Consequently, reported costs to collect are inaccurate. We found that some costs incurred by VA’s central office as part of its efforts for collecting first- and third-party payments were not allocated to the central office cost center. For example, the following activities are costs incurred by organizations that support the Chief Business Office, but are not included in the central office cost center: Staff at the Health Eligibility Center spend a portion of their time determining veterans’ copayment status. Staff at the Health Revenue Center processed first-party refunds resulting from a settlement with a third-party payer regarding claims submitted from January 1995 through December 2001. VA reported that about 15 full- time staff members are dedicated to this effort. Staff assigned to Health Informatics assisted with contractor-developed software to review third-party claims for accuracy. Some costs incurred by field locations also were not always allocated to the field office cost center. Cost allocation differences occur because VA does not provide guidance to its field locations on which costs to allocate to specific cost centers. Thus, each of VA’s health care VISNs makes a determination as to which cost center to use when allocating costs for specific revenue cycle functions—such as patient intake and registration and utilization review. Figure 2 shows inconsistencies among VISNs in the way they allocate costs to some of the activities within the revenue cycle functions. For example, for precertification and certification activities within the utilization review function, 13 VISNs allocated all of the cost, 3 VISNs allocated some costs, and 5 VISNs allocated none of the cost to the field office cost center. In addition, the following are examples of costs that are related to collection activities but were not included in the costs for collecting payments: A veteran call center in VISN 8 (Bay Pines, Florida)—staffing resources valued at about $635,000 designed to assist veterans with questions about bills they receive and, if necessary, the arrangement of payment plans. Two service contracts in VISN 2 (Albany, New York)—approximately $470,000 in contract expenses for collecting third-party payments and a service contract estimated at $104,000 for insurance verification. Two service contracts in VISN 10 (Cincinnati, Ohio)—approximately $100,000 in contract expenses to use a software package that reviews claims sent to third-party insurers for technical accuracy. Also not included was an estimated $425,000 to license the use of insurance identification and verification software. In an attempt to standardize how MCCF staff carry out the revenue cycle functions and to instill fiscal discipline throughout its entire health system, VA is piloting the Patient Financial Services System (PFSS) in VISN 10 (Cincinnati, Ohio). PFSS is a financial software package that contains individual patient accounts for billing purposes. According to the Chief Business Office, the system is a key element to standardize MCCF operations throughout the entire VA health care system. PFSS is expected to improve first- and third-party collections by capturing and consolidating inpatient and outpatient billing information. However, PFSS is not currently designed to capture the cost of staff time for these activities—a key element for assessing the efficiency of VA’s collection efforts. VA’s practice of satisfying veterans’ copayment debt with collections from third-party insurers has reduced overall collections and increased administrative expenses. VA does not quantify the lost revenue from veterans’ copayments that is not collected and could be used to supplement its medical care appropriation. Based on interviews with network officials and site visits to individual medical facilities, we did not discover any locations that track the volume of first-party debt that is not collected and its relative dollar value. Hence, the exact dollar value of first-party revenue that was not collected is unknown. Seventeen of the 21 network officials we interviewed stated that considerable administrative time is dedicated to the process required to satisfy first-party debt with third-party collections—resources that could be invested elsewhere if the practice did not exist. One facility official estimated that approximately 5 full-time equivalent staff are used to satisfy first-party debt. Furthermore, one VISN official estimated that its medical facilities use approximately 11 full-time equivalent staff on this process. Collections staff routinely receive insurance payments that include voluminous reports that detail each claim. For example, one medical center provided us with a report that contained approximately 1,000 line items, each representing a pharmaceutical reimbursement. Staff at the medical center must sort through each line item and manually match it to a claim in the veteran’s file to determine if the veteran was charged a copayment for the pharmaceutical. In those cases where VA receives a reimbursement and the veteran was charged a copayment, VA will issue a credit or refund to the veteran—in the case of pharmaceuticals this amount can be up to $7. VA will delay billing copayments to veterans with private health insurance for 90 days to allow time for the insurer to reimburse VA. However, when insurers reimburse VA after the 90-day period, VA must absorb the cost of additional staff time for processing a refund if the veteran has already paid the bill. In our 1997 report, we discussed that VA’s practice of satisfying copayment debt with recoveries made from third-party insurers has resulted in reduced overall cost recoveries and increased administrative expense. In the report we suggested that Congress consider clarifying the cost recovery provisions of title 38 of the U.S. Code to direct VA to collect copayments from patients regardless of any amounts recovered from private health insurance except in instances where the insurer pays the full cost of VA care. VA does not provide guidance to its Chief Business Office and VISNs for accounting for the costs associated with collecting payments from private health insurers and veterans. As a result, VA’s Chief Business Office and VISNs did not allocate certain costs associated with activities related to collecting first- and third-party payments to the two cost centers used by the Chief Business Office in its calculation of cost to collect. In addition, we found inconsistencies in the way VISNs allocated these costs to the field office cost center. Consequently, VA’s reported cost-to-collect measure is inaccurate. Furthermore, VA has determined that it should use collections from private health insurers to satisfy veteran copayment debt. The law is silent on this point. VA’s determination has resulted in increased administrative expenses and reduced overall collections, thus making fewer dollars available for veteran health care. We believe our previous suggestion to Congress—that it consider clarifying the cost recovery provisions of title 38 of the U.S. Code to direct VA to collect copayments from patients regardless of any amounts recovered from private health insurance except in instances where the insurer pays the full cost of VA care—is still valid. Such action would reduce the administrative burden on VA staff, reduce VA administrative expenses, and allow VA to maximize collections to help meet its costs for providing health care. To accurately determine and report the cost to collect first- and third-party payments, we recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health to provide guidance for standardizing and consistently applying across VA the accounting of costs associated with collecting payments from veterans and private health insurers. We provided a draft of this report to VA for comment. In oral comments, an official in VA’s Office of Congressional and Legislative Affairs informed us that VA concurred with our recommendation. We are sending copies of this report to the Secretary of Veterans Affairs, interested congressional committees, and other interested parties. We will also make copies available to others upon request. In addition, this 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 call me at (202) 512-7101 or Michael T. Blair, Jr., at (404) 679-1944. Michael Tropauer and Aditi Shah Archer contributed to this report. To do our work, we reviewed our prior work and Department of Veterans Affairs (VA) Office of Inspector General reports on VA’s first- and third- party revenue collection for the Medical Care Collections Fund (MCCF). We obtained and reviewed copies of VA policies and regulations governing these collection activities. Also, we reviewed statements by the Federal Accounting Standards and Advisory Board on managerial cost accounting concepts and standards for the federal government. We interviewed officials at VA’s Chief Business Office, which provides policy guidance to MCCF field staff, and obtained information on what they consider to be direct expenses of collecting first- and third-party revenue and documentation on how they calculate the cost to collect first- and third-party revenue. This information was validated through telephone interviews of key officials at each of VA’s 21 networks and site visits to 4 medical facilities. Also, we obtained information on the organizational structure for each network and its medical facilities and obtained the views of VISN and medical facility officials on the accuracy of the Chief Business Office’s cost reporting. In addition, we obtained information from the Healthcare Financial Management Association on other health care industry practices for reporting the cost to collect first- and third- party payments. Regarding the practice of satisfying first-party debt with third-party revenue, we reviewed past opinions and decisions by VA’s Office of General Counsel, applicable laws and regulations, and existing GAO matters for consideration. We also discussed the implementation of VA’s Office of General Counsel’s decisions with staff from VA’s Chief Business Office and medical facilities. In 1986, Congress authorized VA to collect payments from third-party health insurers for the treatment of veterans with nonservice-connected disabilities, and it also established copayments for this care. Funds collected were deposited into the U.S. Treasury as miscellaneous receipts and not made specifically available to the VA to supplement its medical care appropriations. The Balanced Budget Act of 1997 established a new fund in the U.S. Treasury, the Department of Veterans Affairs Medical Care Collections Fund, and authorized VA to use funds in this account to supplement its medical care appropriations. To collect from health insurers, VA uses a four-function process with the following 13 activities to bill and collect third-party payments. 1. Patient Registration: Collecting patient demographic information, determining eligibility for health care benefits, ascertaining financial status, and obtaining consent for release of medical information. 2. Insurance Identification: Obtaining insurance information from veteran, spouse, or employer. 3. Insurance Verification: Confirming patient insurance information and contacting third-party insurer for verification of coverage and benefit structure. 4. Precertification and Certification: Contacting third-party insurer to obtain payment authorization for VA-provided care. 5. Continued Stay Reviews: Reviewing clinical information and obtaining payment authorization from third-party insurer for continuation of care. 6. Coding and Documentation: Reviewing and assigning appropriate codes to document diagnosis of patient ailment and treatment procedures and validating information documented by the physician. 7. Bill Creation: Gathering pertinent data for bills; authorizing and generating bills; and submitting bills to payers. 8. Claims Correspondence and Inquiries: Providing customer service for veterans, payers, Congress, and VA Regional Counsel. 9. Establishment of Receivables: Reviewing outstanding claims sent to third-party insurers and identifying amount of payment due to VA for collection follow-up work. 10. Payment Processing: Reviewing, posting, and reconciling payment received. 11. Collection Correspondence and Inquiries: Following up with payers; resolving first-party bankruptcies, hardships and waivers; processing refund requests, repayment plans, and returned checks; referring claims to utilization review; and generating probate action. 12. Referral of Indebtedness: Referring delinquent first-party debt to the U.S. Treasury for collection against any future government payment to the veteran, such as reducing an income tax refund by the amount of the first-party debt. 13. Appeals: Receiving notification of partial or nonpayment from the third-party insurer, reviewing documentation, initiating an appeal to the third-party insurer for payment, and following up for appropriate payment. VA Health Care: VA Increases Third-Party Collections as It Addresses Problems in Its Collections Operations. GAO-03-740T. Washington, D.C.: May 7, 2003. 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. Washington, D.C.: June 11, 1999. VA Medical Care: Increasing Recoveries From Private Health Insurers Will Prove Difficult. GAO/HEHS-98-4. Washington, D.C.: October 17, 1997. 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 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 (www.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.” | During a May 2003 congressional hearing, questions were raised about the accuracy of the Department of Veterans Affairs' (VA) reported costs for collecting payments from veterans and private health insurers for its Medical Care Collections Fund (MCCF). Congress also had questions about VA's practice of using third-party collections to satisfy veterans' first-party debt. GAO's objectives were to determine: (1) the accuracy of VA's reported cost for collecting first- and third-party payments from veterans and private health insurers, and (2) how VA's practice of satisfying first-party debt with third-party payments affects the collections process. VA has not provided guidance to its Chief Business Office and Veterans Integrated Service Networks (VISN) for accounting for the costs associated with collecting payments from veterans and private health insurers. As a result, GAO found that the Chief Business Office and VISNs excluded some costs associated with collecting first- and third-party payments. In addition, GAO found inconsistencies in the way VISNs allocate these costs. Consequently, VA's reported costs to collect are inaccurate. VA's practice of satisfying--or paying for--first-party, or veterans' copayment debt, with collections from third-party insurers has resulted in a reduction in overall collections and increased administrative expenses due to the reconciliation process. VA has taken the position that payments made from third-party insurers should be used to satisfy veterans' first-party debt. The law and legislative history are not clear on whether third-party collections can be used for this purpose. |
Following the 2000 national elections, we produced a comprehensive series of reports covering our nation’s election process that culminated with a capping report and framework for Congress to use to enact reforms for election administration. Our reports were among the resources that Congress drew on in enacting the Help America Vote Act (HAVA) of 2002, which provided a framework for fundamental election administration reform and created the EAC mission to oversee the election administration reform process. HAVA also provided for funding to replace older voting equipment, specifically punch card and mechanical lever voting equipment and encouraged adoption of other technology. Subsequently, jurisdictions have increased their use of electronic voting methods, of which there are two commonly- used types: optical scan and direct recording electronic (DRE). Enacted by Congress in October 2002, HAVA affects nearly every aspect of the voting process, from voting technology to provisional ballots and from voter registration to poll worker training. In particular, the act authorized $3.86 billion in funding over several fiscal years for programs to replace punch card and mechanical lever voting equipment, improve election administration and accessibility, train poll workers, and perform research and pilot studies. HAVA also established the EAC to assist in the administration of federal elections and provide assistance with the administration of certain federal election laws and programs. HAVA also established minimum election administration standards for the states and units of local government that are responsible for the administration of federal elections. The act specifically tasked the EAC to serve as a national clearinghouse and resource for compiling election information and reviewing election procedures; for example, it is to conduct periodic studies of election administration issues, including electronic voting system performance, to promote methods of voting and administration that are most convenient, accessible, and easy to use for all voters. Other examples of EAC responsibilities include developing and adopting voluntary voting system guidelines and maintaining information on the experiences of states in implementing the guidelines and operating voting systems; testing, certifying, decertifying, and recertifying voting system hardware and software through accredited laboratories; making payments to states to help them improve elections in the areas of voting systems standards, provisional voting and voting information requirements, and computerized statewide voter registration lists; and making grants for research on voting technology improvements. The act also established the Technical Guidelines Development Committee to support the EAC, making it responsible for recommending voluntary voting system guidelines to the EAC. The act assigned the National Institute of Standards and Technology (NIST) responsibility for providing technical support to the development committee and made the NIST Director the committee chair. The EAC began operations in January 2004, initially focusing on the distribution of funds to help states meet HAVA’s Title III requirements for uniform and nondiscriminatory election technology and administration, including the act’s requirements pertaining to voting system standards, provisional voting, voting information, a computerized statewide voter registration list, and identification for first-time voters who register to vote by mail. Actions EAC has taken since 2004 to improve voting systems include publishing the Best Practices Toolkit and specialized management guides to assist states and local jurisdictions with managing election-related activities and equipment; issuing voting system standards in 2005, referred to as the Voluntary Voting System Guidelines; establishing procedures for certifying voting systems; establishing a program for accreditation of independent testing laboratories, with support from NIST’s National Voluntary Laboratory Accreditation Program; disbursing to states approximately $2.3 billion in appropriations for the replacement of older voting equipment and election administration improvements under Title III of HAVA; and conducting national surveys of the 2004 general election, uniformed and overseas voters, and other studies. For fiscal year 2006, EAC’s appropriation totaled $14.1 million. EAC reported that this included $3.8 million (27 percent) for activities related to development and adoption of the voting system standards and the voting system certification program; $3.5 million (25 percent) for research and study and to establish the EAC as a national clearinghouse of election administration information; and $2.8 million (20 percent) to manage HAVA funds distributed to the states. The remaining funds went to various administrative expenses, including funding various advisory board meetings. EAC’s budget for fiscal year 2007 is $16.91 million, of which $4.95 million (29 percent) is to be transferred to NIST for its work on voting system standards and research performed under HAVA. EAC’s requested budget for fiscal year 2008 is $15.5 million, of which $3.25 million (21 percent) is to be transferred to NIST. In the United States today, most votes are cast and counted by one of two types of electronic voting systems: optical scan and direct recording electronic (DRE). For the November 2004 general election, optical scan was the predominant voting method for more than half of local jurisdictions nationwide. In contrast, DREs were used as the predominant voting method by an estimated 7 percent of jurisdictions, although they were the predominant voting method for large jurisdictions. Figure 1 shows the estimated percentage of small, medium, and large jurisdictions using each predominant voting method in the 2004 general election. Optical scan voting systems use electronic technology to tabulate paper ballots. For the 2004 general election, we estimated that about 51 percent of all local jurisdictions used optical scan voting equipment predominantly. An optical scan voting system is made up of computer-readable ballots, appropriate marking devices, privacy booths, and a computerized tabulation device. The ballot, which can be of various sizes, lists the names of the candidates and the issues. Voters record their choices using an appropriate writing instrument to fill in boxes or ovals or to complete an arrow next to the candidate’s name or the issue. The ballot includes a space for write-ins to be placed directly on the ballot. Optical scan ballots are tabulated by optical-mark-recognition equipment (see fig. 2), which counts the ballots by sensing, or reading, the marks on the ballot. Ballots can be counted at the polling place—this is referred to as precinct-count optical scan—or at a central location. If ballots are counted at the polling place, voters or election officials put the ballots into the tabulation equipment, which tallies the votes; these tallies can be captured in removable storage media that are transported to a central tally location, or they can be electronically transmitted from the polling place to the central tally location. If ballots are centrally counted, voters drop ballots into sealed boxes and election officials transfer the sealed boxes to the central location after the polls close, where election officials run the ballots through the tabulation equipment. Software instructs the tabulation equipment to assign each vote (i.e., to assign valid marks on the ballot to the proper candidate or issue). In addition to identifying the particular contests and candidates, the software can be configured to capture, for example, straight party voting and vote-for-no-more-than-N contests. Precinct-based optical scanners can also be programmed to detect overvotes (where the voter, for example, votes for two candidates for one office, invalidating the vote) and undervotes (where the voter does not vote for all contests or issues on the ballot) and to take some action in response (rejecting the ballot, for instance), so that voters can fix their mistakes before leaving the polling place. If ballots are tabulated centrally, voters do not have the opportunity to detect and correct mistakes that may have been made. In addition, optical scan systems often use vote tally software to tally the vote totals from one or more vote tabulation devices. Optical scan systems were widely used as the predominant voting method for jurisdictions in the 2004 general election and we reported last year that jurisdictions planned to acquire more of these systems for the 2006 general election. We estimated that 30 percent of jurisdictions nationwide used precinct count optical scan voting equipment as their predominant voting method for the 2004 general election, while an estimated 21 percent used central count optical scan predominantly. While all sizes of jurisdictions had plans to acquire both precinct count and central count optical scan systems for the 2006 general election, small jurisdictions showed a strong preference for acquiring precinct count optical scan systems (estimated at 28 percent of small jurisdictions) compared with DREs (13 percent) and central count optical scan (4 percent). DREs capture votes electronically without the use of paper ballots. For the 2004 general election, we estimated that about 7 percent of all local jurisdictions used DREs predominantly, although 30 percent of all large jurisdictions used them as the predominant voting method. DREs come in two basic types: pushbutton or touch screen, with pushbutton being the older technology. The two types vary considerably in appearance, as shown in figure 3. Pushbutton and touch screen units differ significantly in the way they present ballots to the voter. With the pushbutton type, all ballot information is presented on a single “full-face” ballot. For example, a ballot may have 50 buttons on a 3 by 3 foot ballot, with a candidate or issue next to each button. In contrast, touch screen DREs display ballot information on an electronic display screen. For both pushbutton and touch screen types, the ballot information is programmed onto an electronic storage medium, which is then uploaded to the machine. For touch screens, ballot information can be displayed in color and can incorporate pictures of the candidates. Because the ballot space on a touch screen is much smaller than on a pushbutton machine, voters who use touch screens must page through the ballot information. Both touch screen and pushbutton DREs can accommodate multilingual ballots. Despite the differences between pushbutton and touch screen DREs, the two types have some similarities, such as how the voter interacts with the voting equipment. To make a ballot selection, voters press a button or the screen next to the candidate or issue, and the button or screen then lights up to indicate the selection. When voters are finished making their selections, they cast their votes by pressing a final “vote” button or screen. Until they hit this final button or screen, voters can change their selections. DREs are designed to not allow overvotes. Both types allow voters to write in candidates. While most DREs allow voters to type write-ins on a keyboard, some pushbutton types require voters to write the name on paper tape that is part of the device. In addition, different types of DREs offer a variety of options that jurisdictions may choose to purchase, such as printed receipts or audio interfaces for voters with disabilities. Although DREs do not receive paper ballots, they can retain permanent electronic images of all the ballots, which can be stored on various media, including internal hard disk drives, flash cards, or memory cartridges. According to vendors, these ballot images, which can be printed, can be used for auditing and recounts. Like optical scan devices, DREs require the use of software to program the various ballot styles and tally the votes, which is generally done through the use of memory cartridges or other media. Some of the newer DREs use smart card technology as a security feature. Smart cards are plastic devices—about the size of a credit card—that use integrated circuit chips to store and process data, much like a computer. Smart cards are generally used as a means to open polls and to authorize voter access to ballots. For instance, smart cards on some DREs store program data on the election and are used to help set up the equipment; during setup, election workers verify that the card received is for the proper election. Other DREs are programmed to automatically activate when the voter inserts a smart card; the card brings up the correct ballot onto the screen. DREs offer various configurations for tallying the votes. Some contain removable storage media that can be taken from the voting device and transported to a central location to be tallied. Others can be configured to electronically transmit the vote totals from the polling place to a central tally location. Vote tally software is often used to tally the vote totals from one or more units. DREs were chosen as the predominant voting method by a relatively small overall proportion of local jurisdictions for the 2004 general election (7 percent overall). However, as previously shown in figure 1, large and medium jurisdictions identified DREs as their predominant voting method (estimated at 30 percent and 20 percent of jurisdictions, respectively) more often than small jurisdictions (estimated at 1 percent). DREs were the leading choice among voting methods for both large and medium jurisdictions that planned to acquire voting systems before the 2006 general election (an estimated 34 percent of jurisdictions in both size groups). Voting systems are one facet of a multifaceted, continuous elections process that involves the interplay of people, processes, and technology. All levels of government—federal, state, and local— share responsibilities for aspects of elections and voting systems. Moreover, effective performance of these systems is a product of effective system life cycle management, which includes systems definition, development, acquisition, operations, testing, and management. Such performance can be viewed in terms of several characteristics, such as security, reliability, ease of use, and cost effectiveness. Voting systems represent one of many important components in the overall election process. This process involves all levels of government and is made up of several stages, with each stage consisting of the interplay of people, processes, and technology. At the federal level, Congress has authority under the Constitution to regulate the administration of presidential and congressional elections and to enforce prohibitions against specific discriminatory practices in all elections—federal, state, and local. It has passed legislation affecting the administration of state elections that addresses voter registration, absentee voting, accessibility provisions for the elderly and handicapped, and prohibitions against discriminatory practices. Congress does not have general constitutional authority over the administration of state and local elections. At the state level, the states are responsible for the administration of both their own elections and federal elections. States regulate the election process, including, for example, adoption of voting system standards, testing of voting systems, ballot access, registration procedures, absentee voting requirements, establishment of voting locations, provision of Election Day workers, and counting and certification of the vote. As we have reported, the U.S. election process can be seen as an assemblage of 51 somewhat distinct election systems—those of the 50 states and of the District of Columbia. Further, although election policy and procedures are legislated primarily at the state level, states typically have decentralized this process so that the details of administering elections are carried out at the city or county levels, and voting is done at the local level. This is important because local election jurisdictions number more than 10,000 and their size varies enormously—from a rural county with about 200 voters to a large urban county such as Los Angeles County, where the total number of registered voters for the 2000 elections exceeded the registered voter totals in 41 states. The size and demographics of a voting jurisdiction significantly affects the complexity of planning and conducting the election, as does the method used to cast and count votes. For example, jurisdictions using DRE systems may need to manage the electronic transmission of votes or vote counts, while jurisdictions using optical scan technology need to manage the transfer of the paper ballots this technology reads and tabulates. Jurisdictions using optical scan technology may also need to manage electronic transmissions if votes are counted at various locations and totals are electronically transmitted to a central tally point. No matter what technology is used, jurisdictions may need to provide ballot translations; however, the logistics of printing paper materials in a range of languages, as would be required for optical scan technology, is different from the logistics of programming translations into DRE units. Some states do have statewide election systems so that every voting jurisdiction uses similar processes and equipment, but others do not. For instance, we reported in 2001 that in Pennsylvania, local election officials told us that there were 67 counties and consequently 67 different ways of handling elections. In some states, such as Georgia, state law prescribes the use of common voting technology throughout the state while in other states, local election officials generally choose the voting technology to be used in their precincts, often from a list of state-certified options. Regardless of levels of government, however, election administration is a year-round activity, involving varying sets of people performing the activities of each stage of the election process. These stages generally consist of the following: Voter registration. Among other things, local election officials register eligible voters and maintain voter registration lists, including updates to registrants’ information and deletions of the names of registrants who are no longer eligible to vote. Absentee and early voting. This type of voting allows eligible persons to vote in person or by mail before Election Day. Election officials must design ballots and other systems to permit this type of voting and educate voters on how to vote by these methods. Election Day vote casting. Election administration includes preparation before Election Day, such as local election officials arranging for polling places, recruiting and training poll workers, designing ballots, and preparing and testing voting equipment for use in casting and tabulating votes, as well as Election Day activities, such as opening and closing polling places and assisting voters in casting their votes. Vote counting. At this stage, election officials tabulate the cast ballots, determine whether and how to count ballots that cannot be read by the vote counting equipment, certify the final vote counts, and perform recounts, if required. As shown in figure 4, each stage of an election involves people, processes, and technology. Electronic voting systems are primarily involved in the last three stages, during which votes are recorded, cast, and counted. However, the type of system that a jurisdiction uses may affect earlier stages. For example, in a jurisdiction that uses optical scan systems, paper ballots like those used on Election Day may be mailed in the absentee voting stage. On the other hand, a jurisdiction that uses DRE technology would have to make a different provision for absentee voting. The performance of any information technology system, including electronic voting systems, is heavily influenced by a number of factors, including how well the system is defined, developed, acquired, tested, and implemented. Like any information technology product, a voting system starts with the explicit definition of what the system is to do and how well it is to do it. These requirements are then translated into design specifications that are used to develop the system. Electronic voting systems are typically developed by vendors and then purchased as commercial off-the-shelf (COTS) products and implemented by state and local election administrators. During the development, acquisition, and implementation of the systems, a range of tests are performed and the process is managed to ensure performance expectations are met. Together, these activities form a voting system life cycle (see fig. 5). Unless voting systems are properly managed throughout their life cycle, this one facet of the election process can significantly undermine the integrity of the whole. Standards. Voting system standards define the functional and performance requirements that must be met and thus provide the baseline against which systems can be developed and tested. They also specify how the systems should be implemented and operated. Voting system standards apply to system hardware, software, firmware, and documentation, and they span prevoting,voting, and postvoting activities. They address, for example, requirements relating to system security; system reliability (accuracy and availability); system auditability; system storage and maintenance; and data retention and transportation. In addition to national standards, some states and local jurisdictions have specified their own voting system requirements. Development. Product development is performed by the voting system vendor. Product development includes further establishing system requirements, designing the system architecture, developing software, integrating hardware and software components, and testing the system. Acquisition. Voting system acquisition activities are performed by state and local governments and include publishing a request for proposals, evaluating proposals, choosing a voting system method, choosing a vendor, writing and administering contracts, and testing the acquired system. Operations. Operation of voting systems is typically the responsibility of local jurisdictions. These activities include setting up systems before voting, vote capture and counting during elections, recounts and system audits after elections, and storage of systems between elections. Among other things, this phase includes activities associated with the physical environments in which the system operates. These include ensuring the physical security of the polling place and voting equipment and controlling the chain of custody for voting system components and supplies. The operations phase also includes monitoring of the election process by use of system audit logs and backups, and the collection, analysis, reporting, and resolution of election problems. Testing. As noted, testing is conducted by multiple entities throughout the life cycle of a voting system. Voting system vendors conduct testing during system development. National testing of systems is conducted by accredited independent testing authorities. Some states conduct testing before acquiring a system to determine how well it meets the specified performance parameters, or states may conduct certification testing to ensure that a system performs as specified by applicable laws and requirements. Once a voting system is delivered by the vendor, states and local jurisdictions may conduct acceptance testing to ensure that the system satisfies requirements. Finally, local jurisdictions typically conduct logic and accuracy tests prior to each election and sometimes subject portions of the system to parallel testing during each election. Management. Management processes ensure that each life cycle phase produces desirable outcomes and is conducted by the organization responsible for each life cycle phase. Voting system vendors manage the development phase, while states and/or local jurisdictions manage the acquisition and operations phases. Typical management activities that span the system life cycle include planning, configuration management, system performance review and evaluation, problem tracking and correction, human capital management, and user training. Management responsibilities related to security and reliability include program planning, disaster recovery and contingency planning, definition of security roles and responsibilities, configuration management of voting system hardware and software, and poll worker security training. Although the debate concerning electronic voting systems is primarily focused on security, other performance attributes are also relevant, such as reliability, ease of use, and cost. Each of these attributes is described here. Security. Election officials are responsible for establishing and managing security and privacy controls to protect against threats to the integrity of elections. Threats to election results and voter confidentiality include potential modification or loss of electronic voting data; loss, theft, or modification of physical ballots; and unauthorized access to software and electronic equipment. Different types of controls can be used to counter these threats. Physical access controls are important for securing voting equipment, vote tabulation equipment, and ballots. Software access controls (such as passwords and firewalls) are important for limiting the number of people who can access and operate voting devices, election management software, and vote tabulation software. In addition, physical screens around voting stations and poll workers preventing voters from being watched or coerced while voting are important to protect the privacy and confidentiality of the vote. Reliability. Ensuring the reliability of votes being recorded and tallied is an essential attribute of any voting equipment and depends to a large degree on the accuracy and availability of voting systems. Without such assurance, both voter confidence in the election and the integrity and legitimacy of the outcome of the election are at risk. The importance of an accurate vote count increases with the closeness of the election. Both optical scan and DRE systems are claimed to be highly accurate. Although voting equipment may be designed and developed to count votes as recorded with 100 percent accuracy, how well the equipment counts votes as intended by voters is a function not only of equipment design, but also of how procedures are followed by election officials, technicians, and voters. It is also important to limit system down time so that polling places can handle the volume of voter traffic. Ease of Use. Ease of use (or user friendliness) depends largely on how voters interact physically and intellectually with the voting system. This interaction, commonly referred to as the human/machine interface, is a function of the system design and how it has been implemented. Ease of use depends on how well jurisdictions design ballots and educate voters on the use of the equipment. A voting system’s ease of use affects accuracy (i.e., whether the voter’s intent is captured), and it can also affect the efficiency of the voting process (confused voters take longer to vote). Accessibility by diverse types of voters, including those with disabilities, is a further aspect of ease of use. Cost. For a given jurisdiction, the particular cost associated with an electronic voting system will depend on the requirements of the jurisdiction as well as the particular equipment chosen. Voting equipment costs vary among types of voting equipment and among different manufacturers and models of the same type of equipment. Some of these differences can be attributed to differences in what is included in the unit cost. In addition to the equipment unit cost, an additional cost for jurisdictions is the software that operates the equipment, prepares the ballots, and tallies the votes (and in some cases, prepares the election results reports). Other factors affecting the acquisition cost of voting equipment are the number and types of peripherals required. Once jurisdictions acquire the voting equipment, they also incur the cost to operate and maintain it, which can vary considerably. Election officials, computer security experts, citizen advocacy groups, and others have raised significant security and reliability concerns with electronic voting systems, citing, for example, inadequacies in standards, system design and development, operation and management activities, and testing. In 2005, we examined the range of concerns raised by these groups and aligned them with their relevant life cycle phases. We also examined EAC’s efforts related to these concerns. Furthermore, we identified key practices that each level of government should implement throughout the voting system life cycle in order to improve security and reliability. The aspects of the voting system life cycle phases are interdependent—that is, a problem experienced in one area of the life cycle will likely affect other areas. For example, a weakness in system standards could result in a poorly designed and developed system, which may not perform properly in the operational phase. State and local jurisdictions have documented instances when their electronic voting systems exhibited operational problems during elections. Such failures led to polling place delays, disruptions, and incorrect vote tabulations. In reviewing the reported concerns, we have explained that many of the security and reliability concerns involved vulnerabilities or problems with specific voting system makes and models or unique circumstances in a specific jurisdiction’s election, and there is a lack of consensus among elections officials, computer security experts, and others on the pervasiveness of the concerns. We concluded in 2005 that these concerns have caused problems with recent elections, resulting in the loss and miscount of votes. In light of the demonstrated voting system problems; the differing views on how widespread these problems are; and the complexity of assuring the accuracy, integrity, confidentiality, and availability of voting systems throughout their life cycles, we stated that the security and reliability concerns merit the focused attention of federal, state, and local authorities responsible for election administration. Appropriately defined and implemented standards for system functions and testing processes are essential to ensuring the security and reliability of voting systems across all phases of the elections process. States and local jurisdictions face the challenge of adapting to and consistently applying appropriate standards and guidance to address vulnerabilities and risks in their specific election environments. The national standards are voluntary— meaning that states are free to adopt them in whole or in part or reject them entirely. The Federal Election Commission (FEC) issued a set of voluntary voting system standards in 1990 and revised them in 2002. These standards identify requirements for electronic voting systems. Computer security experts and others criticized the 2002 voting system standards for not containing requirements sufficient to ensure secure and reliable voting systems. Common concerns with the standards involved their vague and incomplete security provisions, inadequate provisions for some commercial products and networks, and inadequate documentation requirements. In December 2005, EAC issued the Voluntary Voting System Guidelines, which includes additions and revisions for system functional requirements, performance characteristics, documentation requirements, and test evaluation criteria for the national certification of voting systems. These guidelines promote security measures that address gaps in prior standards and are applicable to more modern technologies, such as controls for software distribution and wireless operations. As we previously reported, the 2005 Voluntary Voting System Guidelines do not take effect until December 2007. Moreover, this version of the standards does not comprehensively address voting technology issues. For instance, they do not address COTS devices (such as card readers, printers, or personal computers) or software products (such as operating systems or database management systems) that are used in voting systems without modification. This is significant because computer security experts have raised concerns about a provision in the prior voting system standards that exempted unaltered COTS software from testing and about voting system standards that are not sufficient to address the weaknesses inherent in telecommunications and networking services. Specifically, vendors often use COTS software in their electronic voting systems, including operating systems. Security experts note that COTS software could contain defects, vulnerabilities, and other weaknesses that could be carried over into electronic voting systems, thereby compromising their security. Regarding telecommunications and networking services, selected computer security experts believe that relying on any use of telecommunications or networking services, including wireless communications, exposes electronic voting systems to risks that make it difficult to adequately ensure their security and reliability— even with safeguards such as encryption and digital signatures in place. As states and jurisdictions move to a more integrated suite of election systems, proactive efforts to establish standards in such areas will be essential to addressing emerging technical, security, and reliability interactions among systems and managing risks in this dynamic election environment. However, the 2005 guidelines do not address the emerging trends in election systems, such as the integration of registration systems with voting systems. In light of this and other weaknesses in the standards, we reported in 2005 that EAC did not yet have detailed plans in place for addressing these deficiencies. Accordingly, we recommended that EAC collaborate with NIST and the Technical Guidelines Development Committee to define specific tasks, measurable outcomes, milestones, and resource needs required to improve the standards. To its credit, EAC agreed with our recommendation, recognizing that more work was needed to further develop the technical guidelines. Accordingly, it stated that it planned to work with NIST to plan and prioritize its standards work within its scarce resources. Multiple reports, including several state-commissioned technical reviews and security assessments, have raised concerns about the design and development of secure and reliable electronic voting systems. Among other things, weak embedded security controls and audit trail design flaws were two major areas of concern: Weak system security controls. Some electronic voting systems reportedly have weak software and hardware security controls. Regarding software controls, many security examinations reported flaws in how controls were implemented in some DRE systems to prevent unauthorized access. For example, one model failed to password-protect the supervisor functions controlling key system capabilities; another relied on an easily guessed password to access these functions. If exploited, these weaknesses could damage the integrity of ballots, votes, and voting system software by allowing unauthorized modifications. Regarding physical hardware controls, several recent reports found that certain DRE models contained weaknesses in controls designed to protect the system. For instance, reviewers were concerned that a particular model of DRE was set up in such a way that if one machine was accidentally or intentionally unplugged from the others, voting functions on the other machines in the network would be disrupted. In addition, reviewers found that the switches used to turn a DRE system on or off, as well as those used to close the polls on a particular DRE terminal, were not protected. Design flaws in developing voter-verified paper audit trails. Establishing a voter-verified paper audit trail involves adding a paper printout to a DRE system so that a voter can review and verify his or her ballot. Some citizen advocacy groups, security experts, and elections officials advocate these audit trails as a protection against potential DRE flaws. However, other election officials and researchers have raised concerns about potential reliability and security flaws in the design of systems using voter-verified paper audit trails. If voting system mechanisms for protecting the paper audit trail were inadequate, an insider could associate voters with their individual paper ballots and votes, particularly if the system stored voter-verified ballots sequentially on a continuous roll of paper. If not protected, such information could breach voter privacy and confidentiality. Several reports raised concerns about the operational practices of local jurisdictions and the actual performance of their respective electronic voting systems during elections. These include incorrect system configurations, inadequate security management programs, and poor implementation of security procedures. Incorrect system configuration. Some state and local election reviews have documented cases in which local governments did not properly configure their voting systems. These improper configurations resulted in voters being unable to vote in certain races or their votes not being captured correctly by the voting system. Poor version control of system software. Security experts and some election officials expressed concern that the voting system software installed at the local level may not be the same as what was qualified and certified at the national or state levels. These groups raised the possibilities that either intentionally or by accident, voting system software could be altered or substituted, or that vendors or local officials might install untested or uncertified versions of voting systems, knowingly or unknowingly. As a result, potentially unreliable or malicious software might be used in elections. Inadequate security management programs. Several technical reviews found that states did not have effective information security management plans in place to oversee their electronic voting systems. The reports noted that key managerial functions were not in place, including (1) providing appropriate security training, (2) ensuring that employees and contractors had proper certifications, (3) ensuring that security roles were well defined and staffed, and (4) ensuring that pertinent officials correctly set up their voting system audit logs and require them to be reviewed. Poor implementation of security procedures. Several reports indicated that state and local officials did not always follow security procedures. For example, reports found that a regional vote tabulation computer was connected to the Internet and that local officials had not updated it with several security patches, thus needlessly exposing the system to security threats. In addition, several reports indicated that some state and local jurisdictions did not always have procedures in place to detect problems with their electronic voting systems such as ensuring the number of votes cast matched the number of signatures on precinct sign-in sheets. Security experts and some election officials have expressed concerns that the tests performed by independent testing authorities and state and local election officials do not adequately assess electronic voting systems’ security and reliability. These concerns are intensified by what some perceive as a lack of transparency in the testing process. Inadequate security testing. Many computer security experts expressed concerns with weak or insufficient system testing, source code reviews, and penetration testing. To illustrate their concerns, they pointed to the fact that most of the systems that exhibited the weak security controls previously cited had been nationally certified after testing by an independent testing authority. Security experts and others point to this as an indication that both the standards and the testing program are not rigorous enough with respect to security. Lack of transparency in the testing process. Security experts and some elections officials have raised concerns about a lack of transparency in the testing process. They note that the test plans used by the independent testing authorities, along with the test results, are treated as protected trade secrets and thus cannot be released to the public. Critics say that this lack of transparency hinders oversight and auditing of the testing process. This in turn makes it harder to determine the actual capabilities, potential vulnerabilities, and performance problems of a given system. Despite assertions by election officials and vendors that disclosing too much information about an electronic voting system could pose a security risk, one security expert noted that a system should be secure enough to resist even a knowledgeable attacker. In 2006, we reported on state and local government experiences in conducting the 2004 national election. Regarding voting systems, states’ and jurisdictions’ responses to our surveys showed that differing versions of the national voting system standards were used (not always the most current version); voting system life cycle management practices were not consistently implemented; and certain types of system testing were not widely performed. Moreover, jurisdictions reported that they did not consistently monitor the performance of their systems, which is important for determining whether election needs, requirements, and expectations are met and for taking corrective actions when they are not. States and jurisdictions reported that they applied a variety of voting system standards, some of which were no longer current. Specifically, 44 states and the District of Columbia reported that they were requiring local jurisdictions’ voting systems to be used for the first time in the November 2006 general election to comply with the national voting system standards. However, these states were not all using the same version of the standards. This is troublesome because the later versions of the standards are more stringent than the earlier versions in various areas, including security. More specifically, 28 of the 44 states and the District of Columbia reported that voting systems to be used for the first time in the 2006 election comply with the 2002 voting system standards. Nine of these 28 states would also require their jurisdictions to apply the 1990 federal standards to new voting systems and 4 of the 28 would also require jurisdictions to use the 2005 voting system standards, which were in draft version at the time of our survey. (One other state also expected to apply the 2005 voting system standards.) Ten other of the 44 states reporting said that they expected to use hybrid standards that were based on one or more versions of the national standards, without specifying the composition of their hybrid, and 4 states planned to use the national standards in 2006, but did not specify a version. (Five states responded that they did not require their voting systems to comply with any version of the national standards or had not yet made a decision on compliance with the standards for 2006. One state did not respond.) Local jurisdictions varied widely in the nature and extent of their voting system security efforts and activities during the 2004 election. Our research on recommended security practices shows that effective system security management involves having, among other things, (1) defined policies governing such system controls as authorized functions and access and documented procedures for secure normal operations and incident management; (2) documented plans for implementing policies and procedures; (3) clearly assigned roles and responsibilities for system security; and (4) verified use of technical and procedural controls designed to reduce the risk of disruption, destruction, or unauthorized modification of systems and their information. Jurisdictions’ efforts in each of these areas for the November 2004 general election are discussed here. Policies and procedures. Many jurisdictions reported having written policies and procedures for certain aspects of security related to their voting systems, but others did not. Written security policies were more prevalent among large jurisdictions (an estimated 65 percent) than small jurisdictions (an estimated 41 percent). An estimated one-fifth of jurisdictions reported that they did not have written policies and procedures in place for transporting ballots or electronic memory, storing ballots, or electronic transmission of voted ballots to ensure ballot security. In addition, some jurisdictions that we visited had published detailed voting system security policies and procedures that included such topics as network security policies for election tabulation, procedures for securing and protecting election equipment and software, testing voting equipment to ensure accurate recording of votes, and disaster recovery plans, while others omitted these topics. Some jurisdictions also took additional steps to ensure that election workers had access to, and were trained in, the contents of the policies and procedures for securing ballots and voting equipment. Implementation plans. Election officials in only 8 of the 28 jurisdictions that we visited told us that they had written plans for implementing security aspects of their voting systems and processes. Moreover, the contents of plans we obtained from local jurisdictions varied widely. One of the jurisdiction’s security plans covered most aspects of the voting process, from ballot preparation through recount, while another plan was limited to the security of its vote-tallying system in a stand-alone environment. Of the 5 plans we reviewed, 2 covered almost all of the 8 security topics in our review that included risk assessment, physical controls, awareness training, and incident response, while the others covered just one or two topics. Roles and responsibilities. In addition, security management roles and responsibilities for the 2004 general election were not consistently assigned. According to survey responses, security responsibilities fell primarily to local election officials (estimated at 67 percent) for the 2004 general election, although state officials (estimated at 14 percent) and other entities (e.g., independent consultants and vendors, estimated at 24 percent) were also assigned these responsibilities. Local officials were typically responsible for implementing security controls, while state officials were usually involved with developing security policy and guidance and monitoring local jurisdictions’ implementation of security. Some jurisdictions reported that other entities performed tasks such as securing voting equipment during transport or storage and training election personnel for security awareness. Similarly, 26 states reported that security monitoring and evaluation was performed by two or more entities. In 22 states and the District of Columbia, responsibility for security monitoring and evaluation was shared between the state and local election officials. States also reported cases where other entities (e.g., independent consultants or vendors) were involved in monitoring and evaluating controls. The entities that were assigned tasks and responsibilities at the local jurisdictions we visited are described in table 1. Use of security controls. For the November 2004 general election, jurisdictions’ operation of voting systems employed varying uses of certain security controls. Based on survey responses, we estimated that 59 percent of jurisdictions used power or battery backup, 67 percent used system access controls, 91 percent used hardware locks and seals, and 52 percent used backup electronic storage for votes. We further estimated that 95 percent of jurisdictions used at least one of these controls, and we estimated hardware locks and seals were the controls most consistently used for electronic voting systems. Furthermore, we estimated that a lower percentage of small jurisdictions used power or battery backup and electronic backup storage of votes for their voting systems than large or medium jurisdictions, and these differences are statistically significant in most cases. Figure 6 presents the use of various security controls by jurisdiction size. Among the jurisdictions that we visited, election officials reported that various security measures were in use during the 2004 general election to safeguard voting equipment, ballots, and votes before, during, and after the election. However, the measures were not uniformly reported by officials in these jurisdictions, and officials in most jurisdictions reported that they did not have a security plan to govern the scope, nature, and implementation of these measures or other aspects of their security program. The security controls most frequently cited by officials for the jurisdictions that we visited were locked storage of voting equipment and ballots and monitoring of voting equipment. Other security measures mentioned during our visits included testing voting equipment before, during, or after the election to ensure that the equipment was accurately tallying votes; planning and conducting training on security issues and procedures for elections personnel; and video surveillance of stored ballots and voting equipment. Table 2 summarizes the types and frequency of security measures reported by election officials in the jurisdictions we visited. Voting systems that can be remotely accessed introduce additional security challenges. Based on survey responses, we estimated that a small percentage of local jurisdictions (10 percent) provided remote access to their voting systems for one or more categories of personnel—local election officials, state election officials, vendors, or other parties. Some of the jurisdictions that provided this access described a variety of protections to mitigate the risk of unauthorized remote access, including locally controlled passwords, passwords that change for each access, and local control of communications connections. However, the percentage of jurisdictions with remote access may actually be higher because 7 to 8 percent of jurisdictions did not know if remote access was available for their systems. To ensure that voting systems perform as intended, the systems must be effectively tested. Voting system test and evaluation can be grouped into various types, or stages: certification testing (national level), certification testing (state level), acceptance testing, readiness testing, parallel testing, and postelection voting system audits. Each of these tests has a specific purpose and is conducted at the national, state, or local level at a particular time in the election cycle. Table 3 summarizes these types of tests. For the November 2004 general election, voting system testing was conducted for almost all voting systems, but the types and content of the testing performed varied considerably. According to survey responses, most states and local jurisdictions employed national and state certification testing and readiness testing to some extent, but the criteria used in this testing were highly dependent on the state or jurisdiction. Also, many, but not all, states and jurisdictions conducted acceptance testing of both newly acquired systems and those undergoing changes or upgrades. In contrast, relatively few states and jurisdictions conducted parallel testing during elections or audits of voting systems following elections. State and local responses to our surveys are summarized here relative to each type of testing. National certification. Most states continued to require that voting systems be nationally tested and certified. For voting systems being used for the first time in the 2004 general election, national certification testing was almost always uniformly required. In particular, 26 of 27 states using DRE for the first time in this election, as well as the District of Columbia, required their systems to be nationally certified, while 9 of the 10 states using punch card equipment for the first time and 30 of 35 states and the District of Columbia using optical scan equipment for the first time, reported such requirements. However, for the 2004 general election, we estimated that 68 percent of jurisdictions did not know whether their respective systems were nationally certified. This uncertainty surrounding the certification status of a specific version of voting system at the local level underscores our concern that even though voting system software may have been qualified and certified at the national or state levels, software changes and upgrades performed at the local level may not be. State certification. For the November 2004 general election, 42 states and the District of Columbia reported that they required state certification of voting systems. Seven of these states purchased voting systems at the state level for local jurisdictions. Officials for the remaining states and the District of Columbia reported that responsibility for purchasing a state-certified voting system rested with the local jurisdiction. While state certification requirements often included national testing as well as confirmation of functionality for particular ballot conditions, some states also required additional features such as construction quality, transportation safety, and documentation. Among the remaining 8 states that did not require state certification, officials described other mechanisms to address the compliance of voting equipment with state-specific requirements, such as a state approval process or acceptance of voting equipment based on federal certification. For the 2006 general election, 44 states reported that they would have requirements for certification of voting systems, 2 more states than for the 2004 general election. Of the 44, all but 1 expected to conduct the certification themselves; the remaining state reported that it would rely on results from a national independent testing authority to make its certification decision. In addition, 18 of the 43 states planned to involve a national testing laboratory in their certification process. Acceptance testing. With regard to acceptance testing of new voting systems, 26 states and the District of Columbia reported that responsibility for such testing was assigned to either the state or local level for the 2004 general election. Specifically, 8 states and the District of Columbia reported that they had responsibility for performing acceptance testing, 15 states required local jurisdictions to perform such testing, and 3 states reported that requirements for acceptance testing existed at both the state and local levels. Twenty- two states either did not require such testing or did not believe that such testing was applicable to them. (Two states did not know what their acceptance testing requirements were for the 2004 election.) In addition, more states required that acceptance testing be performed for changes and upgrades to existing systems than they did for new systems—30 states in all and the District of Columbia. Similarly, election officials at a majority of the local jurisdictions that we visited told us that they conducted some type of acceptance testing for newly acquired voting equipment, although they described a variety of approaches to performing acceptance testing. For example, the data used for testing could be vendor-supplied, developed by election officials, or both, and could include system initialization, logic and accuracy, and tamper resistance. Other steps, such as diagnostic tests, physical inspection of hardware, and software configuration checks, were also mentioned as testing activities by local election officials. Further, election officials from 3 jurisdictions that we visited said that vendors were heavily involved in designing and executing the acceptance tests, while officials from another jurisdiction that we visited said that vendors contributed to a portion of their testing. In 2 jurisdictions, officials said that acceptance tests were conducted at a university center for elections systems. Readiness testing. Almost all states (49) and the District of Columbia reported that they performed readiness testing of voting systems at the state level, the local level, or both (one state did not require readiness testing). Most states (37) required local jurisdictions to perform readiness testing. However, 7 states reported that they performed their own readiness testing for the 2004 general election in addition to local testing. Five states and the District of Columbia reported that they had no requirements for local jurisdictions to perform readiness testing but conducted this testing themselves. State laws or regulations in effect for the 2004 election typically had specific requirements for when readiness testing should be conducted and who was responsible for testing, sometimes including public demonstrations of voting system operations. We found that most jurisdictions conducted readiness testing, also known as logic and accuracy testing, for both the 2000 and 2004 general elections. Election officials in all of the local jurisdictions we visited following the 2004 election reported that they conducted readiness testing on their voting equipment using one or more approaches, such as diagnostic tests, integration tests, mock elections, and sets of test votes, or a combination of approaches. Security testing. Security testing was reportedly performed by 17 states and the District of Columbia for the voting systems used in the 2004 general election, and 7 other states reported that they required local jurisdictions to conduct such testing. The remaining 22 states said that they did not conduct or require system security testing. (Three states reported that security testing was not applicable for their voting systems.) Moreover, we estimated that at least 19 percent of local jurisdictions nationwide (excluding jurisdictions that reported that they used paper ballots) did not conduct security testing for the systems they used in the November 2004 election. Although jurisdiction size was not a factor in whether security testing was performed, the percentage of jurisdictions performing security testing was notably higher when the predominant voting method was DRE (63 percent) and lower for jurisdictions where the predominant method was precinct count optical scan (45 percent). Parallel testing. Parallel testing was not widely performed by local jurisdictions in the 2004 general election, although 7 states reported that they performed parallel testing of voting systems on Election Day, and another 6 states reported that this testing was required by local jurisdictions. We estimated that 2 percent of jurisdictions using electronic systems for at least some of their voting conducted parallel testing for the 2004 general election. Large and medium jurisdictions primarily performed this type of testing (7 percent and 4 percent of jurisdictions, respectively). The percentage of small jurisdictions performing this type of testing was negligible (0 percent). Election officials in 2 of the 28 jurisdictions that we visited told us that they performed parallel testing either at the state level or at the local jurisdiction. In both cases, the tests were conducted on voting equipment for which security concerns had been raised in another state’s voting equipment test report. Local officials who told us that parallel testing was not performed on their voting systems attributed this to the absence of parallel testing requirements, a lack of sufficient voting equipment to perform these tests, or the view that parallel testing was unnecessary because of the stand-alone operation of their systems. Post-election audits. Less than one-half of the states (22) and the District of Columbia reported that they performed postelection voting system audits for the 2004 general election. Specifically, 4 states and the District of Columbia reported that they conducted postelection audits of voting systems, 16 states required that audits of voting systems be conducted by local jurisdictions, and 2 states reported that audits of voting systems were performed at both the state and local levels. Moreover, state laws or regulations in effect for the 2004 general election varied in when and how these audits were to be conducted. We estimated that 43 percent of jurisdictions that used voting systems for at least some of their voting conducted postelection voting system audits. This practice was much more prevalent at large and medium jurisdictions (62 percent and 55 percent, respectively) than small jurisdictions (34 percent). We further estimated that these voting system audits were conducted more frequently in jurisdictions with central count optical scan voting methods (54 percent) than they were in jurisdictions with precinct count optical scan voting methods (35 percent). It is important that performance be measured during system operation. As we reported in 2001 and 2006, measuring how well voting systems perform during a given election allows local officials to better position themselves for ensuring that elections are conducted properly. Such measurement also provides the basis for knowing where performance needs, requirements, and expectations are not being met so that timely corrective action can be taken to ensure the security and reliability of the voting system. Jurisdictions without supporting measures for security and reliability may lack sufficient insight into their system operations. Overall, responses to our local jurisdiction survey show that large jurisdictions were most likely to record voting system performance and small jurisdictions were least likely. We estimated that 42 percent of jurisdictions overall monitored the accuracy of voting equipment in the 2004 general election. Other measures recorded were spoiled ballots (estimated at 50 percent of jurisdictions), undervotes (50 percent of jurisdictions), and overvotes (49 percent of jurisdictions). During our visits to local jurisdictions, election officials in several jurisdictions told us that measuring overvotes was not a relevant performance indicator for jurisdictions using DREs because they do not permit overvoting, and that undervotes were not a meaningful metric because most voters focused on a limited range of issues or candidates and thus frequently chose not to vote on all contests. Figure 7 shows the percentages of small, medium and large jurisdictions that collected information on various measures of accuracy. We estimated that 15 percent of jurisdictions measured voting system failure rates and 11 percent measured system downtime. A higher percentage of large and medium jurisdictions collected these performance data than small jurisdictions. Collection of these data was also related to the predominant voting method used by a jurisdiction, with jurisdictions that predominantly used DREs more likely to collect system data than those that used precinct count or central count optical scan voting methods (an estimated 45 percent of jurisdictions versus 23 percent or 10 percent, respectively). Figure 8 shows the percentages of small, medium, and large jurisdictions that collected information on voting equipment failures and downtime. Figure 9 shows the percentages by predominant voting method of all jurisdictions that collected data on equipment failures. of medium jurisdictions and 52 percent of small jurisdictions. The responsibilities for monitoring or reporting voting system performance most often rested with local jurisdictions. We estimated that 83 percent of local jurisdictions had local officials responsible for performance monitoring or reporting, while states or other organizations (such as independent consultants or vendors) held such responsibilities in 11 percent and 13 percent of jurisdictions, respectively. The challenges in ensuring that voting systems perform securely and reliably are not unlike those faced by any technology user— application of well-defined standards for system capabilities and performance; effective integration of the people, processes, and technology throughout the voting system life cycle; rigorous and disciplined performance of security and testing activities; objective measurement to determine whether the systems are performing as intended; and analytical and economically justified bases for making informed decisions about voting system investment options. These challenges are complicated by other conditions common to both the national elections community and other information technology environments: the distribution of responsibilities among various organizations, technology changes, funding opportunities and constraints, changing requirements and standards, and public attention. Although responsibility for voting system performance falls largely on local governmental units, state and federal governments have important roles to play as well. Therefore, all levels of government need to work together to address these challenges, under the leadership of the EAC. To assist the EAC in executing its leadership role, we previously made recommendations to the commission aimed at better planning its ongoing and future activities relative to, for example, system standards and information sharing. While the EAC agreed with the recommendations, it told us that its ability to effectively execute its role is resource constrained. The extent to which states and local jurisdictions adopt and consistently apply up-to-date voting system standards directly affects the security and reliability of voting systems during elections. For the 2006 general election, a substantial proportion of states and jurisdictions had yet to adopt the most current federal voting system standards or related performance measures, meaning that the systems they employ may not perform as securely and reliably as desired. Beyond this, decisions by states and local jurisdictions to apply these latest standards for the 2008 election present additional challenges such as (1) whether the systems can be tested and certified in time for the election and (2) adopting standards that are now undergoing revision rather than continued use of earlier standards or later adoption of even newer standards. EAC plays an important role in ensuring the timely testing and certification of voting systems against the latest standards and in informing state and local decisions on whether to adopt these standards for the 2008 election. Accordingly, we have recommended that EAC define tasks and time frames for achieving the full operational capability of the national voting system certification program. These management elements would need to take into account estimating testing capacity and expected volume for the testing laboratory accreditation program, establishing protocols and time frames for reviewing certification packages, and setting norms for timely consideration and decision making regarding system certifications. Sharing this information with state and local election officials would help them to plan for system upgrades, testing, and state certification to meet their upcoming election cycles. States and local jurisdictions must also consider the timely adoption of standards in light of the additional work that is currently under way and planned to address known weaknesses in the national standards. For example, in addition to establishing minimum functional and performance requirements for voting systems, standards can also be used to govern integration of election systems, such as the accuracy, reliability, privacy, and security of components and interfaces. Accordingly, we have recommended that the EAC collaborate with NIST and the Technical Guidelines Development Committee to define the specific tasks, measurable outcomes, milestones, and resource needs required to improve the voting system standards. Identifying the incremental improvements to standards for several future election cycles and coordinating these with states and local jurisdictions would help those officials plan for these cycles and prepare the public for expected changes in voting technologies, security and reliability features, and compensating controls. Maximizing the performance of the voting systems that jurisdictions currently have and those they plan to use in the next general election means taking proactive steps between now and November 2008 to ensure that these systems perform as intended. These steps include activities aimed at securing, testing, and preparing these systems for operation. Although the vast majority of jurisdictions performed security, testing, and operational activities in one form or another for the 2004 general election, the extent and nature of these activities varied among jurisdictions and depended on the availability of resources (financial and human capital) committed to them. The challenge facing all voting jurisdictions will be to ensure that these activities are fully and properly performed, particularly in light of the security and reliability concerns that have been reported with electronic voting systems. Security, testing, and operational activities are to a large degree responsive to—and limited by—formal state and local directives. For 2004, election officials for some states identified various state and local directives for managing the security and reliability of their voting systems, including security plans, security testing, system acceptance testing, and voting equipment auditing. When appropriately defined and implemented, such directives can promote the effective execution of security and testing practices across all phases of the election process. As voting technologies and requirements evolve, states and local jurisdictions face the challenge of adapting and implementing the directives to meet the needs of their specific election environments. As previously stated, jurisdictions need to manage the triad of people, processes, and technology as interrelated and interdependent parts of the total voting process. Given the amount of time that remains between now and the November 2008 elections, jurisdictions’ voting system performance is more likely to be influenced by improvements in poll worker system operation training, voter education about system use, and vote casting and counting procedures than by changes to the physical systems. The challenge for voting jurisdictions is thus to ensure that these people and process issues are dealt with effectively. In this regard, the election management decisions and practices of states and local jurisdictions can benefit from the experiences and results of those with comparable election environments. In 2004 and again in 2006, EAC compiled such information into guidance documents for widespread use by election officials. However, as the election environment and voting systems continue to evolve, additional lessons and topics will undoubtedly surface. Accordingly, we have recommended that the EAC establish a process and schedule for periodically compiling and disseminating recommended practices for security and reliability across the system life cycle and that the practices be informed by information it collects on the problems and vulnerabilities of these systems. Incorporating the feedback obtained through actual voting system development, acquisition, preparation, and operations into practical guidance will allow the election community to be more robust and efficient. Reliable measures and objective data are needed for jurisdictions to know whether the technology they use is meeting the needs of the user communities (both the voters and the officials who administer the elections). While the vast majority of jurisdictions reported that they were satisfied with the performance of their respective technologies in the November 2004 elections, this satisfaction was based mostly on the subjective impressions of election officials rather than on objective data that measured voting system performance. Although these impressions should not be discounted, informed decision making on voting system operations and technology investment requires more objective data. The immediate challenge for jurisdictions is to define measures and begin collecting data so that they can definitely know how their systems are performing. States and local jurisdictions can benefit from sharing performance data on voting systems, including information on problems and vulnerabilities. However, the diffused and decentralized nature of our election system impedes timely and accurate collection and dissemination of this type of information for particular voting system models. Accordingly, we have recommended that the EAC develop a process and associated time frames for sharing information on voting system problems and vulnerabilities across the election community. The national voting system certification process established in January 2007 provides a mechanism for election officials to report problems and vulnerabilities with their systems to the EAC. Not yet defined are the mechanisms to collect and disseminate information on problems and vulnerabilities that are identified by voting system vendors and independent groups outside of the national certification process. In addition, foreseeable changes in technology require jurisdictions to determine whether a particular technology will provide benefits that are commensurate with life cycle costs (acquisition as well as operation and maintenance) and to assess whether these collective costs are affordable and sustainable. Thus, the long-term challenge for jurisdictions is to view and treat voting systems as capital investments and to manage them as such, including basing decisions on technology investments on clearly defined requirements and reliable analyses of quantitative and qualitative return on investment. In closing, I would like to say again that electronic voting systems are an undeniably critical link in the overall election chain. While this link alone cannot make an election, it can break one. The problems that some jurisdictions have experienced and the serious concerns that have surfaced highlight the potential for continuing difficulties in upcoming national elections if these challenges are not effectively addressed. The EAC plays a vital role related to ensuring that election officials and voters are educated and well informed about the proper implementation and use of electronic voting systems and ensuring that jurisdictions take the appropriate steps— related to people, process, and technology—that are needed regarding security, testing, and operations. More strategically, the EAC needs to move swiftly to strengthen the voting system standards and the testing associated with enforcing them. However, the EAC alone cannot ensure that electronic voting system challenges are effectively addressed. State and local governments must also do their parts. Moreover, critical to the commission’s ability to do its part will be the adequacy of resources at its disposal and the degree of cooperation it receives from entities at all levels of government. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other Members of the Subcommittee may have at this time. For further information, please contact Randolph C. Hite at (202) 512-3439 or by e-mail at [email protected]. Other key contributors to this testimony were Nancy Glover, Paula Moore, Sushmita Srikanth and Kim Zelonis. (310645) 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. | Since the 2000 national elections, concerns have been raised by various groups regarding the election process, including voting technologies. Beginning in 2001, GAO published a series of reports examining virtually every aspect of the elections process. GAO's complement of reports was used by Congress in framing the Help America Vote Act of 2002, which, among other things, provided for replacement of older voting equipment with more modern electronic voting systems and established the Election Assistance Commission (EAC) to lead the nation's election reform efforts. GAO's later reports have raised concerns about the security and reliability of these electronic voting systems, examined the EAC's efforts to address these concerns, and surveyed state and local officials about practices used during the 2004 election, as well as plans for their systems for the 2006 election. Using its published work on electronic voting systems, GAO was asked to testify on (1) the contextual role and characteristics of electronic voting systems, (2) the range of security and reliability concerns that have been reported about these systems, (3) the experiences and management practices of states and local jurisdictions regarding these systems, and (4) the longstanding and emerging challenges facing all levels of government in using these systems. Voting systems are one facet of a multifaceted, year-round elections process that involves the interplay of people, processes, and technology, and includes all levels of government. How well these systems play their role in an election depends in large part on how well they are managed throughout their life cycles, which begins with defining system standards; includes system design, development, and testing; and concludes with system operations. Important attributes of the systems' performance are security, reliability, ease of use, and cost effectiveness. A range of groups knowledgeable about elections or voting systems have expressed concerns about the security and reliability of electronic voting systems; these concerns can be associated with stages in the system life cycle. Examples of concerns include vague or incomplete voting system standards, system design flaws, poorly developed security controls, incorrect system configurations, inadequate testing, and poor overall security management. For the 2004 national elections, states' and local governments' responses to our surveys showed that they did not always ensure that important life cycle and security management practices were employed for their respective electronic voting systems. In particular, responses indicated that the most current standards were not always adopted and applied, security management practices and controls were employed to varying degrees, and certain types of system testing were not commonly performed. Moreover, jurisdictions' responses showed that they did not consistently monitor the performance of their systems. In GAO's view, the challenges faced in acquiring and operating electronic voting systems are not unlike those faced by any technology user--adoption and application of well-defined system standards; effective integration of the technology with the people who operate it and the processes that govern the operation; rigorous and disciplined performance of system security and testing activities; reliable measurement of system performance; and the analytical basis for making informed, economically justified decisions about voting system investment options. These challenges are complicated by other conditions such as the distribution of responsibilities among various organizations and funding opportunities and constraints. Given the diffused and decentralized allocation of voting system roles and responsibilities across all levels of government, addressing these challenges will require the combined efforts of all levels of government, under the leadership of the EAC. To assist the EAC in executing its leadership role, GAO has previously made recommendations to the commission aimed at better planning its ongoing and future activities relative to, for example, system standards and information sharing. While the EAC agreed with the recommendations, it stated that its ability to effectively execute its role is constrained by a lack of adequate resources. |
In March 2008, we reported that CDC had 13 guidelines for hospitals on infection control and prevention, and in these guidelines CDC recommended almost 1,200 practices for implementation to prevent HAIs and related adverse events. (See table 1.) CDC’s infection control and prevention guidelines set forth recommended practices, summarize the applicable scientific evidence and research, and contain contextual information and citations for relevant studies and literature. Most of CDC’s infection control and prevention guidelines are developed in conjunction with HICPAC, an advisory body created in 1992 by the Secretary of HHS. CDC publishes the final guidelines in its Morbidity and Mortality Weekly Report, on its Web site, or through a professional journal. We found that CDC’s guidelines covered such topics as prevention of catheter-associated urinary tract infections, prevention of surgical site infections, and hand hygiene. An example of a recommended practice in the hand hygiene guideline is the recommendation that health care workers decontaminate their hands before having direct contact with patients. Most of the practices were sorted into five categories—from strongly recommended for implementation to not recommended— primarily on the basis of the strength of the scientific evidence for each practice. Over 500 practices were strongly recommended. We also found that CDC and AHRQ had conducted some activities to promote implementation of recommended practices, such as disseminating the guidelines and providing research funds. However, these steps were not guided by a prioritization of recommended practices. Our March 2008 report noted that one factor to consider in prioritization is strength of evidence, as CDC had done. In addition to strength of evidence, an AHRQ study identified other factors to consider in prioritizing recommended practices, such as costs and organizational obstacles. Furthermore, the efforts of the two agencies had not been coordinated. For example, we found that CDC and AHRQ independently examined various aspects of the evidence related to improving hand hygiene compliance, such as the selection of hand hygiene products and health care worker education. This could have been an opportunity for coordination. We found that no one in the HHS Office of the Secretary was responsible for coordinating infection control activities across HHS. The department subsequently established the Steering Committee for the Prevention of Healthcare-Associated Infections, with senior-level representation of HHS offices and operating divisions, to develop the HHS Action Plan. To facilitate implementation of recommended practices among health care organizations, the plan prioritized some recommended practices to address four of its six targeted HAIs. In March 2008, we reported that while CDC’s infection control guidelines described specific clinical practices recommended to reduce HAIs, the infection control standards that CMS and accrediting organizations require as part of the hospital certification and accreditation processes described the fundamental components of a hospital’s infection control program. These components included the active prevention, control, and investigation of infections. Examples of standards and corresponding standards interpretations that hospitals must follow included educating hospital personnel about infection control and having infection control policies in place. The standards were far fewer in number than the recommended practices in CDC’s guidelines—for example, CMS’s infection control COP contained two standards. We also found that as a whole, the CMS, Joint Commission, and AOA standards and their interpretations described similar required elements of hospital infection programs. For example, all required that the hospital designate a person or persons to be responsible for the infection control program. However, there were differences, including the extent to which the standards and their interpretations required implementation of practices recommended in CDC’s infection control guidelines. Although CMS and the accrediting organizations generally did not require that hospitals implement all recommended practices in CDC’s infection control and prevention guidelines, we reported that the Joint Commission and AOA had standards that required the implementation of certain practices recommended in CDC’s infection control guidelines. For example, we reported that the Joint Commission and AOA required hospitals to annually offer influenza vaccinations to health care workers, whereas CMS’s interpretive guidelines, or standards interpretations, were more general, stating that hospitals should adopt policies and procedures based as much as possible on national guidelines that address hospital-staff- related issues, such as evaluating hospital staff immunization status for designated infectious diseases. In our March 2008 report, we proposed that HHS determine how to promote implementation of prioritized practices, including whether to incorporate selected practices into CMS’s hospital standards. In its Action Plan, HHS indicates its preference not to include specific infection control practices in its hospital standards in order to keep its standards flexible and broad. In our March 2008 report, we also discussed how compliance with hospital standards is assessed. CMS, the Joint Commission, and AOA assessed compliance with their infection control standards during on-site surveys through direct observation of hospital activities and review of hospital policy documents. Among the surveys conducted in the first quarter of 2007, 12.6 percent of CMS-surveyed hospitals, 17.6 percent of Joint Commission–surveyed hospitals, and 22.2 percent of AOA-surveyed hospitals were cited as noncompliant with one of the respective organizations’ standards on infection control. In March 2008, we reported that multiple HHS programs collected data on HAIs but that limitations in the scope of information they collected and the lack of integration across the databases maintained by these separate programs constrained the utility of the data. Three agencies within HHS— CDC, CMS, and AHRQ—collect HAI-related data for a variety of purposes in databases maintained by four separate programs: CDC’s National Healthcare Safety Network (NHSN) program, CMS’s Medicare Patient Safety Monitoring System (MPSMS), CMS’s Annual Payment Update (APU) program, and AHRQ’s Healthcare Cost and Utilization Project (HCUP). (See table 2.) We found that the most detailed source of information on HAIs in HHS was the NHSN database. It began as a voluntary program in the 1970s to assist hospitals that wanted to monitor their HAI rates. CDC has drawn on these data to publicly report aggregate trends in selected HAIs, and we found that it was working with a number of states that were implementing mandatory programs for hospitals to submit HAI-related data through NHSN. We reported that the MPSMS database provided CMS with information on national trends in the incidence of selected adverse events among hospitalized Medicare beneficiaries, including a number of different types of HAIs. These data were collected from medical records selected for annual random samples of approximately 25,000 Medicare inpatients. We also reported that the APU program implemented a financial incentive for hospitals to submit to CMS data that were used to calculate hospital performance on measures of quality of care. The program received quality-related data quarterly for a range of medical conditions, including data on three surgical infection prevention measures. We noted that CMS reported the results of its analyses of these data on its Hospital Compare Web site. Finally, we reported that AHRQ sponsored the development of the HCUP databases to create a national information resource of patient-level health care data. Two of the 20 Patient Safety Indicators that AHRQ derived from these data were related to HAIs, one involving infections caused by intravenous lines and catheters, and the other postoperative sepsis. We found that each of these databases presented only a partial view of the extent of the HAI problem because each focused its data collection on selected types of HAIs and collected data from a different subset of hospital patients across the country. Although two databases—NHSN and MPSMS—addressed many of the same types of HAIs, the former provided information only from selected units of hospitals that participated in the NHSN program (which did not represent hospitals nationwide), while the latter provided information only on a representative sample of Medicare inpatients (i.e., MPSMS did not provide information on non-Medicare patients). In addition, the data collection methods employed by the NHSN, MPSMS, and HCUP databases ranged from concurrent review of patient care as patients were being treated in the hospital, to retrospective review of patient medical records after patients had been discharged, to analyses of diagnostic codes recorded electronically in patient billing data. Although we noted that officials from the various HHS agencies discussed HAI data collection with each other, we found that the agencies were not taking steps to integrate any of the existing data from the four databases. This integration could involve creating linkages across the databases by, for example, creating common patient identifiers so that data from the same individuals in multiple databases could be pulled together. Creating linkages across the HAI-related databases could enhance the availability of information to better understand where and how HAIs occur. For example, data on surgical infection rates and data on surgical processes of care were collected for some of the same patients in two different databases that were not linked. In our March 2008 report, we concluded that, as a consequence, the potential benefit of using the existing data to monitor the extent to which compliance with the recommended surgical care processes led to actual improvements in surgical infection rates had not been realized. In its January 2009 Action Plan, HHS proposes remedying this situation by undertaking a series of short- and longer-term initiatives to coordinate and align its various HAI-related data collection activities, under the guidance of a new interagency working group. In our March 2008 report, we reported concerns with the use of HAI data for providing a national picture of HAIs. Although none of the databases collected data on the incidence of HAIs for a nationally representative sample of hospital patients, CDC officials had produced national estimates of HAIs. However, those estimates derived from assumptions and extrapolations that raised questions about the reliability of those estimates. In its Action Plan, HHS proposes to draw on some of the same data sources—primarily NHSN—to track progress in reducing the incidence of five of its six targeted HAIs. HAIs in hospitals can cause needless suffering and death. Federal authorities and private organizations have undertaken a number of activities to address this serious problem; however, to date, these activities have not gained sufficient traction to be effective. In our March 2008 report, we identified two possible reasons for the lack of effective actions to control HAIs. First, although CDC’s guidelines are an important source for its recommended practices on how to reduce HAIs, the large number of recommended practices and lack of department- level prioritization hinder efforts to promote their implementation. The guidelines we reviewed contain almost 1,200 recommended practices for hospitals, including over 500 that are strongly recommended—a large number for a hospital trying to implement them. A few of these are required by CMS’s or accrediting organizations’ standards or their standards interpretations, but it is not reasonable to expect CMS or accrediting organizations to require additional practices without prioritization. Although CDC has categorized the practices on the basis of the strength of the scientific evidence, there are other factors to consider in developing priorities. For example, work by AHRQ suggests factors such as costs or organizational obstacles that could be considered. The lack of coordinated prioritization may have resulted in duplication of effort by CDC and AHRQ in their reviews of scientific evidence on HAI- related practices. Second, we reported that HHS had not effectively used the HAI-related data it had collected through multiple databases across the department to provide a complete picture of the extent of the problem. Limitations in the databases, such as nonrepresentative samples, hinder HHS’s ability to produce reliable national estimates on the frequency of different types of HAIs. In addition, data collected on HAIs are not being combined to maximize their utility. HHS has made efforts to use the currently collected data to understand the extent of the problem of HAIs, but the lack of linkages across the various databases results in a lost opportunity to gain a better grasp of the problem of HAIs. HHS has multiple methods to influence hospitals to take more aggressive action to control or prevent HAIs, including issuing guidelines with recommended practices, requiring hospitals to comply with certain standards, releasing data to the public to expand information about the nature of the problem, and using hospital payment methods to encourage the reduction of HAIs. Prioritization of CDC’s many recommended practices can help guide their implementation, and better use of currently collected data on HAIs could help HHS—and hospitals themselves— monitor efforts to reduce HAIs. In our March 2008 report, we concluded that leadership from the Secretary of HHS was lacking to do this and that without such leadership, the department would not be able to effectively leverage its various methods to have a significant effect on the suffering and death caused by HAIs. The recently released HHS Action Plan identifies strategies that are intended to address some of the reasons for the lack of effective actions to control HAIs, including some identification of priorities from among the 1,200 recommended practices, and plans to coordinate HAI-related data collection activities across HHS. HHS released the Action Plan for comment in early January 2009, with the intent of revising it based on the public input it received. Following the transition to the new presidential administration, HHS has continued to solicit public comments on the plan with no designated deadline for submissions. Consequently, it remains uncertain when or if the new administration will choose to implement this plan, and if so, with what modifications, to address our recommendations and reduce the serious problem of HAIs. Mr. Chairman, this completes my prepared remarks. I would be happy to respond to any questions you or other members of the subcommittee may have at this time. For further information about this statement, please contact Marjorie Kanof at (202) 512-7114 or [email protected] or Cynthia A. Bascetta at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this statement were William Simerl, Assistant Director; Mary Giffin; Shannon Slawter Legeer; Eric Peterson; and Roseanne Price. 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. | According to the Centers for Disease Control and Prevention (CDC), health-care-associated infections (HAI)--infections that patients acquire while receiving treatment for other conditions-- are estimated to be 1 of the top 10 causes of death in the nation. The statement GAO is issuing today summarizes a March 2008 report, Health-Care-Associated Infections in Hospitals: Leadership Needed from HHS to Prioritize Prevention Practices and Improve Data on These Infections (GAO-08-283). In this report, GAO examined (1) CDC's guidelines for hospitals to reduce or prevent HAIs and what HHS does to promote their implementation, (2) Centers for Medicare & Medicaid Services' (CMS) and hospital accrediting organizations' required standards for hospitals to reduce or prevent HAIs, and (3) HHS programs that collect data related to HAIs and integration of the data across HHS. To conduct the work, GAO reviewed documents and interviewed HHS and accrediting organization officials. To update certain information for this statement, GAO reviewed relevant HHS documents released after GAO's March 2008 report. In its March 2008 report, which is summarized in this statement, GAO found that CDC has 13 guidelines for hospitals on infection control and prevention, which contain almost 1,200 recommended practices, but activities across HHS to promote implementation of these practices are not guided by a prioritization of the practices. Although most of the practices have been sorted into categories primarily on the basis of the strength of the scientific evidence for the practice, other factors to consider in prioritizing, such as costs or organizational obstacles, have not been taken into account. While CDC's guidelines describe specific clinical practices recommended to reduce HAIs, the infection control standards that CMS and the accrediting organizations require describe the fundamental components of a hospital's infection control program. The standards are far fewer in number than CDC's recommended practices and generally do not require that hospitals implement all recommended practices in CDC's guidelines. Multiple HHS programs have databases that collect data on HAIs, but limitations in the scope of information collected and a lack of integration across the databases constrain the utility of the data. GAO concluded that the lack of department-level prioritization of CDC's large number of recommended practices had hindered efforts to promote their implementation. GAO noted that a few of CDC's strongly recommended practices were required by CMS or the accrediting organizations but that it was not reasonable to expect CMS or the accrediting organizations to require additional practices without prioritization. GAO also concluded that HHS had not effectively used the HAI-related data it had collected through multiple databases across the department to provide a complete picture of the extent of the problem. Subsequent to GAO's report, HHS established a steering committee, with senior-level representation of HHS offices and operating divisions, to develop the HHS Action Plan to Prevent Healthcare-Associated Infections. This plan includes strategies that are intended to address some of the reasons for the lack of effective actions to control HAIs, including some identification of priorities from among the 1,200 recommended practices, and plans to coordinate HAI-related data collection activities across HHS. HHS released the Action Plan for comment in early January 2009, with the intent of revising it based on the public input it received. Following the transition to the new presidential administration, HHS has continued to solicit public comments. Consequently, it remains uncertain when or if the new administration will choose to implement this plan, and if so, with what modifications, to address GAO's recommendations and reduce the serious problem of HAIs. |
Preserving U.S. industrial capabilities in sectors critical to national security has been a traditional U.S. policy goal. An important concern in the debate on foreign investment in the United States is the possibility that key segments of industries critical to the national security could come under foreign control through foreign investments. Because U.S. defense strategy relies on the deterrent effects of technological rather than numerical superiority, concern about foreign investment focuses on the U.S. government’s ability to identify technologies crucial to defense systems and to act to preserve and promote U.S. leadership in them. The United States does not screen inward investment but relies on certain laws or regulations to ensure that foreign investment does not assume forms harmful to the nation’s interests. For example, specific restrictions are in place to protect classified defense information from foreign access and to ensure U.S. production of vital defense goods in the event of a crisis. Foreign investments in U.S. firms performing classified defense work are monitored under the National Industrial Security Program. Restrictions under this program provide authority to restrict or deny foreign access to classified information. Although they do not authorize denials of foreign investments, they can, in effect, deter potential investors who are seeking access to classified information. The U.S. government, in addition, restricts foreign investment in certain sectors, such as energy resources, coastal and domestic shipping, and air transport. To counter the loss of leading-edge or highly advanced technology and processes that are important to the country’s security through the acquisition of U.S. companies by foreign investors, Congress passed the Exon-Florio legislation in 1988. Congress was concerned that foreign takeovers of U.S. firms that harmed U.S. security could not be stopped unless the President declared a national emergency or regulators invoked Federal antitrust, environmental, or securities laws. The Exon-Florio legislation grants the President the authority to take appropriate action to suspend or prohibit foreign acquisitions, mergers, or takeovers of U.S. businesses that threaten to impair the national security. To exercise this authority, the President must find that (1) credible evidence exists that the foreign interest might take action that threatens to impair national security and (2) provisions of law, other than the International Emergency Economic Powers Act, do not provide adequate and appropriate authority to protect the national security. However, Congress did not intend for the legislation to raise obstacles to foreign investment. The President designated CFIUS as responsible for reviewing transactions. CFIUS is an existing Committee comprised of representatives from 11 agencies or offices. The Secretary of the Treasury chairs the Committee and the Departments of State, Commerce, and Defense are among the agencies represented. The Defense Technology Security Administration coordinates the positions of various Department of Defense (DOD) components and provides the final DOD position for CFIUS reviews. Notification to CFIUS of an acquisition is voluntary. However, it is in the interest of foreign investors to do so because CFIUS retains the right to review in the future any acquisition not notified to the Committee. The Exon-Florio regulations also permit a Committee member to submit a notice of a proposed or completed acquisition for a national security review. The CFIUS review process serves both to protect national security and to minimize any potential adverse effect of the Exon-Florio legislation on foreign investment in the United States. CFIUS determination that there are no national security issues essentially eliminates the risk that the President will at a later time block the transaction or order a divestiture. Once it is notified, CFIUS has an initial 30-day review period to determine if the transaction involves foreign control and whether there are national security concerns that warrant further investigation. If CFIUS decides that there will be foreign control and that potentially serious national security concerns are present, the Committee initiates a 45-day investigation. It then submits a report and recommendation to the President. The President has 15 days to decide whether or not to take appropriate action. The President may exercise the authority conferred by the Exon-Florio legislation, however, only if there is credible evidence that a foreign controlling interest might threaten national security and that other legislation cannot provide adequate protection. As shown in table 1, between October 1988 and December 1994, CFIUS received 918 voluntary notifications. Of these, 15 involved 45-day investigations with recommendations to the President. In 5 of the 15 investigations, the companies voluntarily withdrew their investment offers. Of the remaining 10 investigations, the President decided not to intervene in 9 transactions and ordered divestiture in 1 case involving a Chinese company’s acquisition of a U.S. aircraft parts company. In 1992, Thomson-CSF, a French government-owned company, attempted to acquire the LTV Corporation’s Missile Division, which prompted legislation aimed at strengthening Exon-Florio. One provision made a distinction between foreign control and foreign government control and mandated 45-day investigations when the acquiring company is controlled by or acting on behalf of a foreign government and the acquisition could result in foreign government control that could affect the national security. Another provision required intelligence agency assessments of the risk of diversion of a defense critical technology when the U.S. company is engaged in the development of such a technology or is otherwise important to the defense industrial and technology base. Our analysis of data on CFIUS cases from October 1988 through May 1994 showed that about two-thirds of the filings involved high-technology industries in which there could be potential national security concerns.Among these industries are computers and semiconductors, electronics, aerospace, advanced materials, chemicals, biotechnology, and telecommunications. About one-third of the notifications to CFIUS involved industries in which national security concerns would be unlikely to arise. Examples of these industries include mining, plastics and rubber, construction, retailing, real estate, and entertainment. (App. III contains additional information on the industries with foreign investments that were reported to CFIUS.) Companies from Japan, the United Kingdom, France, and Germany accounted for over 65 percent of the notifications to CFIUS since 1988. Japanese companies were the leading investors notifying CFIUS, primarily on investments in computers and semiconductors. British companies were the second most active investors filing with CFIUS, most frequently on investments in advanced materials and electronics. French companies most frequently notified CFIUS of investments in aerospace, computers, and telecommunications companies, while German companies filed with CFIUS for investments in chemicals, industrial controls, equipment and machinery, and energy industries. Our comparison of CFIUS data with two private sector databases on foreign investments showed somewhat comparable investment concentrations by country and by industry. (Details on the four countries’ CFIUS filings by industry are in app. IV.) The 1992 legislation required the President to report on various aspects of foreign investment in U.S. critical-technology companies. The National Economic Council formed a working group to respond to the requirement and reported its findings in 1994. The group found no credible evidence that a country or private companies had a coordinated strategy to acquire U.S. critical-technology companies. It also noted that the absence of credible evidence demonstrating a coordinated strategy should not be viewed as conclusive proof that a coordinated strategy does not exist. The report also indicated that foreign governments, including those of France, Germany, and Japan, provide indirect assistance and guidance to their companies regarding foreign investments in high-technology U.S. firms. The Exon-Florio legislation and implementing regulations do not define which investments are important to review for national security reasons. Moreover, notification to CFIUS is voluntary. CFIUS officials believe that the Committee has been notified of most foreign investments in key or high-technology companies that could affect national security. CFIUS officials pointed out that investors have a strong inducement to notify CFIUS and seek its prior approval because the President retains the authority to order divestitures of transactions not cleared by CFIUS. However, we found that many foreign investments occur in high-technology or defense-related industries that were not reported to CFIUS. While the significance of the gap is unclear, it does suggest that the CFIUS process alone cannot be relied on to surface transactions posing potential national security concerns. Our comparison of two private databases on foreign investment in the United States with CFIUS data showed that many transactions occurred in high-technology industries that were not filed with CFIUS. Among these industries were telecommunications, advanced materials, biotechnology, electronics, computers, and aerospace. We verified selected transactions and determined that an acquisition of a U.S. aircraft parts manufacturer and investments in biotechnology and chemical companies occurred without being reported to CFIUS. However, these databases do not contain sufficient information to establish a link to national security, since they do not contain information on, for example, whether the acquired company had DOD contracts or produced products subject to U.S. export controls. (See app. I for an explanation of our comparison and app. II for details on transactions not notified to CFIUS, according to these private databases.) Furthermore, because Exon-Florio was never intended to be a comprehensive foreign investment review act, it is to be expected that there would be foreign investments that are not notified to CFIUS. Under the Exon-Florio legislation, CFIUS has considerable flexibility to decide if a transaction results in foreign company control over a U.S. firm or if a foreign government has control over an acquiring company. The implementing regulations do not specify that a given percentage of foreign ownership automatically results in control because minority owners can exercise control under various conditions. For example, a minority owner might hold board membership and have special voting rights over certain company actions. For this reason, the regulations broadly define control to mean having the power to directly or indirectly effect key company decisions and actions. CFIUS generally relies on a company’s stated intentions regarding the structure of the investment and the decision-making framework of the corporation. While decisions about foreign control are straightforward in complete acquisitions and majority investments, such decisions can be complicated and difficult in minority investment cases. Also, deciding foreign government control over the acquiring company can be difficult and involves a high degree of judgment. Of the 16 cases we reviewed, 12 involved majority investments or 100 percent acquisitions, and 4 involved minority investments. In two of the minority investment cases, CFIUS found foreign control and in two cases it determined there was no foreign control. A British company notified CFIUS of its intention to acquire 20 percent of a U.S. company. The U.S. company had classified contracts and provided a critical U.S. government emergency service. The acquisition would give the British company 3 of the 15 seats on the company’s board of directors and certain “consent rights” that would enable the British company to block several corporate actions. CFIUS found that foreign control would result on the basis of the British company’s right to veto certain acquisitions, joint ventures, and asset sales as well as any company charter amendment adversely affecting the British company. CFIUS conducted a 30-day review. However, this review determined that national security concerns were not sufficient to warrant an investigation. A German company notified CFIUS of its intention to purchase 12.25 percent of the common stock of a U.S. company. The U.S. parent company controlled 51 percent of the stock, and three European companies controlled the remaining 49 percent. The proposed investment would redistribute the stock among the foreign owners, leaving the U.S. majority ownership intact. The U.S. company had classified DOD and other U.S. government contracts that were protected by facility security clearances. CFIUS determined that the purchase of 12.25 percent of the company’s voting stock constituted foreign control because of several minority veto rights. These rights included the ability of any single foreign director to block decisions such as the adoption of a strategic plan or annual budget or the development of a new product that varies from the types of business stated in the strategic plan. CFIUS reviewed the company’s notification for national security concerns and decided to proceed with a 45-day investigation. During the investigation, CFIUS addressed issues relating to DOD’s ability to mitigate foreign control and influence over the company under the existing security agreement. As required, CFIUS prepared a report to the President. The transaction was not blocked. A Singaporean company proposed acquiring 22.8 percent of the voting stock in an investor group formed to acquire all of a U.S. company. A majority of the investor group’s voting stock was held by U.S. entities. The Singaporean company was indirectly owned by a holding company that was 99.9 percent owned by the Singapore Ministry of Finance. The U.S. company had classified contracts with DOD, necessitating a security agreement protecting classified information and technologies. CFIUS based its finding that the foreign company would not have control partly on the minority investor’s willingness to execute a proxy agreement under industrial security regulations that would give the minority investor’s voting rights to two U.S citizens. (The minority foreign investor later entered into a security agreement that would allow the foreign investor to gain board membership.) In our discussions on this case, CFIUS officials agreed that a proposed security agreement should not be used to determine foreign control. The Exon-Florio control standards are not comparable to the control issues under the industrial security regulations, which intend to isolate foreign control and influence over certain aspects of the business, not to determine whether the entire company will become foreign controlled. Although CFIUS’s letter to the company notifying it of its decision referenced the proxy agreement, CFIUS officials stated the finding of no foreign control was based on other factors, including a requirement for a two-thirds stockholder majority for certain decisions. Because CFIUS found no foreign control, it did not review the transaction for national security concerns. Two Israeli companies acquired a total of 35.6 percent of the outstanding stock of a U.S. company. One of the Israeli companies increased its ownership from 10.5 percent of the outstanding stock to 17.4 percent, while the second company acquired 18.2 percent of the outstanding stock. The notification to CFIUS stated that the two companies were considering entering into a shareholders’ agreement to vote their respective shares in concert. In subsequent correspondence, CFIUS was informed that the two Israeli companies had not concluded a shareholders’ agreement. CFIUS found that there was no foreign control because the two firms were not acting together and did not either individually or collectively have the ability to control the U.S. company. Because CFIUS found no foreign control, it did not review the transaction for national security concerns. The 1992 legislation required mandatory investigations of CFIUS cases in which the foreign company proposing an investment is controlled by a foreign government and the transaction could result in foreign control that “could affect the national security.” As a result, CFIUS also reviews cases for foreign government control. Of the 174 cases reviewed between October 1992 and December 1994, CFIUS found foreign government control in 18 cases. None of these cases resulted in investigations. CFIUS found the national security concerns in these cases were not sufficient to warrant investigations. In implementing the legislative requirement, CFIUS has determined that even when there is foreign government control, the provision does not mandate an investigation for a notification that does not pose a credible threat to the national security. Of the 16 cases we reviewed, 13 occurred after the 1992 legislation. Six cases involved some level of foreign government ownership of or participation in the acquiring companies. In two of these cases, CFIUS determined there was foreign government control. A subsidiary of a German company proposed acquiring a U.S. manufacturer of large machine tools. The U.S. company had unclassified contracts with DOD, and its products were subject to export controls applying to dual-use products, but it did not possess unique capabilities, and its technology was not considered defense critical. About one-third of the German company was indirectly owned by one German state government and two German city governments. Under German law, this level of ownership gave the government-owned entities the power to block certain decisions, such as the acquisition or closing down of businesses. The government-owned entities offered to abstain on shareholder decisions affecting the U.S. company. CFIUS found that there was foreign control because the acquiring company was German-owned and planned to purchase substantially all the assets of the U.S. company. Because the government entities had the power to block certain decisions, CFIUS determined there was foreign government control. CFIUS also concluded that there were not sufficient national security concerns to warrant an investigation. A subsidiary of a French company proposed purchasing a U.S. developer and manufacturer of software tools. The U.S. company had unclassified contracts with DOD and other U.S. government entities, but the technology was not militarily sensitive. The ultimate parent of the acquiring company is 100 percent owned by the French government. CFIUS determined that the acquiring company was foreign owned and that the outright acquisition of the U.S. company would result in foreign control. Because the buyer was owned by the French government, CFIUS decided that foreign government control would result from this acquisition. CFIUS also concluded that there were not sufficient national security concerns to warrant an investigation. In the other four cases, CFIUS determined that there was no foreign government control. Two of these cases are discussed below for illustrative purposes. In the other two cases, CFIUS decided there was no foreign government control because either multiple intervening layers of ownership diluted government control or the foreign government could not appoint board members. A South Korean company notified CFIUS of its intent to acquire a U.S. designer and manufacturer of semiconductor devices. The U.S. company was a defense subcontractor engaged in a defense-critical but not state-of-the-art technology. The foreign buyer indicated its intention to transfer the U.S. company’s technology to Korea and establish a production facility there. The foreign buyer received a small proportion of its total assets from two banks owned by the Korean government. Because this was a 100-percent acquisition by a Korean-owned company, CFIUS made a determination of foreign control. Although the foreign buyer had financing arrangements with the government-owned banks, CFIUS determined the amount of capital provided was not sufficient to constitute foreign government control. CFIUS also determined that there were not sufficient national security concerns to warrant a 45-day investigation. A British company notified CFIUS of its intention to acquire 20 percent of a U.S. company. The U.S. company had classified contracts and provided a critical U.S. government emergency service. Although the British government owned only 1.5 percent of the acquiring company’s issued shares, it retained special powers over the acquiring company. These powers included requiring the government shareholder’s written consent to alter certain sections of the foreign buyer’s articles of incorporation. For example, consent must be obtained when there are changes in the limit of any single shareholder owning more than 15 percent. The British government could also appoint two directors. As discussed on page 8, CFIUS determined that the minority investment would result in foreign control. CFIUS decided that there was no foreign government control because the government owned only a small amount of stock, had not recently appointed directors to the board, and had no significant consent rights over the acquiring company. CFIUS conducted a 30-day review and determined that there were not sufficient national security concerns to warrant a 45-day investigation. DOD has no special statutory role in reviewing transactions for national security concerns, and all other CFIUS members have equal standing to raise such concerns. However, officials from other CFIUS agencies stated that they look to DOD to make key judgments regarding the national security risks of a transaction. DOD considers, among numerous factors, whether (1) the technologies and products involved are critical to the national security, (2) the firm being acquired is a sole-source supplier to DOD, and (3) the U.S. company has classified contracts with the U.S. government. In addition, DOD reviews and analyzes information from the intelligence community regarding the foreign buyer’s past record of compliance with export controls, proliferation of sensitive weapons-related technologies, and other matters. Our sample included some cases involving intelligence information on the acquiring company or its government’s practices, including violations of U.N. sanctions and transfers of U.S. technology to proscribed countries; for most of these cases, DOD did not recommend a 45-day investigation. According to Defense Technology Security Administration officials, this information alone did not provide sufficient grounds to warrant investigations. They said that in some cases the technology at the U.S. company was not deemed to be critical and in others the intelligence information was not sufficiently corroborated, did not show violations of U.S. laws, or had occurred so long ago that it was no longer relevant. As required by the 1992 legislation, DOD agencies, including defense intelligence entities, assess the risk of diversion when the Secretary of Defense determines that a proposed merger, acquisition, or takeover may involve a firm engaged in the development of a defense-critical technology or is otherwise important to the defense industrial and technology base. These assessments are to be shared with all the Committee members, according to CFIUS officials. The Office of the Assistant Secretary of Defense for Economic Security found that 9 of the 174 CFIUS cases reviewed between October 1992 and December 1994 required a risk of diversion assessment. The responsible DOD official noted that the legislation requires a risk of diversion assessment only when the company is involved in the development, not the application, of a critical technology or is otherwise important to the defense industrial base. DOD uses the Key Technologies Plan, as authorized by the legislation, to decide whether the company is developing a defense-critical technology. The Departments of Defense, State, and the Treasury generally agreed with our draft report and provided minor technical comments. The Department of Defense said it concurred with the report as presented. The Department of State, in official oral comments, said that the report fairly and thoroughly describes the activities of CFIUS and accurately reflects the role of CFIUS members. The Department of the Treasury discussed the voluntary nature of CFIUS notification and said it will remind agencies to bring to CFIUS’s attention transactions in high-technology industries that have not been notified to CFIUS. Treasury also stated that it believes Exon-Florio implementation “has increased the awareness of investors to national security issues, brought transactions into conformity with existing laws where needed, and caused investors to consider explicitly national security when putting together proposals to acquire U.S. businesses.” The full text of the comments from the Departments of the Treasury and Defense are included in appendixes V and VI, respectively. The Department of Commerce reviewed the final draft and provided minor technical comments. The Department of Justice also reviewed the report but did not comment. We are sending copies of this report to other congressional committees; the Secretaries of the Treasury, State, Defense, Commerce, and Justice; and the Director, Office of Management and Budget. We are also making copies available to other interested parties upon request. Please contact me at (202) 512-4125 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix VII. Our examination of the implementation of Exon-Florio legislation and its amendments was requested by the former Chairs of the Subcommittee on Legislation and National Security and the Subcommittee on Commerce, Consumer, and Monetary Affairs, House Committee on Government Operations, and the Chairs and Ranking Minority Members of the Subcommittee on Research and Technology and the Subcommittee on Oversight and Investigation, House Committee on Armed Services. Specifically, we focused on (1) the extent foreign investments are reported to the Committee on Foreign Investment in the United States (CFIUS) and the characteristics of these investments and (2) the factors CFIUS considers in making decisions on whether the foreign investment would result in foreign companies’ control of U.S. companies, whether the acquiring foreign company is controlled by a foreign government, and whether there are associated national security risks. To address these objectives, we interviewed officials and examined records at the Departments of Defense (DOD), the Treasury, State, and Commerce. We also discussed CFIUS procedures and selected foreign company notifications with officials from the Defense Technology Security Administration and other DOD participants, including the Office of the Under Secretary of Defense for Acquisition and Technology; the Office of the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence; the military services; the Defense Intelligence Agency; the National Security Agency; the Defense Investigative Service; the Defense Logistics Agency; and the Advanced Research Projects Agency. We also obtained information from other CFIUS participants, including the Department of Justice, and contacted the Council of Economic Advisers, the Office of Management and Budget, the Office of Science and Technology Policy, and the National Security Council. To examine the scope of foreign investments voluntarily filed with CFIUS, we used an unofficial Department of Commerce database on CFIUS cases maintained by the Office of Strategic Industries and Economic Security.We also compared the CFIUS data with foreign investment databases maintained by the Economic Strategy Institute (ESI) and Securities Data Company (SDC). The ESI database tracks foreign investments in and acquisitions of U.S. companies involved in high, key, or critical technologies. These technology categories are developed by consultation with technical experts and generally follow broad standard technology categories. The SDC tracks investments, acquisitions, and mergers worldwide, but we obtained selected data on foreign investment in the United States in technology areas comparable to those tracked by ESI. SDC categorizes the technology sector by ascertaining the primary business of each company and by identifying pertinent standard industrial classification codes. From this comparison of the databases, we identified transactions not reviewed by CFIUS. We further selected transactions involving foreign acquisitions of or majority investments in high-technology industries and verified that these transactions were completed without CFIUS review for foreign control and national security concerns. We eliminated duplications in the Commerce database and deleted notifications withdrawn from CFIUS review. To develop industry categories, we relied primarily on those used by Commerce but also considered ESI’s categories. We divided the U.S. industries listed in the database into two categories, high technology and low technology, by referring to DOD’s Key Technologies Plan and the Militarily Critical Technologies List. We consulted with experts within and outside the government on our industry groupings and made changes in response to their recommendations. To evaluate the overall concentration or frequency of foreign investments by country and industry, we obtained data from federal government reports and interviewed agency officials at Commerce’s Bureau of Economic Analysis about aspects of their data collection efforts. We also obtained information from several private sector firms tracking foreign investment in U.S. companies, including SDC, Ulmer Brothers, Inc., and Technology Strategic Planning, Inc. We did not independently verify the information in the Commerce, ESI, or SDC databases. To examine the factors CFIUS considers in its decision-making process, we selected a judgmental sample of notifications from 1992 and 1993. We used the Defense Intelligence Agency’s list of 188 CFIUS filings for these years to select 33 notifications that the agency ranked high, moderate, and low risk. After an initial examination, we focused on 16 cases for in-depth review on the basis of the following criteria: (1) the technologies and industries involved, including cases DOD found to involve critical technologies; (2) the countries and companies involved in the transactions, including foreign government-owned companies; (3) whether validated export licenses are required; (4) the risk and intelligence analyses done; (5) the presence of DOD classified contracts and associated security agreements; and (6) the presence of sole-source or last supplier considerations. The 16 cases we reviewed covered 8 foreign countries and 6 industrial sectors. Table I.1 shows the 16 cases we selected for review. Percent acquired Risk of diversion Case withdrawn Represents two investors. Technology information is not included to avoid revealing the transaction. The sampling is not statistically representative of the entire CFIUS caseload, but these cases illustrate the CFIUS process and allowed us to examine the more difficult cases (that is, those involving minority investments, foreign government ownership and control, critical defense technologies, and/or adverse intelligence information). We reviewed records for each of the 16 cases at the Departments of the Treasury, Defense, State, and Commerce because CFIUS does not maintain a central file repository. DOD and State screened their CFIUS files and documents before making them available to us, which may have impeded our scope. The Defense Intelligence Agency and Central Intelligence Agency also provided information on our sample cases, where applicable. We reviewed the Exon-Florio legislation and subsequent amendments, implementing regulations, and the legislative history. We considered DOD’s role in the legislation and focused on the implementation of recently related legislation. We performed our work between March 1994 and April 1995 in accordance with generally accepted government auditing standards. Tables II.1 and II.2 provide information on foreign investment transactions from two private databases that were not in the Commerce Department’s database on CFIUS notifications. In our tables, we include only those transactions involving high-technology industries. From the Commerce Department’s database on CFIUS cases, we obtained data on cases reviewed for national security concerns between October 1988 through May 1994. Table III.1 shows the number of CFIUS cases reviewed during that period, by country, in high-technology and non-high-technology industry categories. Table III.2 provides further details of CFIUS cases reviewed for national security concerns by high-technology industry category and by country. Table III.3 illustrates CFIUS cases in non-high-technology industries by country. We developed these industry categories using the Commerce Department’s groupings and by consulting with industry experts within and outside the U.S. government. Defense Industrial Security: Issues in the Proposed Acquisition of LTV Corporation Missiles Division by Thomson-CSF (GAO/T-NSIAD-92-45, June 25, 1992). Foreign Investment: Analyzing National Security-Related Investment Under the Exon-Florio Provision (GAO/T-GGD-92-49, June 4, 1992). National Security Reviews of Foreign Investment (GAO/T-NSIAD-91-8, Feb. 26, 1991). National Security Review of Two Foreign Acquisitions in the Semiconductor Sector (GAO/T-NSIAD-90-47, June 13, 1990). Foreign Investment: Analyzing National Security Concerns (GAO/NSIAD-90-94, Mar. 29, 1990). The President’s Decision to Order a Chinese Company’s Divestiture of a Recently Acquired U.S. Aircraft Parts Manufacturer (GAO/T-NSIAD-90-21, Mar. 19, 1990). Strategic Minerals: Implications of Proposed Takeover of a Major British Mining Company (GAO/NSIAD-89-123, Mar. 3, 1989). 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. 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 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. | Pursuant to a congressional request, GAO examined the Committee on Foreign Investment in the United States' (CFIUS) implementation of the Exon-Florio legislation and related amendments, focusing on: (1) the characteristics of foreign investments in the United States and the extent to which they are reported to CFIUS; (2) the factors CFIUS considers in determining whether a foreign investment results in foreign control of a U.S. company; and (3) whether foreign control of U.S. companies threatens U.S. national security. GAO found that: (1) about two-thirds of the cases notified to CFIUS between October 1988 and May 1994 involved defense-related and high-technology industries that raised possible national security concerns; (2) many companies voluntarily notified CFIUS of proposed investments in and acquisitions of U.S. companies, but, according to two private-sector databases, many others did not; (3) the CFIUS process was not intended to provide a comprehensive screening mechanism for all foreign investment although CFIUS officials expressed the view that, because CFIUS clearance essentially eliminates the risk of a forced divestiture, most transactions affecting national security are reported; (4) in deciding whether a foreign investment will result in a foreign company gaining control of a U.S. company, CFIUS considers many factors related to the investor's ability to affect key company decisions; (5) when deciding on foreign government control, CFIUS examines the extent to which a foreign government owns and controls the acquiring company; (6) of the 174 transactions filed between the 1992 legislation and December 1994, CFIUS decided there was foreign government control in 18 cases; (7) none of these cases were investigated since CFIUS decided the national security concerns were not sufficient to warrant further investigation; (8) the Exon-Florio legislation does not provide a precise definition of national security, and neither the statute nor the implementing regulations contain guidelines for weighing the various factors considered in examining the national security risks of a transaction; (9) as a result, CFIUS agencies have significant flexibility in making such judgments; (10) CFIUS members noted that they rely primarily on the Department of Defense's (DOD) assessment of national security risks; (11) the 1992 legislation requires DOD to direct appropriate defense intelligence and other agencies to assess the risks of diversion when DOD decides that a CFIUS case involves a company engaged in the development of defense-critical technology or is otherwise important to the defense industrial or technology base; and (12) of the 174 cases reviewed between October 1992 and December 1994, the Office of the Assistant Secretary of Defense for Economic Security found that 9 cases required a risk of diversion assessment. |
The United States has the largest, most extensive aviation system in the world with over 19,000 airports ranging from large commercial transportation centers transporting millions of passengers annually to small grass airstrips serving only a few aircraft each year. Of these, nearly 3,400 airports are designated as part of the national airport system and thus are eligible for federal assistance. The national airport system consists of two primary types of airports—commercial service airports, which have scheduled service and board 2,500 or more passengers per year, and general aviation airports, which have no scheduled service and board fewer than 2,500 passengers. FAA divides commercial service airports into primary airports (boarding more than 10,000 passengers annually) and commercial service nonprimary airports. The 389 primary airports are arranged into various types of hub airports—large, medium, and small hub, and nonhub—based on passenger traffic (see fig. 1). Passenger traffic is highly concentrated: 88 percent of all passengers in the United States boarded at the 62 large or medium hub airports in 2012. More than 2,500 airports in the national airport system are designated as “general aviation” (GA) airports. These airports range from large business aviation and cargo-shipment centers that handle thousands of operations a year to small rural airports with fewer operations per year but which provide vital access to the national transportation system for their communities. Since 1946, the federal government has sponsored a grant program to fund airport development. Today, those monies come from Airport Improvement Program (AIP) grants. AIP is supported by the Airport and Airway Trust Fund (trust fund), which is funded in part by airline ticket taxes and fees. General aviation flights also contribute to the trust fund through a tax on noncommercial jet fuel. Airports in the national airport system may receive AIP entitlement grants based on the number of passengers and amount of cargo carried and may also compete for AIP discretionary grants. FAA selects grantees for discretionary grants according to national priorities and objectives. AIP grants can only be used for eligible projects, generally those that enhance capacity, safety, or environmental concerns, such as runway construction and rehabilitation, airfield lighting, and airplane noise mitigation. AIP appropriations totaled $3.35 billion in fiscal year 2013. The grants require a local match ranging from 5 to 25 percent, depending on the size of the airport and type of project. 49 U.S.C. § 47102 (3). types of projects as AIP grants, but are also allowed to pay interest costs on debt issued for those projects. The $4.50 maximum PFC was last increased in 2000. Collections totaled $2.8 billion in calendar year 2013. According to FAA, 388 commercial service airports were approved to collect PFCs as of April 2014. Airports also fund development projects from revenues generated directly by the airport. Airports generate revenues from aviation activities such as aircraft landing fees and terminal rentals, and non-aviation activities such as concessions, parking, and land leases. Aviation revenues are a traditional method for funding airport development; however, because Department of Transportation (DOT) regulations generally limit aviation charges to the recovery of historical airport costs—rather than replacement costs—they may not fully fund new investment. Generally, the level of aviation activity—whether commercial passenger and cargo or general aviation business and private aircraft—drives airport development and the monies that finance it. While only three new major airports have been built in the United States over the last three decades, billions of dollars have been invested in building new capacity and maintaining and upgrading existing airport infrastructure during that time. In addition, according to the most recent FAA forecast, air traffic demand is projected to increase 2.7 percent per year from 2014 through 2034. Funding for both AIP and PFCs is linked to passenger activity. In this way, Congress aims to direct funds to where they are needed most. Similarly, airport-generated revenues are also tied to aviation activity and the number of passengers who use airport-related services. These revenues are typically used to finance the issuance of local debt such as tax-exempt bonds, which for larger commercial airports constitutes more than half of their funding. Because of the size and duration of airport development—for example, planning, funding and building a new runway can take more than a decade and several hundred million dollars to complete—long-term debt is used to help finance these types of projects. While almost all airport sponsors in the United States are states, municipalities, or public authorities, there is a significant reliance on the private sector for finance, expertise, and control of airport assets. For example, the majority of airport employees are employed by private sector entities, such as vendors and baggage handlers, and private companies also own and operate some airports. Under congressional authorization, since 1996, FAA has piloted an airport privatization program that relaxes certain restrictions on the sale or lease of airports to private entities. Since 2007, economic pressures—including record-high fuel prices and the recession of 2007 through 2009—helped spark a wave of consolidation across the airline industry. For instance, Delta acquired Northwest in 2008, United and Continental merged in 2010, Southwest acquired AirTran in 2011, and US Airways and American Airlines received U.S. District Court approval for their proposed merger in April 2014. As part of this restructuring and a more general focus on capacity decisions, U.S. airlines have reduced the number of flights they offer passengers in certain markets. We found in June 2014, based on our analysis of DOT data, that there were 1.2 million fewer scheduled domestic flights at large, medium, and small hub, and nonhub airports in 2013 than during 2007. The greatest reduction in scheduled flights occurred at medium hub airports, which decreased nearly 24 percent from 2007 through 2013, compared to a decrease of about 9 percent at large hub airports and about 20 percent at small hub airports over the same time period. Medium hub airports also experienced the greatest percentage reduction in air service as measured by available seats (see fig. 2). However, because airlines are now better able to match capacity to demand, planes are fuller than they have ever been. As a result, passenger boardings did not fall as much as either the number of flights or available seats. According to our analysis of DOT’s data from 2007 through 2012, passenger boardings decreased approximately 17 percent at medium hub airports and about 2 percent at large hub airports, but increased more than 4 percent and about 3 percent at small hub and nonhub airports, respectively. In addition, this April, we testified before this Committee that air service to small communities has declined since 2007 due, in part, to higher fuel costs, airline consolidation, and reduced demand both from declining populations in those communities and as a result of some passengers’ opting to drive to larger markets with more attractive service (i.e., larger airports in larger cities). A 2013 Massachusetts Institute of Technology (MIT) study of domestic air service trends reported similar results and found that the prolonged economic downturn, high fuel prices, and capacity restraint contributed to a reduction in service. The study also concluded that airlines have been cutting back on capacity to medium hub and small hub airports far more than at the nation’s large hub airports. Kamala I. Shetty and R. John Hansman, Current and Historical Trends in General Aviation in the United States, Massachusetts Institute of Technology International Center for Air Transportation (Aug. 2012). FAA estimates that the annual costs of planned airport development projects that are eligible for AIP grants will average about $8.5 billion (2011 dollars) from fiscal years 2013 to 2017. In 2012, FAA estimated $42.5 billion (2011 dollars) in total 5-year costs of eligible development for fiscal years 2013–2017. This figure was down 18 percent from the estimated $52.3 billion (2009 dollars) costs for fiscal years 2011—2015 or $10.5 billion annually. FAA attributed the decline to several factors, including airport sponsors choosing to defer projects due to reductions in aviation activity, having identified other funding sources for projects, and projects’ having been completed. In developing the estimate, FAA reviewed approximately 23,000 existing projects at the five categories of commercial airports, GA airports, reliever airports, and new airports and adjusted, deferred, or removed from consideration approximately 3,700 projects (16 percent). FAA estimated that eligible development costs for all airport categories decreased between the two time periods, with the largest nominal decreases for large hubs ($2.7 billion, a 15 percent decrease) and medium hubs ($2.3 billion, a 31 percent decrease) (see fig. 3). Based on FAA’s estimates, the largest category of eligible planned development is to bring existing airports up to current design standards (28 percent), followed by reconstruction (replacement or rehabilitation of airport facilities, mostly pavement and lighting systems) (25 percent), and increasing airfield capacity (23 percent). Compared to fiscal years 2011– 2015, FAA’s estimates of planned development for fiscal years 2013– 2017 decreased across every development category except capacity, which saw a slight increase of 2.5 percent (see fig. 4). While large hubs were the only airport category that experienced an increase in the cost of planned capacity projects (from about $6.8 billion to about $8.1 billion, a 19 percent increase), this increase was greater than the corresponding decrease for all other airport categories (from about $2.7 billion to about $1.7 billion, a 37 percent decrease). FAA is currently compiling the estimated planned development costs for the fiscal years 2015–2019 period, due to be published in fall 2014. ACI-NA also estimated airports’ costs of planned development for the fiscal years 2013–2017 period for projects eligible for federal funding as well as those not eligible. The total estimated costs of planned development for fiscal years 2013–2017 are $68.2 billion (2012 dollars) or approximately $13.6 billion per year on average. This is about a 10 percent decline from ACI-NA’s prior estimate of $75.6 billion (2010 dollars) for the prior fiscal years 2011–2015 estimating period. ACI-NA attributed the decline to several factors, including the recent recession and challenging economic conditions, airline consolidation and capacity reductions, and projects’ having been completed or postponed beyond 2017. ACI-NA’s estimates of eligible development decreased between the two time periods for all airport categories except medium hubs, which saw a 5 percent increase. The largest decreases were for large hubs ($2.3 billion, a 6 percent decrease) and small hubs ($2.1 billion, a 27 percent decrease). In addition, there are other differences in the way FAA and ACI-NA estimate airport planned development costs. First, while FAA’s estimates cover projects for every airport in the national system, ACI-NA surveyed its member airports in the U.S. (117 of which responded, consisting mostly of large, medium, and small hub airports) and then extrapolates a total based on cost-per-boarding calculations for large, medium, and small hub airports that did not respond. Second, FAA data are based on planned project information taken from airport master plans and state system plans, minus projects that already have an identified funding source, while ACI-NA includes all projects, whether funding has been identified or not. Third, FAA data includes only the portion of a project that is eligible for AIP, while ACI-NA estimates the total value project cost. Fourth, ACI-NA and FAA estimated planned development costs for the same 5-year time period, but the estimates were made at different times—the ACI-NA survey was completed in 2012, while FAA’s estimate is based on information available through 2011. Lastly, FAA’s estimates use 2011 dollars, whereas ACI-NA’s estimates use 2012 dollars. ACI-NA’s estimates for these categories of airports are drawn directly from FAA’s estimate. Regarding AIP grants, annual appropriations decreased from about $3.5 billion for fiscal years 2007 through 2011 to about $3.4 billion for fiscal years 2012 through 2014. In addition, the actual amount of AIP grants awarded annually has decreased 9.6 percent since 2007 from $3.3 billion in fiscal year 2007 to $3 billion in fiscal year 2013. Excluding grants to GA airports, AIP grants on a per-passenger basis have also decreased, from $3.80 per passenger in 2007 to $3.40 per passenger in 2012. Since then Congress transferred $253 million in unobligated funds from AIP to FAA operations to reduce furloughs for air traffic controllers in legislation passed in March 2014. Airport association representatives told us that these funds had been reserved for airport development. The President’s 2015 Budget calls for a reduction in AIP appropriations to $2.9 billion. The Wendell H. Ford Aviation Investment and Reform Act for the 21st Century of 2000 legislates that if AIP appropriations fall below $3.2 billion and that provision is not changed, AIP entitlement grants will be reduced by half; the funds from the entitlement grant reductions would instead flow to AIP discretionary grants giving FAA greater decision-making over which airport projects receive funding. With regard to PFCs, the federal PFC cap of $4.50 has not increased since 2000 and thus has not kept pace with inflation. According to FAA data, PFCs collections peaked in 2006 at $2.93 billion and then fell during the recession before rebounding to $2.81 billion in 2013. According to FAA, as of (April 2014, 388 commercial service airports (including of the largest 100 airports by passenger boardings) imposed a PFC. According to FAA, more than 90 percent of PFC collections go to large and medium hub airports, but large and medium hub airports collecting PFCs must return a portion of their AIP entitlement grants, which are then redistributed to smaller airports. In addition, we have found that many airports’ future PFC collections are already committed to pay off debt for past projects, leaving them little future PFC collections for new development. For example, at least 50 airports have leveraged their PFCs through 2030 or later, according to FAA data. The President’s 2015 Budget and airports have requested an increase in the PFC cap to $8—which they say takes into account inflation that has occurred since 2000 and eliminating AIP entitlements for large hub airports. fees, including PFCs, arguing that if an increase in taxes or fees is passed onto the consumers through an increase in ticket prices, it could reduce demand for air travel. For example, in December 2013, Congress approved allowing the Transportation Security Administration to raise the security fee currently applied to each ticket from $2.50 to $5.60 and to eliminate the cap on the number of fees that can be collected on a flight itinerary. Airlines opposed that increase based on concerns that it would hurt travel demand. We concluded in 2012 that a $3.00 increase in the security fee to $5.50 would reduce passenger boardings by about 1 percent based on a review of passenger demand literature. We are currently assessing the impact of increases in the amount of the PFC on passenger demand, airport investment, and aviation users and plan to report our findings later this year. Airport trade associations ACI-NA and the American Association of Airport Executives have made prior proposals to raise the PFC cap to $8.50 with periodic adjustments for inflation. smartphones that could be used to collect PFCs separately from the ticket. We found that none of these alternatives was better than the current method. Specifically, we determined that each of the alternatives negatively affected the passenger experience and the transparency of fees relative to the current method. Although support for airport development from AIP and PFCs has declined in recent years, so have planned development costs. In addition, we have not yet determined how much funding has recently been generated by the other major source of revenues for airport development—municipal bond proceeds, backed primarily by airport revenues. Therefore, the extent to which the gap between airport funding and planned airport development costs has changed since we last reported on this in 2007 is unknown. As discussed above, for the 2013 through 2017 period, the total estimated annual costs for airports’ planned development projects is about $13.1 billion, $8.5 billion of which is eligible for AIP grants and PFCs. However, annually only about $6 billion in support has been available from AIP grants and PFC collections. The remaining $7 billion in annual planned development will need to be funded by locally generated revenues or deferred. In 1998, 2003, and 2007, we found a funding gap between the 5-year airport planned development costs and historical funding. In 2007, the total gap was $1 billion annually. This gap has been most acute for smaller airports that We are currently assessing may have less access to capital markets. whether this gap has grown or declined in light of declining federal funding and planned development and will report our findings to this Committee later this year. GAO, Airport Finance: Observations on Planned Airport Development Costs and Funding Levels and the Administration’s Proposed Changes in the AIP, GAO-07-885 (Washington, D.C.: June 29, 2007); Airport Finance: Past Funding Levels May Not Be Sufficient to Cover Airports’ Planned Capital Development, GAO-03-497T (Washington, D.C.: Feb. 25, 2003); and Airport Financing: Funding Sources for Airport Development, GAO/RCED-98-71 (Washington, D.C.: Mar. 12, 1998). To help fund airport development, some commercial service airports have increasingly relied on non-aviation revenues. According to ACI-NA, non- aviation revenue has grown, on average, over 4 percent each year since 2004, compared to a 1.5 percent increase in passenger boardings over the same period. In 2012, according to FAA data, non-aviation revenue accounted for approximately 45 percent of airports’ total operating revenues. Parking and ground transportation accounted for the greatest portion (41 percent) of passenger-related non-aviation revenue, followed by terminal concessions (20 percent) and revenue from rental car facilities (20 percent) (see fig. 5). In addition to traditional commercial activities to generate non-aviation revenue, some airports have developed unique commercial activities with stakeholders from local jurisdictions and the private sector to help develop airport properties into retail, business, and leisure destinations.An increasing range of unique developments on airport property have contributed to non-aviation revenues, including high-end commercial retail and leisure activities, hotels and business centers, medical facilities, and specialized cargo handling and refrigerated storage facilities, among other developments (see fig. 6). For example, Miami International Airport was named one of the world’s top-10 airports for retail shopping, and the $1.7 billion international terminal at Los Angeles International Airport, which is currently under construction, will contain 140,000 square feet of premier dining, retail, and club lounges. By acting more like businesses than public utilities, airports have increasingly become more competitive with one another, providing services, including hotels and conference space, to attract and retain business travelers who might otherwise stay in a downtown hotel off airport property. For example, Dallas/Fort Worth International Airport owns a Grand Hyatt hotel inside Terminal D, Denver International Airport is building an attached Westin Hotel, and Hartsfield- Jackson Atlanta International Airport is considering an airport hotel inside or connected to its domestic terminal. Also, in an effort to generate revenue by leasing cold storage space to freight forwarders and businesses that transport low-volume, high-valued goods, including pharmaceuticals, produce, and other time-sensitive or perishable items, airports in Denver, Miami, and Indianapolis have built—or plan to build— cold storage facilities on airport property. In addition, airports can fund airport improvements with private sector participation. Public-private partnerships, involving airports and developers, have been used to finance airport development projects without increasing the amount of debt already incurred by airports. FAA’s noise land disposal program, for example, allows airports to sell or lease land that had been used in the past for noise abatement purposes and is no longer needed for noise abatement. FAA also allows airports with excess available land to use the land for certain types of commercial Airport operators must development, pending approval by the FAA.obtain FAA’s concurrence prior to leasing airport land or facilities to private developers to help ensure, among other things, that the developer’s plans will be compatible with airport operations and that the airport receives fair market value for the use of its property. The ability to lease airport land has allowed some airport operators to generate revenue through temporary leases of airport property for manufacturing, warehousing, and freight-forwarding operations while also reserving the land for future aviation needs. For example, solar farms have been built on airport land in Indianapolis and Denver; officials at Dallas/Fort Worth International Airport have leased a portion of the airport property for oil extraction; and land at Alliance Airport near Ft. Worth, Texas, has been leased for agricultural uses, such as cattle grazing and a golf course (see fig. 7). In addition, Miami International Airport entered a $512 million public-private partnership to develop 33 acres of airport property. The developer will finance construction and pay rent and a percentage of the revenues to the airport in return for a 50-year lease. Privatization of airports is another option that some public sector airport owners have considered to obtain private capital for airport improvement and development, among other things. However, FAA’s Airport Privatization Pilot Program (APPP), which was established in 1996 to reduce barriers to airport privatization has not led to many privatizations. Only one airport—San Juan Luis Muñoz Marín International Airport in Puerto Rico –has been privatized, and currently there is only one active applicant in the program. Nonetheless, airports are using the private sector to finance airport development or manage airports outside of the APPP. For example, the Port Authority of New York and New Jersey has recently received responses for its request for proposals for the private sector to demolish old terminal buildings and construct, partially finance, operate, and maintain a new Central Terminal Building for LaGuardia Airport in New York City in return for a share of terminal revenues. In addition, Gary/Chicago International Airport in Gary, Indiana, outside Chicago has entered into a public-private partnership with a private sector firm to both operate the airport and economically develop off-airport property. We are currently examining airport privatization and the APPP and plan to report our findings later this year. In conclusion, this year commemorates one century since the first commercial airline flight, and in that relatively short time span, commercial aviation has grown at an amazing pace to become a ubiquitous and mature industry in the United States. While commercial aviation still has many exciting prospects for its second century, it also faces many challenges, chief among these are ensuring that airports can continue to accommodate millions of flights and hundreds of millions of passengers every year. Maintaining and upgrading this vital infrastructure will require the combined resources of federal, state, and local governments, as well as private companies’ capital and expertise. Effectively supporting this development involves focusing federal resources on the FAA’s key priorities of maintaining one of the world’s safest aviation system and providing adequate system capacity, while allowing maximum flexibility for local airport sponsors to maximize local investment and revenue opportunities. In deciding the best course for future federal investment in our national airport system, key considerations for Congress will be to balance the interests of all aviation stakeholders, including airports, airlines, and most importantly passengers and shippers, to help ensure a safe and vibrant aviation system. Chairman LoBiondo, Ranking Member Larsen, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to respond to any questions that you may have at this time. For further information about this testimony, please contact Gerald L. Dillingham at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this testimony include Paul Aussendorf (Assistant Director), Amy Abramowitz, Jessica Bryant-Bertail, Jonathan Carver, Ben Emmel, John Healey, David Goldstein, Greg Hanna, David Hooper, Delwen Jones, Jennifer Kamara, Maureen Luna-Long, Faye Morrison, Eleni Orphanides, Justin Reed, Melissa Swearingen, and Pamela Vines. 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. | U.S. airports are important contributors to the U.S. economy, providing mobility for people and goods both domestically and internationally and often contributing to the economic success of the communities served. Since 2007 when GAO last reported on airport funding and its sufficiency to meet planned development of airport infrastructure, there have been significant changes in the aviation industry. During this time, federal support for airport development has declined. As deliberations begin in advance of FAA's reauthorization in 2015, Congress will consider the most appropriate type, level, and distribution of federal support for development of the national airport system. This testimony discusses trends in (1) aviation activity at airports since 2007, (2) costs of airports' planned development, and (3) federal funding and airport revenues that may be available to finance development costs. This testimony is based on previous GAO reports on aviation from June 2007 through June 2014, updated through June 2014 with interviews with key FAA and trade association officials and FAA airport funding data from 2005-2013. GAO shared the information it used to prepare this statement with FAA and incorporated its comments as appropriate. Since 2007, economic pressures—including high fuel prices, the financial crisis, and the ensuing recession of 2007–2009—contributed to airline restructuring which has resulted in reductions in the number of commercial flights at airports, especially at medium- and smaller-sized airports. General aviation activity, which includes all forms of aviation except commercial and military, has also declined over the last decade. Because many sources of airport funding, including federal support and locally generated revenue, are tied to aviation activity, for many airports these trends mean less funding available for infrastructure development. According to Federal Aviation Administration's (FAA) estimates, airports' total costs of planned infrastructure development eligible for federal support from FAA's Airport Improvement Program (AIP) grants are about $42.5 billion for the 2013 through 2017 period, or about $8.5 billion per year on average which was down 18 percent from $52.2 billion for the 2011 through 2015 period. FAA attributed the decline to airports' choosing to defer projects due to reductions in aviation activity or having identified other funding sources, among other factors. Airports in the national airport system receive AIP entitlement grants for eligible projects, generally those that enhance capacity, safety, or environmental conditions. The U.S. airport association, Airports Council International—North America, estimated costs of other planned development not eligible for federal support, such as parking structures, totaled $4.6 billion per year for the 2013 through 2017 period. Therefore, the total costs of planned development for the most current period are estimated to be approximately $13.1 billion per year. |
To reach the Internet, a consumer needs service from two types of providers: (1) a communications company (i.e., a telephone, cable television, or wireless company) providing a transport service to physically transmit data to and from the consumer’s home and (2) an ISP (e.g., America Online or EarthLink) providing access to the Internet. Usually, consumers buy these services separately, but some providers (particularly cable companies) sell transport and ISP services as an integrated package. Some wireless providers also offer an integrated ISP as part of their Internet transport services. Different transport providers, depending on the physical makeup of their network, can supply different amounts of “bandwidth,” or data transmission capacity. A “narrowband” connection, such as that provided by a conventional telephone line, offers limited capacity resulting in relatively slow rates of data transmission. A “broadband” connection, such as that provided by cable modem service or by a telephone technology known as digital subscriber line (DSL), has greater capacity, giving the user faster data transmission rates and better access to sophisticated, “bandwidth-intensive” content. While many Internet users enjoy fast Internet transport at their place of work or school, no substantial commercial deployment of broadband connections to homes took place until the late 1990s. To date, the two most widely used broadband technologies in homes are cable modem service and DSL. Increased deployment of and subscription to competing broadband transport methods, such as satellite, terrestrial wireless, and optical fiber technologies, is expected in the future. An ISP is the consumer’s “on-ramp” to the Internet, and once connected to the ISP, the consumer actually becomes part of the Internet. ISPs have routers, switches, and other equipment necessary to transmit traffic to and from the long-haul networks—known as the Internet “backbone”—which connect the computers and communications networks that are part of the Internet. ISPs differ in the features and functions they offer to subscribers. While some only provide access to the Internet and an e-mail application, others offer a “home page” with direct links to specific content on the Internet, as well as proprietary content and additional applications available only to the ISP’s subscribers. Through section 706 of the Telecommunications Act of 1996, the Congress directed the FCC and the state commissions to “encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans….” In its most recent report on the deployment of advanced telecommunications capability (released in August 2000), FCC identified certain categories of Americans who may have difficulty obtaining access to advanced services. These categories include low-income consumers, those living in sparsely populated areas, minority consumers, Native Americans, persons with disabilities, and those living in U.S. territories. In particular, FCC concluded that several barriers might hinder the ability of low-income, inner-city residents to obtain advanced services. Such barriers include the poor quality of the telecommunications plant or of the inside wiring in multiple-tenant buildings, the relatively high price of advanced services, the lower rates of computer ownership among inner-city residents, and the lack of marketing by providers of advanced services to low-income populations. FCC also found that for the majority of Americans who live in rural areas, lowest- cost access to advanced services was not readily available, and that some rural areas still lacked basic access to the Internet through a local telephone call. Similarly, the Department of Commerce stated in a recent report that although a sharp upward trend in the number of Americans connecting to the Internet from their homes exists (a trend Commerce found to encompass every income category, education level, racial group, and family type and to include both urban and rural areas), some demographic groups are nevertheless still connecting to the Internet far less than others. However, Commerce pointed out that there was a higher expansion rate of Internet use among these “lower usage” groups. Over time, this suggests that the digital divide may narrow. Much attention has been directed recently to the question of whether a “digital divide” is occurring in our country—that is, whether Internet access is unevenly distributed across socioeconomic divisions within our society. Our survey results support the perception that access to and use of the Internet are influenced by a person’s race, education, and income level. Geographically, however, we did not find that Internet use—when both narrowband and broadband users were measured together—was related to a person’s residence in a small or large metropolitan area or rural area. One of the most important statistical findings of our survey was that Internet users tended to have a higher household income and more education than the general U.S. population. For example, Internet users were more likely than the general population to be in a household with an income of $35,000 or more per year (see fig. 2). Internet users over the age of 24 were also significantly more likely to be college graduates or to have a graduate degree than the general population. Additionally, our survey found that Internet users, compared with the general U.S. population, represented a higher percentage of whites and a lower percentage of African-Americans and Hispanics. Other demographic findings from our survey include the following: The proportion of men and women online mirrored that of the general population. Surveys from just a few years ago, however, showed women lagging behind men in Internet usage. Thus, our survey suggests that women have caught up in their use of Internet technology and are now just as likely to be online as men. Compared with the percentage of the general population in various age categories, users who accessed the Internet from home were more likely to be between 25 and 54 years old and less likely to be aged 55 and older. Another concern embodied in the digital divide concept is that people living in rural areas might have less access to the Internet than their more urban counterparts. Our analysis considered Internet use in five types of geographic areas across the United States: nonmetropolitan areas (areas with populations of less than 50,000) and four categories of metropolitan statistical areas (MSA), the largest of which included populations of 2.5 million or more. We found the proportion of Internet users living in each type of geographic area to approximate the breakdown of the overall U.S. population across these areas. This implies that people living in less populated areas are just as likely to obtain some form of Internet access as those in more populated areas. This analysis, however, was based on whether users obtained any form of Internet access—narrowband or broadband. Special concerns surround the issue of whether deployment of broadband in rural areas will match that in urban areas. This issue is addressed in the section below. Our survey of Internet users found that 12 percent of the respondents had a broadband connection to the Internet. At the same time, over 52 percent of the survey respondents reported that broadband transport via DSL or cable modem was available to them. The reported availability of broadband, however, was uneven across local areas and was greatest in large metropolitan markets and in wealthy areas. Regardless of these geographic differences, narrowband and broadband subscribers shared many demographic characteristics. The reasoning behind their choice of an Internet transport provider often differed, however. We found that 12 percent of the respondents had a broadband method of transport to the Internet—9 percent used a cable modem and 3 percent used DSL. The conventional telephone line was still the most common method of transport to the Internet, with about 88 percent of respondents using narrowband telephone transport. Figure 3 presents the distribution of the means of physical transport to the Internet based on our survey results. Although the vast majority of Internet users still rely on narrowband transport, there has been substantial growth in broadband usage. This point is illustrated by reports from two financial services firms, showing that as recently as 1998 only about 2 percent of Internet users subscribed to a broadband service. Section 706 of the Telecommunications Act of 1996 directs FCC to initiate regular inquiries into the availability of advanced services (which include, but are not limited to, broadband Internet transport) to all Americans. In its most recent section 706 report, FCC gathered data from companies providing high-speed service lines and conducted case studies to examine the deployment and use of advanced services in different communities. FCC generally found significant investment in the facilities needed to provide advanced services, steadily rising subscription rates for advanced services, and a proliferation of providers in the marketplace. However, FCC stated that less than 20 percent of sparsely populated areas had high- speed subscribers and concluded that many rural Americans are “particularly vulnerable to untimely access to advanced services if left to market forces alone.” Likewise, the Commerce Department, which based its report on a survey of U.S. households, found the percentages of Internet users with a broadband transport method to be 12.2 percent in central cities and 11.8 percent in urban areas, but only 7.3 percent in rural areas. To further gauge the level of broadband deployment, we asked current Internet users about the availability of DSL and cable modem services where they live. Among all survey respondents, 52 percent reported that one or more broadband service was available to them: 17 percent reported that only cable modem service was offered, 10 percent reported that only DSL service was available, and 25 percent reported that they could choose from both cable modem and DSL services (see fig. 4). This slightly greater prevalence of cable modem services accords with the findings of FCC and the Commerce Department, both of which found cable to have a greater market share than DSL at this time. To determine whether the availability of broadband varies by community size, we examined the relationship between the population of the area where respondents live and whether they reported that DSL and cable modem services were obtainable. Similar to the other studies, our survey found the availability of broadband technology to be most prevalent in large metropolitan areas (see fig. 5). For example, more than 32 percent of the survey respondents in a metropolitan area with a population of 2.5 million or more reported having both DSL and cable modem service available where they lived. The corresponding figure for rural areas was less than 8 percent. While nationwide and metropolitan area-level data provide insights on broadband deployment, additional insights can be gained by analyzing data at a more localized level. To examine the characteristics of local areas with and without broadband availability, we used Census Bureau demographic data for areas designated by zip code. Within each zip code we looked at several variables including income, poverty rates, home values, and education levels. Using survey respondents’ answers to whether DSL and cable modem services were available where they lived, we examined whether these Census Bureau variables differed between zip codes where users reported the availability or unavailability of broadband transport services. The data in table 1 suggest that residents of local areas where survey respondents reported broadband service to be available were, on average, wealthier than residents of local areas where survey respondents said broadband service was unavailable. Specifically: Median household income was higher where broadband service was available than where it was unavailable. Local areas where both DSL and cable modem service were available had an average median household income approximately 28 percent higher than areas where neither service was available. Poverty rates were lower in local areas where both DSL and cable modem service were available compared with local areas where neither was available. The average median home value was over 63 percent higher in local areas where both DSL and cable modem services were available than where neither was available. Another notable characteristic of local areas where broadband service was reported to be available was the educational level of the residents. As shown in table 2, a larger percentage of the population had attained some amount of postsecondary education in local areas where respondents said broadband service was available. For example, 27 percent of people (aged 25 and older) in local areas where both DSL and cable modem service were said to be available had a college or advanced degree, compared with 19 percent in areas where neither service was reported to be available. Little difference existed in the demographic characteristics of survey respondents subscribing to narrowband service compared with those subscribing to broadband service. We found no differences in marital status, household size, race, Hispanic origin, education, or employment, between narrowband and broadband subscribers. However, we did find a statistically significant difference with respect to income: 40 percent of broadband subscribers had an annual household income of $75,000 or more, compared with only 20 percent of narrowband users. While narrowband and broadband subscribers shared many demographic attributes, they differed in their reasons for selecting their method of transport to the Internet. Among narrowband users, the most commonly reported reason for selecting narrowband service—cited by 38 percent of respondents—was its relatively low price. Survey respondents using narrowband transport reported spending less for both one-time initial fees and recurring monthly fees. For example, only 18 percent of narrowband subscribers reported spending over $100 for one-time initial fees, whereas 39 percent of broadband subscribers reported spending this much for initial installation and setup. The same pattern emerges for monthly fees (see fig. 6). Among narrowband subscribers, less than 18 percent reported spending more than $30 per month to access the Internet while the corresponding figure for broadband subscribers was 74 percent. These pricing patterns held consistent across geographic areas: the monthly fees consumers encountered in rural areas, small metropolitan markets, and large metropolitan markets were similar. Although most narrowband users based their selection of transport provider on price, many others were narrowband users by default—that is, almost 29 percent of narrowband subscribers reported the lack of a broadband alternative as their most important reason for choosing a narrowband transport provider. In fact, 19 percent of narrowband Internet users had made some attempt to obtain broadband service but were unsuccessful, often because companies were unable to or had elected not to provide broadband service in their area at that time. Additionally, 12 percent of narrowband respondents reported that they were unaware of any choices other than a narrowband connection. Seven percent of narrowband respondents stated that they chose a narrowband connection so they would be able to choose their ISP; 6 percent said they chose narrowband because it was the easiest type of connection to use. Among broadband users, the most commonly reported reason for selecting their transport mode—cited by 40 percent of these respondents—was that the speed was appropriate for the services and applications they used most frequently. An additional 18 percent of broadband respondents said that they chose this kind of connection in order to free up their telephone line, which is in use during a dial-up Internet session unless the consumer purchases a second telephone line. Finally, 10 percent of broadband users said they chose this type of connection because it was the most user- friendly. Just as Internet users often based their selection of transport provider on price, they often based their selection of ISP on price. Broadband users, however, were more likely to consider other factors, such as whether the ISP offered the various content and applications that were important to them. Once online, all users rated the importance of various Internet features and applications roughly the same. Narrowband and broadband users spent a similar amount of time accessing their ISP’s content compared with surfing the Internet. However, we found that infrequent users and new users tended to rely more on the content provided to them by their ISP. As the Internet industry continues to evolve, so does the role of the ISP. In our prior report on Internet competition, we noted that many ISPs now serve as “content aggregators”—that is, they provide subscribers with applications, proprietary content, and direct links to content on the Internet. Concerns have been raised about how ISPs choose the content they offer subscribers—in particular, whether ISPs might favor material from affiliated content providers or discriminate against unaffiliated content providers. Consumer choice among ISPs is thus seen as important to enhancing consumers’ access to varied content. In our survey, we examined how Internet users selected their ISP and how they used the services provided by their ISP. In the case of narrowband users, the most common reason given for their choice of ISP—cited by almost 35 percent of respondents—was price, while only 13 percent of broadband users identified price as the most important reason why they chose their particular ISP (see fig. 7). Among broadband users, the most common answer to this question—cited by 23 percent of respondents—was that they selected their ISP because it was the company that provided the features and applications of most interest to them. Nearly 13 percent of broadband users reported that the most important reason they chose their ISP was that they effectively had no choice—the ISP came bundled with their transport provider. Among survey respondents in areas where broadband service was thought to be available, this response was the most frequent, cited by 24 percent of broadband users. Because of concerns that ISPs might influence or restrict consumers’ content choices, we asked users how much time they spent accessing content available on their ISP’s Web site (or available through a direct link from the ISP’s Web site) compared with the time they spent accessing content that they searched for on the Internet. Overall, users reported spending more time surfing the Internet for content or accessing sites already familiar to them than accessing ISP-provided content. We found that, on average, respondents spent 35 percent of their time online using applications or content available from their ISP’s site. Narrowband users spent slightly more time on their ISP’s site or accessing ISP-provided content than broadband users—36 percent versus 29 percent—although the difference was not statistically significant. The amount of time users spent online was a more important determinant of how long they spent on their ISP’s site. Users whose households were online less than 10 hours per week (this included 18 percent of total respondents) spent an average of almost 43 percent of their time accessing their ISP’s content or linked content. However, for households with usage of 40 hours or more per week (this included 13 percent of total respondents), time spent on their ISP’s content dropped to 26 percent. For respondents from areas where broadband service was thought to be available, the number of years a respondent had been accessing the Internet was another factor associated with the time spent on their ISP’s site. For example, new users (those online for less than 2 years, which constituted 18 percent of respondents) spent nearly 41 percent of their time on their ISP’s site while long-term users (those online for 5 or more years, which constituted 39 percent of respondents in this group) spent only 30 percent of their time accessing content and applications on their ISP’s site. Respondents to our survey said the biggest advantage to using ISP-provided content was that it was readily available and, thus, easier to use than content that required searching on the Internet. Both narrowband and broadband Internet users rated e-mail and Web surfing as the most important applications available to them online, with 89 percent of users rating e-mail as “extremely important” or “very important,” and 78 percent of users placing Web surfing in those categories (see fig. 8). Almost 80 percent of users said chat rooms were “not that important” or “not at all important,” and almost 70 percent said the same about posting and maintaining a personal Web page. The results for e-commerce (such as online shopping), an Internet application that receives considerable attention, were mixed. Among all survey respondents, 22 percent said that e-commerce was “extremely important” or “very important.” However, 39 percent of respondents said that e-commerce was “not that important” or “not at all important.” The general absence of appreciable differences in how broadband users and narrowband users rated the features and applications available to them online may illustrate that, at this time, both narrowband and broadband subscribers are using the Internet in the same fashion, mostly for e-mail and Web surfing. This is likely due to the fact that little broadband-specific content is currently available. As more bandwidth-intensive content and applications are introduced in the market, consumers may begin to perceive narrowband and broadband Internet transport as distinct products with different capabilities. In turn, broadband users may begin to use the Internet in new and different ways. We provided a draft of this report to FCC and to the Department of Commerce’s National Telecommunications and Information Administration (NTIA) and Economics and Statistics Administration (ESA) for their review and comment. NTIA and ESA provided written comments that are included in appendix IV. Also, FCC, NTIA, and ESA officials provided technical comments that were incorporated as appropriate. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 14 days after the date of this letter. At that time we will provide copies to interested congressional committees; the Honorable Michael K. Powell, Chairman, Federal Communications Commission; the Honorable John F. Sopko, Acting Assistant Secretary for Communications and Information, Department of Commerce; James Lee Price, Acting Under Secretary for Economic Affairs, Department of Commerce; and other interested parties. We will also make copies available to others on request. If you or your staff have any questions about this report, please contact me at (202) 512-7631. Key contributors to this report are listed in appendix V. We conducted various statistical tests on the data from our survey of Internet users (conducted in April and May 2000) and reviewed relevant reports from the Federal Communications Commission (FCC) and the Department of Commerce. In our survey, we asked questions about what method of Internet transport consumers used, why consumers selected their method of Internet transport, why they selected their Internet service provider (ISP), what applications consumers believed were important, how consumers used the Internet, what costs consumers incurred for Internet services, and to what extent consumers found broadband Internet access available and easy to purchase. Participants were notified about the survey and responded to the survey over the Internet. We selected this approach, rather than a traditional mail or telephone survey, because we sought information only from current users of Internet services. To provide the sample frame, draw the sample, and manage the survey operations, we contracted with NPD Group, Inc. (NPD), a market research firm. NPD maintains a panel of approximately 400,000 Internet users that is intended to be representative of the Internet population. The panel consists of Internet users who have volunteered to respond to surveys NPD conducts for its clients over the Internet. Factors influencing the degree to which the panel is deemed representative include demographic information and usage patterns. We did not evaluate whether NPD’s panel is representative of the Internet population. We used information from existing documentary evidence and preliminary interviews from our earlier report to develop the survey instrument. We conducted two rounds of pretests. First, we conducted pretests in person to assess whether the survey instrument was understandable and unbiased. Second, the survey instrument was pretested by 34 randomly selected members of NPD’s panel using NPD’s Internet-based application. This allowed us to assess whether the performance of the online survey instrument was acceptable and to further identify any unclear portions of the survey and any potentially biased questions. To detect any differences between users residing in areas where broadband Internet access may be available and the general U.S. Internet population, we asked NPD to draw two samples from its panel of Internet users. The first sample frame was intended to be representative of the U.S. Internet population, 18 years or older. The second sample frame was intended to be representative of the U.S. Internet population, 18 years or older, who reside in areas where broadband Internet access was likely to be available. NPD developed this second sample frame using zip code information that we had developed. We used a three-step process to identify zip codes where broadband Internet access was likely to be available. First, we consulted an industry publication to get a preliminary list of geographic areas where cable modem service was deployed. Second, we developed a list of zip codes that corresponded to these geographic areas. We gathered the zip code information from the U.S. Postal Service’s Web site and one additional commercial Web site. Third, we checked the Web sites of cable companies identified by the industry publication to confirm the geographic locations where they provide cable modem service. We excluded all geographic locations that we could not confirm as having cable modem service available; we also added geographic locations to the list if the cable company reported providing cable modem service in those areas. Because broadband service is generally available on a neighborhood-by- neighborhood basis in a given geographic area, we probably included zip codes where broadband service was not available to all consumers. However, our approach did identify areas where broadband service was available or was available in the immediate geographic area. NPD used the final list to develop the second sample frame. The survey was available to participants over an 18-day period (Apr. 21, 2000, through May 8, 2000) on NPD’s secure Web site. Participants were notified by e-mail that a survey was available to be completed; they could complete it any time during the period. At our request, NPD sent a follow- up e-mail to increase the response rate for both samples. For the first sample, a total of 1,225 people were notified. A total of 604 people responded to the survey (a 49.3-percent response rate). Of the respondents, 97 were excluded because they did not make the household’s primary decisions about Internet access and therefore did not complete the entire survey. Additionally, 11 observations were removed because the respondent provided inconsistent answers to questions 2 and 4 (see app. II for the questions in the survey). This left 496 complete responses (40.5 percent of the sample). For the second sample, 2,525 people were notified of the survey. A total of 1,209 people responded to the survey (a 47.9- percent response rate). We excluded 409 responses (16.2 percent of the sample) as recommended by NPD to ensure that the sample was representative of the target population. Of the remaining respondents, 140 were excluded because they did not make the primary decisions about Internet access and therefore did not complete the entire survey. Additionally, 21 observations were removed because the respondent provided inconsistent answers to questions 2 and 4 (see app. III for the questions in the survey) or because the respondent was under 18 years old. This left 639 complete responses (25.3 percent of the sample). The sample frame determines the population to which we can generalize the survey results. For the first sample, the sample frame was intended to be representative of the U.S. Internet user population 18 years or older. The second sample frame was intended to be representative of the U.S. Internet user population, 18 years or older, who reside in areas where broadband access was likely to be available. While demographic and usage patterns for survey participants were intended to be representative of the U.S. Internet user population, some biases might be present because participants were volunteers. Because we used a sample to develop the estimates of Internet characteristics presented throughout this report, each estimate has a measurable precision, or sampling error, that may be expressed as a plus or minus figure. A sampling error indicates how closely we can reproduce from a sample the results that we would obtain if we were to take a complete count of the population we are analyzing using the same measurement methods. By adding the sampling error to and subtracting it from the estimate, we can develop upper and lower bounds for each estimate. This range is called a confidence interval. Sampling errors and confidence intervals are stated at a certain confidence level—in this case, 95 percent. For example, a confidence interval at the 95-percent confidence level means that in 95 out of 100 instances, the sampling procedure used would produce a confidence interval containing the universe value we are estimating. To assess the demographic characteristics of Internet users and of local areas where broadband service was expected to be available, we relied on a number of Census Bureau data sets. We compared the proportion of Internet users in various categories of each demographic variable with the proportion of the general population in the same categories using the most recent Census Bureau data available. This permitted us to assess whether Internet users were more or less prevalent in certain categories of demographic variables than the general population. To assess the demographic characteristics of local areas where broadband service was reported to be available, we relied on Census Bureau zip code data. For each respondent, NPD provided a corresponding zip code for the area where the respondent lived. We gathered demographic data for each zip code from the Census of Population and Housing, 1990: Summary Tape File 3B, Tables P57, P80A, P117, and H61A (the most recent data available). On the basis of respondents’ answers about the availability of broadband service, we made inferences about the demographic characteristics of local areas with and without broadband service as indicated by Census Bureau data at the zip code level. The following tables show the questions included in our survey of Internet users and the responses, by percentage of respondents. For this sample, we randomly surveyed 1,225 Internet users and received 604 responses (a 49.3-percent response rate). Question 1—which asked whether the respondent was the primary decisionmaker for Internet purchases in the household—was asked of all survey participants. Only those participants who responded “Yes” to this question (507 participants) continued with the remainder of the survey. Additionally, 11 observations were removed because the respondent provided inconsistent answers to questions 2 and 4. This left 496 responses for questions 2 through 18. For this sample, the sample frame—that is, the entire panel of potential survey respondents—consisted of 389,593 individuals. This is the population to which the survey results can be generalized. With a 49.3- percent response rate, our survey results can thus be interpreted as estimates for the 192,096 potential individuals that we estimate would have responded to our survey if we had contacted all individuals in the panel. For questions 2 though 18, the relevant population estimate was 157,748 because observations from respondents who did not make the household’s primary decisions about Internet purchases were excluded. Unless otherwise noted in footnotes to the questions, there were no missing observations. Question 1: Are you the primary decisionmaker for your household regarding what form of Internet access to purchase for your home? (Select one) Question 2: Which of the following do you most frequently use to access the Internet from your home? (Select one) Conventional dial-up telephone service provided by a telephone company (this includes ISDN service) High-speed “digital subscriber line” (or “DSL”) telephone service High-speed cable modem service (this includes using the cable modem as the downlink and a telephone line for the return path or uplink) Wireless service (for example, satellite service such as DirecPC, fixed wireless service such as Winstar or Teligent, or other wireless service) Question 3A: What is the most important reason you use conventional dial-up telephone service for your Internet access from home? No choice; only method of Internet access available to me Not aware of other choices of Internet access Company’s service quality reputation and/or experience Most appropriate for the applications/services I use most frequently Ability to select the Internet service provider I wanted Other (Please specify) Information based on respondents who indicated that they use conventional dial-up telephone service in question 2. Among “Other,” 0.9% of respondents reported free as the most important reason for selecting conventional dial-up telephone service. Question 3B: What is the most important reason you use (high- speed DSL service, high-speed cable modem service, or wireless service) for your Internet access from your home? (Select one) Company’s service quality reputation and/or experience Ability to select the Internet service provider I wanted Speed appropriate for the applications/services I use most frequently Speed equivalent to the access I have at work or at other locations where I have Internet access To free up my regular telephone line for voice call Other (Please specify) Question 4: In addition to conventional dial-up telephone Internet access, is any other form of Internet access available in the area where you live? (Select one for each row) Wireless service (e.g., satellite, fixed wireless, other wireless) Question 5: For those methods of Internet access that are not available in your area, or not available to you, do either of the following reasons describe why such methods are not available? (Select one in each row) Question 6: Which of the following is the most important reason you selected your current Internet service provider (e.g., AOL, Excite@Home, MindSpring, etc.)? (Select one) Previous experience/was familiar with my ISP prior to subscribing Provided the best access to the content/applications that I use and/or want most Did research on my ISP prior to subscribing Recommended to me by family, friends, co-workers, etc. Part of a promotion with the purchase of my computer (e.g., a cash rebate, a free trial, etc.) Offered as part of a package of services by a telecommunications company My Internet service provider came bundled with my Internet access Other (Please specify) Missing observation = 0.2%. Is (are) _____ available to you through your Internet service provider (you don’t necessarily have to be using the application)? (Select one for each row) Question 8: Thinking about a typical Internet session, what percentage of your time is spent on your ISP’s home page accessing content or service applications, such as e-mail, as opposed to the percentage of time spent surfing the Internet for content and applications? (Please enter appropriate percentage) Percentage of time spent on ISP’s home page content 5.5 (Continued From Previous Page) Question 9: What are the advantages to using applications or accessing content that appear on your ISP’s home page? (Select all that apply) Question 10A: How interested would you be in purchasing a package of communications services from a single company (for example, telephone, cable television, Internet access, etc.)? (Select one) Question 11: In addition to your home, from which other locations do you access the Internet? (Select all that apply) A remote location using my laptop (for example, a hotel, an airport, etc.) A remote location using my mobile wireless device (for example, Palm Pilot) Other (Please specify) Question 12: On average, how many hours per week do you and all members of your household spend on the Internet from your home using any and all applications (for example, e-mail, Web surfing, working, shopping, etc.)? (Select one) Question 13: Including your work experience, how long have you been accessing the Internet? (Select one) Question 14A: About how much did you initially pay to obtain Internet access from your home? Please include in your amount such items as the purchase of an external modem, any initial fee for your Internet service provider, and any installation charge for a second phone line if you purchased one to be used primarily for your Internet use. Do not include in your amount the purchase of a computer. (Select one) Question 14B: About how much do you pay per month to access the Internet from your home? Please include in your amount such items as access (via telephone, cable, etc.), the monthly charge for a second phone line if you purchased one to be use primarily for your Internet use, the monthly charge for your Internet service provider, and any equipment leasing.(Select one) Question 15: About how much more would you be willing to pay over and above what you are currently paying per month for high- speed Internet access (for example, high-speed DSL service, high- speed cable modem service, or wireless service)? (Select one) Question 16: About how much more per month would you be willing to pay over and above what you are currently paying per month for your high-speed Internet access before you would either discontinue the service and/or change to a conventional dial-up telephone line for Internet access? (Select one) Question 17: Overall, how easy or difficult was the process of purchasing high-speed Internet access from your home (for example, the amount of time, the number of calls made to the Internet access provider, the number of visits made to your home by the provider’s technician, etc.)? (Select one) Question 18: Have you ever tried to get high-speed Internet access (high-speed DSL service, high-speed cable modem service, or wireless service) but been unable to? (Select one) The following tables show the questions included in our survey of Internet users and the responses by percentage of respondents. For this sample, we surveyed 2,525 Internet users who lived in areas of the country that we had determined were very likely to have at least one broadband choice available to them. We received 1,209 responses (a 47.9-percent response rate). Question 1—which asked whether the respondent was the primary decisionmaker for Internet purchases in the household—was asked of all survey participants. Only those participants who responded “Yes” to this question (1,069 participants) continued with the remainder of the survey. We also excluded 409 responses (16.2 percent of the sample) as recommended by NPD to ensure that the sample was representative of the target population. Additionally, 21 observations were removed because the respondent provided inconsistent answers to questions 2 and 4 or because the respondent was under 18 years old. This left 639 responses for questions 2 through 18. For this sample, the sample frame consisted of 72,600 individuals; this is the population to which the survey results can be generalized. For questions 2 through 18, the relevant population estimate was 57,989 because of the excluded observations mentioned above. Unless otherwise noted in footnotes to the questions, there were no missing observations. Question 1: Are you the primary decisionmaker for your household regarding what form of Internet access to purchase for your home? (Select one) Question 2: Which of the following do you most frequently use to access the Internet from your home? (Select one) Conventional dial-up telephone service provided by a telephone company (this includes ISDN service) High-speed “digital subscriber line” (or “DSL”) telephone service High-speed cable modem service (this includes using the cable modem as the downlink and a telephone line for the return path or uplink) Wireless service (for example, satellite service such as DirecPC, fixed wireless service such as Winstar or Teligent, or other wireless service) Question 3A: What is the most important reason you use conventional dial-up telephone service for your Internet access from home? (Select one) No choice; only method of Internet access available to me Not aware of other choices of Internet access Company’s service quality reputation and/or experience Most appropriate for the applications/services I use most frequently Ability to select the Internet service provider I wanted Other (Please specify) Question 3B: What is the most important reason you use (high- speed DSL service, high-speed cable modem service, or wireless service) for your Internet access from your home? (Select one) Company’s service quality reputation and/or experience Ability to select the Internet service provider I wanted Speed appropriate for the applications/services I use most frequently Speed equivalent to the access I have at work or at other locations where I have Internet access To free up my regular telephone line for voice call Other (Please specify) Question 4: In addition to conventional dial-up telephone Internet access, is any other form of Internet access available in the area where you live? (Select one for each row) Wireless service (e.g., satellite, fixed wireless, other wireless) Question 5: For those methods of Internet access that are not available in your area, or not available to you, do either of the following reasons describe why such methods are not available? (Select one in each row) Question 6: Which of the following is the most important reason you selected your current Internet service provider (e.g., AOL, Excite@Home, MindSpring, etc.)? (Select one) Previous experience/was familiar with my ISP prior to subscribing Provided the best access to the content/applications that I use and/or want most Did research on my ISP prior to subscribing Recommended to me by family, friends, co-workers, etc. Part of a promotion with the purchase of my computer (e.g., a cash rebate, a free trial, etc.) Offered as part of a package of services by a telecommunications company My Internet service provider came bundled with my Internet access Other (Please specify) Is (are) _____ available to you through your Internet service provider (you don’t necessarily have to be using the application)? (Select one for each row) Question 8: Thinking about a typical Internet session, what percentage of your time is spent on your ISP’s home page accessing content or service applications, such as e-mail, as opposed to the percentage of time spent surfing the Internet for content and applications? (Please enter appropriate percentage) Percentage of time spent on ISP’s home page content 0.2 (Continued From Previous Page) Question 9: What are the advantages to using applications or accessing content that appear on your ISP’s home page?(Select all that apply) Question 10A: How interested would you be in purchasing a package of communications services from a single company (for example, telephone, cable television, Internet access, etc.)? (Select one) Question 10B: Which best describes why you would be interested in purchasing a package of communications services? (Select one) Question 11: In addition to your home, from which other locations do you access the Internet?(Select all that apply) A remote location using my laptop (for example, a hotel, an airport, etc.) A remote location using my mobile wireless device (for example, Palm Pilot) Other (Please specify) Question 12: On average, how many hours per week do you and all members of your household spend on the Internet from your home using any and all applications (for example, e-mail, Web surfing, working, shopping, etc.)? (Select one) Question 13: Including your work experience, how long have you been accessing the Internet? (Select one) Question 14A: About how much did you initially pay to obtain Internet access from your home? Please include in your amount such items as the purchase of an external modem, any initial fee for your Internet service provider, and any installation charge for a second phone line if you purchased one to be used primarily for your Internet use. Do not include in your amount the purchase of a computer. (Select one) Question 14B: About how much do you pay per month to access the Internet from your home? Please include in your amount such items as access (via telephone, cable, etc.), the monthly charge for a second phone line if you purchased one to be use primarily for your Internet use, the monthly charge for your Internet service provider, and any equipment leasing. (Select one) Question 15: About how much more would you be willing to pay over and above what you are currently paying per month for high- speed Internet access (for example, high-speed DSL service, high- speed cable modem service, or wireless service)? (Select one) Question 16: About how much more per month would you be willing to pay over and above what you are currently paying per month for your high-speed internet access before you would either discontinue the service and/or change to a conventional dial-up telephone line for Internet access? (Select one) Question 17: Overall, how easy or difficult was the process of purchasing high-speed Internet access from your home (for example, the amount of time, the number of calls made to the Internet access provider, the number of visits made to your home by the provider’s technician, etc.)? (Select one) Question 18: Have you ever tried to get high-speed Internet access (high-speed DSL service, high-speed cable modem service, or wireless service) but been unable to? (Select one) In addition to those named above, Michael Clements, Faye Morrison, and Luann Moy 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, 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 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: [email protected] 1-800-424-5454 (automated answering system) | Americans' use of the Internet has grown dramatically during the last few years. Nationally, more than half of all households have a computer and more than 80 percent of those households have access to the Internet. Yet, during the last few years, even as Internet usage has continued to expand, concerns have arisen about whether access to the Internet and other advanced telecommunications services is limited for Americans in lower socioeconomic classes or who live in rural areas. GAO found that Internet users are more likely to be white and well-educated and have higher-than-average household incomes. There is no noticeable difference between the genders when it comes to Internet usage. GAO also found that the availability of some services is limited by location. Some of this information points to the existence of the "digital divide," but the evidence is not clear. It is important, however, to ensure that the differences in Internet availability do not adversely affect existing societal divisions. |
Congress created FDIC in 1933 to restore and maintain public confidence in the nation’s banking system. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 sought to reform, recapitalize, and consolidate the federal deposit insurance system. The act created the Bank Insurance Fund and the Savings Association Insurance Fund, both of which are responsible for protecting insured bank and thrift depositors. The act also abolished the FSLIC and created the FSLIC Resolution Fund to complete the affairs of the former FSLIC and liquidate the assets and liabilities transferred from the former Resolution Trust Corporation. It also designated FDIC as the administrator of these funds. As part of this function, FDIC has an examination and supervision program to monitor the safety of deposits held in member institutions. FDIC insures deposits in excess of $10 trillion for about 8,900 institutions. Together, the three funds—the Bank Insurance Fund, the Savings Association Insurance Fund, and the FSLIC Resolution Fund—have about $52 billion in assets. FDIC had a budget of about $1.1 billion for calendar year 2004 to support its activities in managing the three funds. For that year, it processed more than 3.8 million financial transactions. FDIC relies extensively on computerized systems to support its financial operations and store the sensitive information it collects. Its local and wide area networks interconnect these systems. To support its financial management functions, it relies on several financial systems to process and track financial transactions that include premiums paid by its member institutions and disbursements made to support operations. In addition, FDIC uses other systems that maintain personnel information for its employees, examination data for financial institutions, and legal information on closed institutions. At the time of our review, about 6,200 individuals were authorized to use FDIC’s systems. The corporation’s key official for computer security is the Chief Information Officer, who is responsible for establishing, implementing, and overseeing a corporatewide information security program. Information system controls are a critical consideration for any organization that depends on computerized systems and networks to carry out its mission or business. Without proper safeguards, there is risk that individuals and groups with malicious intent may intrude into inadequately protected systems and use this access to obtain sensitive information, commit fraud, disrupt operations, or launch attacks against other computer systems and networks. We have reported information security as a governmentwide high-risk area since February 1997. Our previous reports, and those of agency inspectors general, describe persistent information security weaknesses that place a variety of federal operations, including those at FDIC, at risk of disruption, fraud, and inappropriate disclosure. Congress and the executive branch have taken action to address the risks associated with persistent information security weaknesses. In December 2002, the Federal Information Security Management Act (FISMA) of 2002, which is intended to strengthen information security, was enacted as Title III of the E-Government Act of 2002. In addition, the administration undertook important actions to improve security, such as integrating information security into the President’s Management Agenda Scorecard. Moreover, the Office of Management and Budget and the National Institute of Standards and Technology (NIST) have issued information security guidance to agencies. The objectives of our review were to assess (1) the progress FDIC had made in correcting or mitigating weaknesses reported in connection with our financial statement audits for calendar years 2002 and 2003 and (2) the effectiveness of the corporation’s information system controls. Our evaluation was based on (1) our Federal Information System Controls Audit Manual (FISCAM), which contains guidance for reviewing information system controls that affect the integrity, confidentiality, and availability of computerized data and (2) our May 1998 report on security management best practices at leading organizations, which identifies key elements of an effective information security program. Specifically, we evaluated information system controls intended to prevent, limit, and detect electronic access to computer resources (data, programs, and systems), thereby protecting these resources against unauthorized disclosure, modification, and use; provide physical protection of computer facilities and resources from espionage, sabotage, damage, and theft; ensure that work responsibilities for computer functions are segregated so that no one individual controls all key aspects of a computer-related operation and thereby has the ability to conduct unauthorized actions or gain unauthorized access to assets or records without detection by another individual performing assigned responsibilities; prevent the implementation of unauthorized changes to application or ensure recovery of computer process operations and data in case of disaster or other unexpected interruption; and ensure an adequate information security program. To evaluate these controls, we identified and reviewed pertinent FDIC security policies and procedures, guidance, plans, and reports. We also discussed whether information system controls were in place, adequately designed, and operating effectively with key security representatives, system administrators, and management officials. In addition, we conducted tests and observations of controls in operation and reviewed corrective actions taken by the corporation to address vulnerabilities identified in our audits for calendar years 2002 and 2003. FDIC has made significant progress in correcting previously reported information system control weaknesses. Of the 22 weaknesses reported in our 2003 audit, FDIC corrected 19 and is taking action to resolve the 3 that remain. In addition, the corporation corrected the one weakness still open from our 2002 audit. FDIC’s actions included resolving weaknesses related to its key access controls, network security, and monitoring capabilities. For example, the corporation restricted user access to critical financial and sensitive data and strengthened security configurations of network devices, including firewalls, routers, switches, and servers; and enhanced its monitoring of security-relevant events by fully implementing its intrusion detection system to monitor its computer network traffic for unusual or suspicious access activities. In addition to addressing previously reported weaknesses, FDIC took other steps to improve information security. For example, the corporation strengthened its oversight of contractor connections to its network by requiring contractors to develop security plans to protect these connections and to perform periodic inspections of contractor facilities to ensure security effectiveness. Further, FDIC established certification and accreditation guidelines that outline requirements for performing this process as part of each system’s life cycle and certified and accredited each of its key systems. In addition, the corporation updated its disaster recovery procedures and has been routinely performing different types of tests of its disaster recovery plan. Although FDIC made substantial improvements in its information system controls, we identified 20 additional weaknesses that diminish its ability to effectively protect the integrity, confidentiality, and availability of its financial and sensitive information and information systems. Specifically, we identified weaknesses in electronic access controls, network security, physical security, segregation of computer functions, and application change controls. Although these information system control weaknesses do not pose significant risks to FDIC’s financial and sensitive systems, they warrant management’s action to decrease the risk of unauthorized modification of data and programs, inappropriate disclosure of sensitive information, or disruption of critical operations. A basic management control objective for any organization is the protection of its information systems and critical data from unauthorized access. Organizations accomplish this objective by granting employees the authority to read, create, or modify only those programs and data that they need to perform their duties. Effective electronic access controls should be designed to restrict access to computer programs and data and detect unauthorized access. These controls include assigning user access rights and permissions and reviewing audit logs to ensure that access privileges are used appropriately. Although FDIC restricted access to programs and information, we found instances in which access was not sufficiently controlled. For example, about 250 users were inadvertently granted access to read, create, or modify critical production programs and data for financial, payroll/personnel, and bank regulatory systems. The risk of weakening security access was further heightened because the access activities of these users were not being logged for review. In addition, emergency access accounts with broad system access to all critical system and security resources intended to be used solely to manage problems or emergencies that interrupt the system’s 24-hour-a-day operation were routinely used by four system and operations staff. Further, FDIC did not configure security software to appropriately restrict, log, and monitor access to certain sensitive system software libraries. As a result, increased risk exists that individuals could circumvent security controls to read, create, or modify critical or sensitive programs and data, possibly without detection. In response to these weaknesses, FDIC’s Chief Information Officer said that they have taken steps to restrict access to critical financial data and program and related sensitive information. Further, the corporation stated that it has restricted access to sensitive system software libraries and plans to generate monthly audit reports for review and follow-up action as needed. Networks are a series of interconnected devices and software that allow individuals to share data and computer programs. Because sensitive programs and data are stored on network servers or transmitted along networks, effectively securing networks is essential to protecting computing resources and data from unauthorized access, manipulation, and use. Organizations secure their networks, in part, by installing and configuring network devices that permit authorized network service requests and deny unauthorized requests and by limiting the services that are available on the network. Network devices include (1) firewalls designed to prevent unauthorized access to and from the network, (2) routers that filter and forward data along the network, (3) switches that forward information among parts of a network, and (4) servers that host applications and data. Network services consist of protocols for transmitting data between network devices. In addition, effective network controls, such as passwords, should be established to authenticate authorized users who access the network from local and remote locations. Since networks often provide the entry point for access to electronic information assets, failure to secure them increases the risk of unauthorized use of sensitive data and systems. Although FDIC’s network controls were generally effective, we identified instances where FDIC did not adequately secure specific network services and devices or protect passwords. For example, database server configurations for some of the corporation’s financial applications were not adequately secured. These servers had insecure settings that could have allowed an unauthorized user to gain access without providing authentication. In addition, FDIC did not have controls in place to consistently ensure that data transmitted between network devices were secure. Further, the passwords of local network administrators who had broad system access privileges were not adequately secured. As a result, increased risk exists that a malicious user could gain unauthorized access to some of FDIC’s sensitive network systems, read and modify sensitive system data, and disrupt or deny computer processing services to corporation employees. In response to these weaknesses, FDIC’s Chief Information Officer said that the corporation had taken steps to improve network security including strengthening server settings, data transmission, and administrator passwords. Physical security controls are important for protecting computer facilities and resources from espionage, sabotage, damage, and theft. These controls involve restricting physical access to computer resources, usually by limiting access to the buildings and rooms in which the resources are housed and by periodically reviewing access rights granted to ensure that access continues to be appropriate based on criteria established for granting it. At FDIC, physical access control measures (such as guards, badges, and locks, used either alone or in combination) are vital to protecting computing resources and the sensitive data it processes from external and internal threats. Although FDIC had taken numerous actions to strengthen its physical security over its computing environment, certain weaknesses reduced its effectiveness in protecting and controlling physical access to sensitive work areas. For example, 4 employees and contractors had access to the computer data center even though they had changed their job responsibilities and no longer required this access. As a result, there is an increased risk that unauthorized individuals could gain access to sensitive computing resources and data and inadvertently or deliberately misuse or destroy them. In response, FDIC’s management plans to update procedures to ensure that physical access to the data center is limited to authorized individuals. Segregation of computer functions refers to the policies, procedures, and organizational structure that helps ensure that one individual cannot independently control all key aspects of a process or computer-related operation and, thereby, gain unauthorized access to assets or records. Often segregation of computer functions is achieved by dividing responsibilities among two or more organizational groups. Dividing duties among two or more individuals or groups diminishes the likelihood that errors and wrongful acts will go undetected because the activities of one individual or group will serve as a check on the activities of the others. Inadequate segregation of computer functions increases the risk that erroneous or fraudulent transactions could be processed, improper program changes implemented, and computer resources damaged or destroyed. Although computer responsibilities were generally properly segregated at FDIC, we identified one instance in which responsibilities were not adequately segregated: system administrators were also serving as database administrators for systems that maintained FDIC’s key financial information. The risk associated with this weakness was further heightened because these administrators could take full control over the financial applications and databases that include audit and reconciliation data. Consequently, there is an increased risk that these individuals could perform unauthorized system activities without being detected. In response to this weakness, FDIC’s Chief Information Officer said that the corporation plans to segregate the duties of system and database administrator functions. It is important to ensure that only authorized and fully tested application programs are placed in operation. To ensure that changes to application programs are needed, work as intended, and do not result in the loss of data or program integrity, such changes should be authorized, tested, and independently reviewed. Although FDIC had application change control procedures for its general ledger and accounts payable mainframe applications, it did not have procedures for documenting tests performed or independent reviews made for changes made to other key mainframe and client/server financial applications. In addition, the corporation did not have a process for authorizing changes to Web-based financial applications. Without adequate application change control procedures, changes may be implemented that are not authorized, tested, or independently reviewed. In response, FDIC’s Chief Information Officer plans to establish procedures for documenting tests performed and independent reviews made for application software changes made to all mainframe and client/server application software. In addition, the corporation plans to establish a process for authorizing changes to Web-based financial applications. A key reason for FDIC’s weaknesses in information system controls is that it had not fully implemented a complete test and evaluation process, which is a key element of a comprehensive agency information security program. Our May 1998 study of security management best practices determined that a comprehensive information security program is essential to ensuring that information system controls work effectively on a continuing basis. Also, FISMA, consistent with our study, requires an agency’s information security program to include certain key elements. These elements include a central information security management structure to provide overall security policy and guidance along with oversight to ensure compliance with established policies and reviews of the effectiveness of the information security environment; periodic assessments of the risk and magnitude of the harm that could result from unauthorized access, use, disclosure, disruption, modification, or destruction of information and information systems; policies and procedures that (1) are based on risk assessments, (2) cost effectively reduce risks, (3) ensure that information security is addressed throughout the life cycle of each system, and (4) ensure compliance with applicable requirements; security awareness training to inform personnel, including contractors and other users of information systems, of information security risks and their responsibilities in complying with agency policies and procedures; and a process of tests and evaluations of the effectiveness of information security policies, procedures, and practices relating to management, operational, and technical controls of every major information system identified in the agency’s inventories. FDIC has made substantial progress in establishing a comprehensive information security program. The corporation strengthened its central information security management structure by providing additional staff resources to oversee the program. Further, the corporation initiated a program to routinely perform risk assessments on all major systems. In addition, FDIC updated its overall security policies covering network security, computer center access, and security management and it developed security plans for all key systems. Also, the corporation continued to enhance its security awareness program by adding specialized training for selected technical staff. Although FDIC enhanced its process to test and evaluate its information system controls, it did not ensure that all key control areas supporting the corporation’s financial environment were routinely reviewed and tested. These areas included electronic access controls, network security, and audit logging. During the past year, FDIC strengthened its test and evaluation process to cover additional key information system control areas, provide for independent tests of corrective actions, and assess and test newly-identified weaknesses and emerging security threats. Although FDIC established a process to test and evaluate network and mainframe information system controls, its program did not include routine evaluations of network desktop and database application controls. Further, the process did not include comprehensive tests to ensure that electronic access to key financial programs and data (1) were restricted to only those users who need it to perform their job functions and (2) had appropriate audit logs maintained to record security-relevant events for subsequent review. Without routine tests and evaluations of all key information system control areas, FDIC will have limited assurance that its financial and sensitive information is adequately protected. Incorporating these key areas into its test and evaluation process should allow FDIC to better identify and correct security problems, such as those identified in our 2004 audit. Further, the corporation’s implementation of new financial systems in the coming year will significantly change the nature of its information systems environment and of the related information systems controls necessary for their effective operation. Consequently, a comprehensive test and evaluation process that includes these areas will be essential to ensure that the corporation’s financial and sensitive information will be adequately protected in this new environment. In response, FDIC’s Chief Information Officer said that the corporation will continue to take steps to enhance its overall test and evaluation process to ensure an effective security environment. FDIC has made significant progress in correcting the information system control weaknesses we previously identified and has taken other steps to improve information security. Although we identified weaknesses in information system controls involving electronic access, network security, segregation of computer functions, physical security, and application change control, these weaknesses do not pose significant risks to FDIC’s financial and sensitive systems. Accordingly, we concluded that weaknesses in information system controls at the corporation no longer constitute a reportable condition, as stated in our audit of the calendar year 2004 financial statements for FDIC’s three funds. However, they warrant action by the FDIC management to decrease the risk of unauthorized modification of data and programs, inappropriate disclosure of sensitive information, or disruption of critical operations. A key reason for FDIC’s weaknesses in information system controls is that it had not fully implemented a complete test and evaluation process, which is a key element of a comprehensive agency information security program. Although the corporation has made substantial progress in implementing its information security program and enhanced its process to test and evaluate its information system controls, it did not ensure that all key control areas supporting its financial environment were routinely reviewed and tested. These areas included electronic access controls, network security, and audit logging. Until FDIC fully implements a comprehensive test and evaluation process, its ability to maintain adequate information system controls over its financial and sensitive information will be limited. This will be especially crucial as the corporation implements new financial systems in the coming year. To strengthen FDIC’s information security program, we recommend that the Chairman direct the Chief Information Officer to broaden its process of tests and evaluations to ensure that all key control areas supporting FDIC’s financial environment are routinely reviewed and tested. This process should include routine tests and evaluations of key control areas such as electronic access, network security, and audit logging. We are also making recommendations in a separate report designated for “Limited Official Use Only.” These recommendations address actions needed to correct specific information security weaknesses related to electronic access, network security, physical security, segregation of computer functions, and application change controls. In providing written comments on a draft of this report, FDIC’s Chief Financial Officer (CFO) agreed with our recommendations. His comments are reprinted in appendix I of this report. Specifically, FDIC plans to correct all weaknesses identified and broaden the testing and evaluation element of its computer management program by February 28, 2006. According to the CFO, significant progress has already been made in addressing the identified weaknesses. We are sending copies of this report to the Chairman and Ranking Minority Member of the Senate Committee on Banking, Housing, and Urban Affairs; the Chairman and Ranking Minority Member of the House Committee on Financial Services; members of the FDIC Audit Committee; officials in FDIC’s divisions of information resources management, administration, and finance; and the FDIC inspector general. We also will make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions regarding this report, please contact me at (202) 512-6244 or David W. Irvin, Assistant Director, at (214) 777-5716. We can also be reached by e-mail at [email protected] and [email protected], respectively. Key contributors to this report are listed in appendix II. In addition to the individual named above, Edward Alexander Jr., Gerald Barnes, Jason Carroll, Lon Chin, Debra Conner, Anh Dang, Kristi Dorsey, Edward Glagola Jr., Nancy Glover, Rosanna Guerrero, David Hayes, Harold Lewis, Leena Mathew, Kevin Metcalfe, Duc Ngo, Eugene Stevens, Charles Vrabel, and Christopher Warweg made key contributions to this report. | The Federal Deposit Insurance Corporation (FDIC) relies extensively on computerized systems to support its financial and mission-related operations. As part of GAO's audit of the calendar year 2004 financial statements for the three funds administered by FDIC, GAO assessed (1) the progress FDIC has made in correcting or mitigating information system control weaknesses identified in our audits for calendar years 2002 and 2003 and (2) the effectiveness of the corporation's information system general controls. FDIC has made significant progress in correcting previously reported information system control weaknesses and has taken other steps to improve information security. Of the 22 weaknesses reported in GAO's 2003 audit, FDIC corrected 19 and is taking action to resolve the 3 that remain. In addition, it corrected the one weakness still open from GAO's 2002 audits. Although FDIC has made substantial improvements in its information system controls, GAO identified additional weaknesses that diminish FDIC's ability to effectively protect the integrity, confidentiality, and availability of its financial and sensitive information systems. These included weaknesses in electronic access controls, network security, segregation of computer functions, physical security, and application change control. Although these do not pose significant risks to FDIC's financial and sensitive systems, they warrant management's action to decrease the risk of unauthorized modification of data and programs, inappropriate disclosure of sensitive information, or disruption of critical operations. A key reason for FDIC's weaknesses in information system controls is that it had not fully implemented a complete test and evaluation process, which is a key element of a comprehensive agency information security program with effective controls. Although FDIC has made substantial progress in implementing its information security program and has enhanced its process to test and evaluate its information system controls, it did not ensure that all key control areas supporting FDIC's financial environment are routinely reviewed and tested. These control areas included electronic access, network security, and audit logging. |
The Schedules of Federal Debt including the accompanying notes present fairly, in all material respects, in conformity with U.S. generally accepted accounting principles, the balances as of September 30, 2006, 2005, and 2004, for Federal Debt Managed by BPD; the related Accrued Interest Payables and Net Unamortized Premiums and Discounts; and the related increases and decreases for the fiscal years ended September 30, 2006 and 2005. BPD maintained, in all material respects, effective internal control relevant to the Schedule of Federal Debt related to financial reporting and compliance with applicable laws and regulations as of September 30, 2006, that provided reasonable assurance that misstatements, losses, or noncompliance material in relation to the Schedule of Federal Debt would be prevented or detected on a timely basis. Our opinion is based on criteria established under 31 U.S.C. § 3512 (c), (d) (commonly referred to as the Federal Managers’ Financial Integrity Act) and the Office of Management and Budget (OMB) Circular A-123, revised December 21, 2004, Management’s Responsibility for Internal Control. We found matters involving information security controls that we consider not to be reportable conditions. We will communicate these matters to BPD’s management, along with our recommendations for improvement, in a separate letter to be issued at a later date. Our tests for compliance in fiscal year 2006 with selected provisions of laws disclosed no instances of noncompliance that would be reportable under U.S. generally accepted government auditing standards or applicable OMB audit guidance. However, the objective of our audit of the Schedule of Federal Debt for the fiscal year ended September 30, 2006, was not to provide an opinion on overall compliance with laws and regulations. Accordingly, we do not express such an opinion. BPD’s Overview on Federal Debt Managed by the Bureau of the Public Debt contains information, some of which is not directly related to the Schedules of Federal Debt. We do not express an opinion on this information. However, we compared this information for consistency with the schedules and discussed the methods of measurement and presentation with BPD officials. Based on this limited work, we found no material inconsistencies with the schedules. Management is responsible for the following: preparing the Schedules of Federal Debt in conformity with U.S. generally accepted accounting principles; establishing, maintaining, and assessing internal control to provide reasonable assurance that the broad control objectives of the Federal Managers’ Financial Integrity Act are met; and complying with applicable laws and regulations. We are responsible for obtaining reasonable assurance about whether (1) the Schedules of Federal Debt are presented fairly, in all material respects, in conformity with U.S. generally accepted accounting principles and (2) management maintained effective relevant internal control as of September 30, 2006, the objectives of which are the following: Financial reporting: Transactions are properly recorded, processed, and summarized to permit the preparation of the Schedule of Federal Debt for the fiscal year ended September 30, 2006, in conformity with U.S. generally accepted accounting principles. Compliance with laws and regulations: Transactions related to the Schedule of Federal Debt for the fiscal year ended September 30, 2006, are executed in accordance with laws governing the use of budget authority and with other laws and regulations that could have a direct and material effect on the Schedule of Federal Debt. We are also responsible for testing compliance with selected provisions of laws and regulations that have a direct and material effect on the Schedule of Federal Debt. Further, we are responsible for performing limited procedures with respect to certain other information appearing with the Schedules of Federal Debt. In order to fulfill these responsibilities, we examined, on a test basis, evidence supporting the amounts and disclosures in the Schedules of Federal Debt; assessed the accounting principles used and any significant estimates evaluated the overall presentation of the Schedules of Federal Debt; obtained an understanding of internal control relevant to the Schedule of Federal Debt as of September 30, 2006, related to financial reporting and compliance with laws and regulations (including execution of transactions in accordance with budget authority); tested relevant internal controls over financial reporting and compliance, and evaluated the design and operating effectiveness of internal control relevant to the Schedule of Federal Debt as of September 30, 2006; considered the process for evaluating and reporting on internal control and financial management systems under the Federal Managers’ Financial Integrity Act; and tested compliance in fiscal year 2006 with the (1) statutory debt limit (31 U.S.C. § 3101(b), as amended by Pub. L. No. 107-199, § 1, 116 Stat. 734 (2002), Pub. L. No. 108-24, 117 Stat. 710 (2003), Pub. L. No. 108-415, § 1, 118 Stat. 2337 (2004), and Pub. L. No. 109-182, 120 Stat. 289 (2006)); (2) suspension and early redemption of investments from the Civil Service Retirement and Disability Trust Fund (5 U.S.C. § 8348(j)(k)); and (3) suspension of investments from the G-Fund (5 U.S.C. § 8438(g)). We did not evaluate all internal controls relevant to operating objectives as broadly described by the Federal Managers’ Financial Integrity Act, such as those controls relevant to preparing statistical reports and ensuring efficient operations. We limited our internal control testing to controls over financial reporting and compliance. Because of inherent limitations in internal control, misstatements due to error or fraud, losses, or noncompliance may nevertheless occur and not be detected. We also caution that projecting our evaluation to future periods is subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with controls may deteriorate. We did not test compliance with all laws and regulations applicable to BPD. We limited our tests of compliance to selected provisions of laws that have a direct and material effect on the Schedule of Federal Debt for the fiscal year ended September 30, 2006. We caution that noncompliance may occur and not be detected by these tests and that such testing may not be sufficient for other purposes. We performed our work in accordance with U.S. generally accepted government auditing standards and applicable OMB audit guidance. In commenting on a draft of this report, BPD concurred with the conclusions in our report. The comments are reprinted in appendix I. Federal debt managed by the Bureau of the Public Debt (BPD) comprises debt held by the public and debt held by certain federal government accounts, the latter of which is referred to as intragovernmental debt holdings. As of September 30, 2006 and 2005, outstanding gross federal debt managed by the bureau totaled $8,493 and $7,918 billion, respectively. The increase in gross federal debt of $575 billion during fiscal year 2006 was due to an increase in gross intragovernmental debt holdings of $333 billion and an increase in gross debt held by the public of $242 billion. As Figure 1 illustrates, both intragovernmental debt holdings and debt held by the public have steadily increased since fiscal year 2002. The primary reason for the increases in intragovernmental debt holdings is the annual surpluses in the Federal Old-Age and Survivors Insurance Trust Fund, Civil Service Retirement and Disability Fund, Federal Hospital Insurance Trust Fund, Federal Disability Insurance Trust Fund, and Military Retirement Fund. The increases in debt held by the public are due primarily to total federal spending exceeding total federal revenues. As of September 30, 2006, gross debt held by the public totaled $4,843 billion and gross intragovernmental debt holdings totaled $3,650 billion. (in billions) Interest expense incurred during fiscal year 2006 consists of (1) interest accrued and paid on debt held by the public or credited to accounts holding intragovernmental debt during the fiscal year, (2) interest accrued during the fiscal year, but not yet paid on debt held by the public or credited to accounts holding intragovernmental debt, and (3) net amortization of premiums and discounts. The primary components of interest expense are interest paid on the debt held by the public and interest credited to federal government trust funds and other federal government accounts that hold Treasury securities. The interest paid on the debt held by the public affects the current spending of the federal government and represents the burden in servicing its debt (i.e., payments to outside creditors). Interest credited to federal government trust funds and other federal government accounts, on the other hand, does not result in an immediate outlay of the federal government because one part of the government pays the interest and another part receives it. However, this interest represents a claim on future budgetary resources and hence an obligation on future taxpayers. This interest, when reinvested by the trust funds and other federal government accounts, is included in the programs’ excess funds not currently needed in operations, which are invested in federal securities. During fiscal year 2006, interest expense incurred totaled $404 billion, interest expense on debt held by the public was $221 billion, and $183 billion was interest incurred for intragovernmental debt holdings. As Figure 2 illustrates, total interest expense decreased from fiscal year 2002 to 2003, but increased in fiscal years 2004 through 2006. Average interest rates on principal balances outstanding as of September 30, 2006 and 2005 are disclosed in the Notes to the Schedules of Federal Debt. (in billions) Debt held by the public reflects how much of the nation’s wealth has been absorbed by the federal government to finance prior federal spending in excess of total federal revenues. As of September 30, 2006, and 2005, gross debt held by the public totaled $4,843 billion and $4,601 billion, respectively (see Figure 1), an increase of $242 billion. The borrowings and repayments of debt held by the public decreased from fiscal year 2005 to 2006 primarily due to Treasury’s decision to finance current operations using more long-term securities. As of September 30, 2006, $4,284 billion, or 88 percent, of the securities that constitute debt held by the public were marketable, meaning that once the government issues them, they can be resold by whoever owns them. Marketable debt is made up of Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation-Protected Securities (TIPS) with maturity dates ranging from less than 1 year out to 30 years. Of the marketable securities currently held by the public as of September 30, 2006, $2,813 billion or 66 percent will mature within the next 4 years (see Figure 3). As of September 30, 2006 and 2005, notes and TIPS held by the public maturing within the next 10 years totaled $2,709 billion and $2,558 billion, respectively, an increase of $151 billion. Callable securities mature between fiscal years 2012 and 2015, but are reported by their call date. Debt Held by the Public, cont. The government also issues to the public, state and local governments, and foreign governments and central banks nonmarketable securities, which cannot be resold, and have maturity dates from on demand to more than 10 years. As of September 30, 2006, nonmarketable securities totaled $559 billion, or 12 percent of debt held by the public. As of that date, nonmarketable securities primarily consisted of savings securities totaling $204 billion and special securities for state and local governments totaling $239 billion. The Federal Reserve Banks (FRBs) act as fiscal agents for Treasury, as permitted by the Federal Reserve Act. As fiscal agents for Treasury, the FRBs play a significant role in the processing of marketable book-entry securities and paper U.S. savings bonds. For marketable book-entry securities, selected FRBs receive bids, issue book-entry securities to awarded bidders and collect payment on behalf of Treasury, and make interest and redemption payments from Treasury’s account to the accounts of security holders. For paper U.S. savings bonds, selected FRBs sell, print, and deliver savings bonds; redeem savings bonds; and handle the related transfers of cash. Intragovernmental debt holdings represent balances of Treasury securities held by over 230 individual federal government accounts with either the authority or the requirement to invest excess receipts in special U.S. Treasury securities that are guaranteed for principal and interest by the full faith and credit of the U.S. Government. Intragovernmental debt holdings primarily consist of balances in the Social Security, Medicare, Military Retirement, and Civil Service Retirement and Disability trust funds. As of September 30, 2006, such funds accounted for $3,188 billion, or 87 percent, of the $3,650 billion intragovernmental debt holdings balances (see Figure 4). As of September 30, 2006 and 2005, gross intragovernmental debt holdings totaled $3,650 billion and $3,317 billion, respectively (see Figure 1), an increase of $333 The majority of intragovernmental debt holdings are Government Account Series (GAS) securities. GAS securities consist of par value securities and market-based securities, with terms ranging from on demand out to 30 years. Par value securities are issued and redeemed at par (100 percent of the face value), regardless of current market conditions. Market-based securities, however, can be issued at a premium or discount and are redeemed at par value on the maturity date or at market value if redeemed before the maturity date. Components of Intragovernmental Debt Holdings as of September 30, 2006 The Social Security trust funds consist of the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund. In addition, the Medicare trust funds are made up of the Federal Hospital Insurance Trust Fund and the Federal Supplementary Medical Insurance Trust Fund. From February 16 to March 20, 2006, Treasury faced a period that required it to depart from its normal debt management procedures and to invoke legal authorities to avoid breaching the statutory debt limit. During this period, actions taken by Treasury included suspending investment of receipts of the Government Securities Investment Fund (G-Fund) of the federal employees Thrift Savings Plan, the Exchange Stabilization Fund (ESF), and the Civil Service Retirement and Disability Fund (Civil Service Fund); redeeming Civil Service Fund securities early; and suspending the sales of State and Local Government Series securities. On March 20, 2006, Public Law 109-182 was enacted, which raised the statutory debt ceiling by $781 billion to $8,965 billion. Subsequently, Treasury restored all losses to the G-Fund and Civil Service Fund in accordance with legal authorities provided to the Secretary of the Treasury. Beginning with the October 3, 2005 auction of 13- and 26-week Treasury bills, individuals with TreasuryDirect online accounts were able to purchase marketable Treasury securities (bills, notes, bonds, and TIPS) on a non-competitive basis in TreasuryDirect. With the addition of marketable securities to TreasuryDirect, investors are able to hold the full range of Treasury retail securities in a single account, providing 24/7 convenience for tracking and managing all Treasury consumer securities. In September 2005, BPD defined a comprehensive approach to risk management in TreasuryDirect and established a Risk Management Group (RMG) to identify and monitor patterns of behavior, establish precedents and procedures, and network with private and public sector industry groups. In FY 2006, the RMG reviewed TreasuryDirect reports for unusual activity, watched blogs for TreasuryDirect references and news reports for scams and alerts, and participated in interagency identity theft workgroups. The re-introduction of the regular semi-annual auctions of the thirty-year bond began with the auction on February 9, 2006, followed by a reopening of the thirty-year bond, which was issued on August 15, 2006. Also, during February 2006, the auction and issuance of the monthly 5-year note was shifted to month end to accommodate the re-introduction of the 30-year bond. Beginning in February 2007, Treasury will issue 30-year bonds on a quarterly basis. A quarterly issuance pattern will benefit the Separate Trading of Registered Interest and Principal of Securities (STRIPS) market by creating interest payments for February, May, August and November. Significant Events in FY 2006, cont. Trust Fund – FDIC Merger Prior to June 1, 2006, the Federal Deposit Insurance Corporation (FDIC) maintained three investment funds in the Federal Investments Program. Two of the larger funds, however, were affected by Public Law 109-173 that merged the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) into the Deposit Insurance Fund (DIF). On June 1, 2006, the combined balances of BIF and SAIF of $45.7 billion were transferred to the new fund. Since June 1, 2006, all new investment activity has taken place in the DIF. Treasury Hunt® is an online application that helps the public identify bonds they may hold that have stopped earning interest. There are nearly 13 million savings bond records with taxpayer identification numbers (TINs) now available for searching in the Treasury Hunt database. This represents over 2.8 million unique TINs. In FY 2006, customers searched the system 840,000 times, with 17,000 possible Series E matured, unredeemed debt matches. In addition, BPD re-mailed 685 bonds, replaced 302 bonds, and released about $3,000 in interest payments. To encourage support for ongoing recovery efforts in areas devastated by last year’s hurricanes, Treasury has designated paper Series I Savings Bonds bought through financial institutions from March 29, 2006 through September 30, 2007 as Gulf Coast Recovery Bonds. The bonds contain the special inscription, “Gulf Coast Recovery Bond.” The Gulf Opportunity Zone Act of 2005 contained a provision that encouraged Treasury to make this designation. As of September 30, 2006, BPD had issued 930,000 Gulf Coast Recovery Bonds worth $775 million. Federal debt outstanding is one of the largest legally binding obligations of the federal government. Nearly all the federal debt has been issued by the Treasury with a small portion being issued by other federal government agencies. Treasury issues debt securities for two principal reasons, (1) to borrow needed funds to finance the current operations of the federal government and (2) to provide an investment and accounting mechanism for certain federal government accounts’ excess receipts, primarily trust funds. Total gross federal debt outstanding has dramatically increased over the past 25 years from $998 billion as of September 30, 1981 to $8,493 billion as of September 30, 2006 (see Figure 5). Large budget deficits emerged during the 1980’s due to tax policy decisions and increased outlays for defense and domestic programs. Through fiscal year 1997, annual federal deficits continued to be large and debt continued to grow at a rapid pace. As a result, total federal debt increased more than five fold between 1981 and 1997. Bank. Managed by the Bureau of the Public Debt For the Fiscal Years Ended September 30, 2006 and 2005 (Dollars in Millions) (Note 2) (Note 3) (Discounts) (Discounts) (34,778) (589) (27,521) Accrued Interest (Note 4) (27,521) Net Amortization (Note 4) (26,768) (26,768) (35,531) (48,568) (12,630) Accrued Interest (Note 4) (48,568) (12,630) Net Amortization (Note 4) (43,934) (43,934) ($40,165) ($1,159) The accompanying notes are an integral part of these schedules. Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt For the Fiscal Years Ended September 30, 2006 and 2005 (Dollars in Millions) Note 1. Significant Accounting Policies The Schedules of Federal Debt Managed by the Bureau of the Public Debt (BPD) have been prepared to report fiscal year 2006 and 2005 balances and activity relating to monies borrowed from the public and certain federal government accounts to fund the U.S. government's operations. Permanent, indefinite appropriations are available for the payment of interest on the federal debt and the redemption of Treasury securities. The Constitution empowers the Congress to borrow money on the credit of the United States. The Congress has authorized the Secretary of the Treasury to borrow monies to operate the federal government within a statutory debt limit. Title 31 U.S.C. authorizes Treasury to prescribe the debt instruments and otherwise limit and restrict the amount and composition of the debt. BPD, an organizational entity within the Fiscal Service of the Department of the Treasury, is responsible for issuing Treasury securities in accordance with such authority and to account for the resulting debt. In addition, BPD has been given the responsibility to issue Treasury securities to trust funds for trust fund receipts not needed for current benefits and expenses. BPD issues and redeems Treasury securities for the trust funds based on data provided by program agencies and other Treasury entities. The schedules were prepared in conformity with U.S. generally accepted accounting principles and from BPD's automated accounting system, Public Debt Accounting and Reporting System. Interest costs are recorded as expenses when incurred, instead of when paid. Certain Treasury securities are issued at a discount or premium. These discounts and premiums are amortized over the term of the security using an interest method for all long term securities and the straight line method for short term securities. The Department of the Treasury also issues Treasury Inflation-Protected Securities (TIPS). The principal for TIPS is adjusted daily over the life of the security based on the Consumer Price Index for all Urban Consumers. Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt For the Fiscal Years Ended September 30, 2006 and 2005 (Dollars in Millions) Note 2. Federal Debt Held by the Public As of September 30, 2006 and 2005, Federal Debt Held by the Public consisted of the following: Total Federal Debt Held by the Public Treasury issues marketable bills at a discount and pays the par amount of the security upon maturity. The average interest rate on Treasury bills represents the original issue effective yield on securities outstanding as of September 30, 2006 and 2005, respectively. Treasury bills are issued with a term of one year or less. Treasury issues marketable notes and bonds as long-term securities that pay semi-annual interest based on the securities' stated interest rate. These securities are issued at either par value or at an amount that reflects a discount or a premium. The average interest rate on marketable notes and bonds represents the stated interest rate adjusted by any discount or premium on securities outstanding as of September 30, 2006 and 2005. Treasury notes are issued with a term of 2 – 10 years and Treasury bonds are issued with a term of more than 10 years. Treasury also issues TIPS that have interest and redemption payments, which are tied to the Consumer Price Index, the leading measurement of inflation. TIPS are issued with a term of 5 years or more. At maturity, TIPS are redeemed at the inflation-adjusted principal amount, or the original par value, whichever is greater. TIPS pay a semi-annual fixed rate of interest applied to the inflation-adjusted principal. The TIPS Federal Debt Held by the Public inflation-adjusted principal balance includes inflation of $43,927 million and $29,001 million as of September 30, 2006 and 2005, respectively. Federal Debt Held by the Public includes federal debt held outside of the U. S. government by individuals, corporations, Federal Reserve Banks (FRB), state and local governments, and foreign governments and central banks. The FRB owned $765 billion and $733 billion of Federal Debt Held by the Public as of September 30, 2006 and 2005, respectively. These securities are held in the FRB System Open Market Account (SOMA) for the purpose of conducting monetary policy. Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt For the Fiscal Years Ended September 30, 2006 and 2005 (Dollars in Millions) Note 2. Federal Debt Held by the Public (continued) Treasury issues nonmarketable securities at either par value or at an amount that reflects a discount or a premium. The average interest rate on the nonmarketable securities represents the original issue weighted effective yield on securities outstanding as of September 30, 2006 and 2005. Nonmarketable securities are issued with a term of on demand to more than 10 years. As of September 30, 2006 and 2005, nonmarketable securities consisted of the following: State and Local Government Series Government Account Series (GAS) securities are nonmarketable securities issued to federal government accounts. Federal Debt Held by the Public includes GAS securities issued to certain federal government accounts. One example is the GAS securities held by the Government Securities Investment Fund (G-Fund) of the federal employees’ Thrift Savings Plan. Federal employees and retirees who have individual accounts own the GAS securities held by the fund. For this reason, these securities are considered part of the Federal Debt Held by the Public rather than Intragovernmental Debt Holdings. The GAS securities held by the G-Fund consist of overnight investments redeemed one business day after their issue. The net increase in amounts borrowed from the fund during fiscal years 2006 and 2005 are included in the respective Borrowings from the Public amounts reported on the Schedules of Federal Debt. Fiscal year-end September 30, 2006, occurred on a Saturday. As a result $31,656 million of marketable Treasury notes matured but not repaid is included in the balance of the total debt held by the public as of September 30, 2006. Settlement of this debt repayment occurred on Monday, October 2, 2006. Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt For the Fiscal Years Ended September 30, 2006 and 2005 (Dollars in Millions) Foreign Service Retirement and Disability Fund National Service Life Insurance Fund Airport and Airway Trust Fund * On June 1, 2006, the Federal Deposit Insurance Corporation (FDIC) merged the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) into the Deposit Insurance Fund (DIF). FDIC’s Holdings as of September 30, 2005: The Savings Association Insurance Fund Social Security Administration (SSA); Office of Personnel Management (OPM); Department of Health and Human Services (HHS); Department of Defense (DOD); Department of Labor (DOL); Federal Deposit Insurance Corporation (FDIC); Department of Energy (DOE); Department of Housing and Urban Development (HUD); Department of the Treasury (Treasury); Department of State (DOS); Department of Transportation (DOT); Department of Veterans Affairs (VA). Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt For the Fiscal Years Ended September 30, 2006 and 2005 (Dollars in Millions) Note 3. Intragovernmental Debt Holdings (continued) Intragovernmental Debt Holdings primarily consist of GAS securities. Treasury issues GAS securities at either par value or at an amount that reflects a discount or a premium. The average interest rates for both fiscal years 2006 and 2005 were 5.2 percent. The average interest rate represents the original issue weighted effective yield on securities outstanding as of September 30, 2006 and 2005. GAS securities are issued with a term of on demand to 30 years. GAS securities include TIPS, which are reported at an inflation-adjusted principal balance using the Consumer Price Index. As of September 30, 2006 and 2005 the inflation-adjusted principal balance included inflation of $19,576 million and $8,268 million, respectively. Fiscal year-end September 30, 2006, occurred on a Saturday. As a result $360 million of GAS securities held by Federal Agencies matured but not repaid is included in the balance of the Intragovernmental Holdings as of September 30, 2006. Settlement of this debt repayment occurred on Monday, October 2, 2006. Note 4. Interest Expense Interest expense on Federal Debt Managed by BPD for fiscal years 2006 and 2005 consisted of the Federal Debt Held by the Public Net Amortization of Premiums and Discounts Total Interest Expense on Federal Debt Held by the Public Net Amortization of Premiums and Discounts (3,269) (1,814) Total Interest Expense on Intragovernmental Debt Total Interest Expense on Federal Debt Managed by BPD The principal for TIPS is adjusted daily over the life of the security based on the Consumer Price Index for all Urban Consumers. This daily adjustment is an interest expense for the Bureau of the Public Debt. Accrued interest on Federal Debt Held by the Public includes inflation adjustments of $14,512 million and $8,582 million for fiscal years 2006 and 2005, respectively. Accrued interest on Intragovernmental Debt Holdings includes inflation adjustments of $607 million and $419 million for fiscal years 2006 and 2005, respectively. Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt For the Fiscal Years Ended September 30, 2006 and 2005 (Dollars in Millions) Note 5. Fund Balance With Treasury The Fund Balance with Treasury, a non-entity, intragovernmental account, is not included on the Schedules of Federal Debt and is presented for informational purposes. In addition to the individual named above, Dawn B. Simpson, Assistant Director; Cara L. Bauer; Theresa M. Bowman; Erik A. Braun; Dean D. Carpenter; Dennis L. Clarke; Chau L. Dinh; Jennifer L. Henderson; Erik S. Huff; Brent J. LaPointe; Nicole M. McGuire; Jay McTigue; Timothy J. Murray; and Danietta S. Williams made key contributions to this report. | GAO is required to audit the consolidated financial statements of the U.S. government. Due to the significance of the federal debt held by the public to the governmentwide financial statements, GAO has also been auditing the Bureau of the Public Debt's (BPD) Schedules of Federal Debt annually. The audit of these schedules is done to determine whether, in all material respects, (1) the schedules are reliable and (2) BPD management maintained effective internal control relevant to the Schedule of Federal Debt. Further, we test compliance with selected provisions of significant laws related to the Schedule of Federal Debt. Federal debt managed by BPD consists of Treasury securities held by the public and by certain federal government accounts, referred to as intragovernmental debt holdings. The level of debt held by the public reflects how much of the nation's wealth has been absorbed by the federal government to finance prior federal spending in excess of federal revenues. Intragovernmental debt holdings represent balances of Treasury securities held by federal government accounts, primarily federal trust funds such as Social Security, that typically have an obligation to invest their excess annual receipts over disbursements in federal securities. In GAO's opinion, BPD's Schedules of Federal Debt for fiscal years 2006 and 2005 were fairly presented in all material respects and BPD maintained effective internal control relevant to the Schedule of Federal Debt as of September 30, 2006. GAO also found no instances of noncompliance in fiscal year 2006 with selected provisions of the statutory debt limit and debt issuance suspension period laws we tested. As of September 30, 2006 and 2005, federal debt managed by BPD totaled about $8,493 billion and $7,918 billion, respectively. At the end of fiscal year 2006, debt held by the public as a percentage of the U.S. economy is estimated at 36.9 percent, compared to 34.1 percent at the end of fiscal year 2002. Further, certain trust funds (e.g., Social Security) continue to run surpluses, resulting in increased intragovernmental debt holdings. These debt holdings are backed by the full faith and credit of the U.S. government and represent a priority call on budgetary resources. As a result, total gross federal debt has increased 37 percent between the end of fiscal years 2002 and 2006. During fiscal year 2006, a debt issuance suspension period was invoked to avoid breaching the statutory debt limit. On March 20, 2006, legislation was enacted to raise the debt limit by $781 billion to $8,965 billion. This was the fourth occurrence since 2002 that the statutory debt limit had to be raised to avoid breaching the statutory debt limit. During that time, the debt limit has increased more than $3 trillion, from $5,950 billion in 2002 to the current limit of $8,965 billion. Total federal debt increased over each of the last 4 fiscal years. Debt held by the public increased during this 4-year period primarily as a result of annual unified budget deficits. Intragovernmental debt holdings steadily increased during this 4-year period primarily due to excess receipts over disbursements in federal trust funds (e.g., Social Security). |
For many years, the federal government has taken steps to coordinate geospatial activities both within and outside the federal government. In 1953, the Bureau of the Budget first issued Circular A-16, encouraging expeditious surveying and mapping activities across all levels of government and avoidance of duplicative efforts. In 1990, OMB revised Circular A-16 to, among other things, establish the Federal Geospatial Data Committee (FGDC) within Interior to promote the coordinated use, sharing, and dissemination of geospatial data nationwide. Building on that guidance, in 1994 the President issued Executive Order 12906 for the purpose of addressing wasteful duplication and incompatibility of geospatial information, and assigned FGDC the responsibility to coordinate the development of NSDI. In 2002, OMB again revised Circular A-16 to further describe the components of NSDI; clearly define agency responsibilities for acquiring, maintaining, distributing, using, and preserving geospatial data; and to reaffirm FGDC’s role as the interagency coordinating body for NSDI-related activities. The circular established the following five components of NSDI and described how these components were to be implemented. Data themes. Data themes are topics of national significance, such as cadastre, which includes rights and interests in real property and surveys and land use/land cover, which includes land surface features and use. OMB Circular A-16 currently identifies 34 data themes and identifies the “lead” agency or agencies for each theme. Each data theme is to be comprised of one or more electronic data records, known as a dataset. Of the 34 themes, 9 are identified as a “framework” theme —that is, a theme identified in Circular A-16 as being critical for any geospatial application. Standards. Geospatial standards provide common and repeatable rules or guidelines for the development, documentation, and exchange of geospatial datasets. Metadata. Metadata are information about datasets, such as content, source, accuracy, method of collection, and point-of-contact. Metadata are used to facilitate the search of and access to datasets within a data library or clearinghouse, and enable potential users to determine the data’s applicability for their use. National Spatial Data Clearinghouse. The clearinghouse is intended to be a centralized geospatial metadata repository that contains geospatial metadata records from federal agencies, state and local governments, and academic and private sector organizations that can be searched to determine whether needed geospatial data exist and can be shared. Federal agencies are required to identify their existing and planned geospatial investments in the clearinghouse, and search the clearinghouse for cost-saving opportunities before acquiring geospatial data. In 2003, FGDC created the Geospatial One-Stop to provide “one-stop” access to geospatial metadata from a centralized database and search function. In October 2011, the Geospatial One- Stop was retired, and FGDC initiated a pilot project, known as the Geospatial Platform, which was envisioned to provide shared and trusted geospatial data, services, and applications for use by government agencies, their partners, and the public. According to Interior officials, Interior is the managing partner of the Geospatial Platform. As of August 2012, there were approximately 835,000 geospatial metadata records in the central repository, of which about 373,000 were from federal sources. Partnerships. Partnerships are efforts aimed at involving all stakeholders (e.g., federal, tribal, state, local government, and academic institutions) in the development of NSDI. In November 2010, OMB issued supplemental guidance specifically regarding how agencies are to manage data themes.guidance expands upon and clarifies some of the language and responsibilities contained in OMB Circular A-16 in order to facilitate the adoption and implementation of a geospatial asset management capability. To fulfill its responsibilities, FGDC is governed by a steering committee— an interagency decision making body that provides leadership and policy direction in support of the development of NSDI. The Secretary of the Interior chairs the committee; the Vice-Chair is the Chief Architect of the Office of E-Government and Information Technology of OMB. All departments or agencies responsible for geospatial data themes, or that have activities in geographic information or geospatial data collection or use, are required to be members of FGDC. Thirty-two agencies are members of the Steering Committee and are to be represented by their senior agency officials for geospatial information.officials are responsible for overseeing, coordinating, and facilitating their respective agency’s implementation of geospatial requirements, policies, and activities. FGDC is supported by the Office of the Secretariat, which consists of about 10 people located in U.S. Geological Survey (USGS) who do the day-to-day work of supporting, managing, and coordinating the activities of FGDC. The Secretary created the committee as a federal advisory committee under the Federal Advisory Committee Act. services to citizens, to business partners, to employees, and among all levels of government. The act also requires OMB to report annually to Congress on the status of e-government initiatives. In these reports, OMB is to describe the administration’s use of e-government principles to improve government performance and the delivery of information and services to the public. OMB subsequently began initiatives to fulfill the requirements established by these laws: In February 2002, OMB established the Federal Enterprise Architecture, which is intended to facilitate governmentwide improvement through cross-agency analysis and identification of duplicative investments, gaps, and opportunities for collaboration, interoperability, and integration within and across agency programs. The Federal Enterprise Architecture is composed of five “reference models” describing the federal government’s (1) business (or mission) processes and functions, independent of the agencies that perform them; (2) performance goals and outcome measures; (3) means of service delivery; (4) information and data definitions; and (5) technology standards. In March 2004, OMB established multiple “lines of business” to consolidate redundant IT investments and business processes across the federal government. Later, in March 2006, OMB established the Geospatial Line of Business. Each line of business is led by an individual agency and supported by other relevant agencies. Interior is the managing partner for the Geospatial Line of Business and the FGDC Secretariat provides project management support. OMB reports to Congress each year on the costs and benefits of these initiatives. Over the past few years, we have issued a series of reports that have identified federal programs and functional areas where unnecessary duplication, overlap, or fragmentation exists; the actions needed to address such conditions; and the potential financial and other benefits of In particular, we identified opportunities to reduce duplication doing so.and the cost of government operations in several critical IT areas. In our most recent duplication report, we reported that better coordination among federal agencies that collect, maintain, and use geospatial information could help reduce duplication of geospatial investments and provide the opportunity for potential savings of millions of dollars. The duplication report reiterated the need for action among several federal agencies, FGDC, and OMB. While the FGDC had made progress in some areas to improve coordination in geospatial activities, our November 2012 report identified a number of areas in which little progress had been made. For example, FGDC had developed a metadata standard that included descriptive information about a dataset—such as the framework theme to which it relates, the time frame of when the data was collected, and who to contact for more information that facilitates the sharing of geospatial data. FGDC had also established a clearinghouse that allowed users to determine whether the geospatial data (including planned data) they are seeking exist. As noted previously, the clearinghouse consists of a centralized repository that contains geospatial metadatafederal agencies, state and local governments, academic and private- sector organizations; and multiple web-based portals from which the metadata can be searched. However, despite this progress, we found that FGDC had not fully implemented key aspects of activities needed for coordinating investments in geospatial data. First, although the clearinghouse was reported to have been modified in May 2012 to allow agencies to identify their planned investments, as of September 2012, there were no federal agencies using this function because FGDC had not yet completed and shared guidance with agencies on how to do so. Second, FGDC had not fully planned for or implemented a portfolio management approach per OMB guidance. Specifically, we found that FGDC had evaluated the 34 data themes identified in OMB Circular A-16 to determine whether any changes were needed; in August 2011, the Steering Committee proposed consolidating the 34 data themes into 17 themes; FGDC Secretariat officials subsequently stated that FGDC agencies were proposing to eliminate one more theme for a total of 16. We reported that officials further stated that, as of August 2012, lead agencies had been identified for each of the 16 themes. However, at the time, the data themes, lead agencies, and datasets had neither been finalized nor approved, and FGDC had yet to provide guidance to agencies about how to implement the portfolio management approach. While Secretariat officials stated that they had developed a draft implementation plan in November 2011, when we issued our November 2012 report, the plan had not been finalized or approved, and FGDC Secretariat officials were unable, on behalf of FGDC agencies, to provide a time frame for doing so. Third, FGDC’s strategic plan was missing key components and had not been kept up-to-date. Specifically, we found that FGDC’s current plan had been issued in 2004 and included OMB-required components such as (1) a vision statement, (2) three outcome-oriented goals and 13 objectives to be accomplished between 2005 and 2008, and (3) a high-level description of how all but 1 of the 13 objectives were to be achieved. However, the plan did not include components such as needed resources, performance measures for 9 of the 13 objectives, or external factors that could affect the achievement of the plan’s goals and objectives. Further, the plan did not reflect significant initiatives that the FGDC Steering Committee had engaged in—such as the Geospatial Platform—and the time frames for the goals were outdated. As we reported in November 2012, according to FGDC officials, they had not yet fully implemented policies and procedures for coordinating geospatial investments because these efforts had not been made a priority. Instead, FGDC officials had been primarily focused on the development of the Geospatial Platform. As a result, we determined in 2012 that efforts to acquire data were uncoordinated and the federal government acquired duplicative geospatial data. For example, a National Geospatial Advisory Committee representative told us that, at that time, a commercial provider was leasing the same proprietary parcel data to six federal agencies; the Department of Housing and Urban Development, the Department of Homeland Security, the Federal Bureau of Investigation, the Small Business Administration, the Federal Deposit Insurance Corporation, and the Federal Reserve. We concluded that unless FGDC decides that coordinating geospatial investments was a priority, this situation would likely continue. Our November 2012 report also showed that none of the three federal departments in our review—the Departments of Commerce, the Interior, and Transportation—had fully implemented activities needed for effectively coordinating and managing geospatial activities within their respective departments. According to OMB guidance and the executive order, federal departments and agencies that handle geospatial data are to: designate a senior agency official for geospatial information that has departmentwide responsibility, accountability, and authority for geospatial information issues; prepare, maintain, publish, and implement a strategy for advancing geographic information and related geospatial data activities appropriate to their mission, and in support of NSDI strategy; develop a policy that requires them to make their geospatial metadata available on the clearinghouse; make all metadata associated with geospatial data available on the clearinghouse, and use the metadata standard; and adopt internal procedures to ensure that they access the NSDI clearinghouse before they expend funds to collect or produce new geospatial data to determine (1) whether the information has already been collected by others, or (2) whether cooperative efforts to obtain the data are possible. However, while all three of the departments had made their metadata available on the clearinghouse, none of the three federal departments in our review had fully implemented all of the other important activities (see table 1). Department officials stated that the lack of progress in these activities was due, in part, to a lack in designating priorities. This lack of priority had contributed to the acquisition of duplicative geospatial data. For example, three separate federal agencies were independently acquiring road centerline data. We concluded in November 2012 that unless the federal departments decided that completing activities to better coordinate geospatial investments was a priority, this situation would likely continue. The three theme-lead agencies in our review—the National Oceanic and Atmospheric Administration (NOAA), USGS, and the Bureau of Transportation Statistics (BTS) had implemented some but not all of the geospatial activities necessary to ensure the national coverage and stewardship of specific geospatial data themes in our review. According to OMB, theme-lead agencies are to: designate a point of contact who is responsible for the development, maintenance, coordination, and dissemination of data using the clearinghouse; prepare goals relating to the theme that support the NSDI strategy, and as needed, collect and analyze information from user needs and include those needs in the theme-related goals; develop and implement a plan for the nationwide population of the data theme that includes (1) the development of partnership programs with states, tribes, academia, the private sector, other federal agencies, and localities that meet the needs of users; (2) human and financial resource needs; (3) standards, metadata, and the clearinghouse needs; and (4) a timetable for the development for the theme; and create a plan to develop and implement theme standards. However, we found that while all three of the theme-lead agencies had made some progress, none of them had implemented all of these important activities (see table 2). Theme-lead agency officials attributed the lack of progress in implementing these activities to competing priorities, among other things. As a result, efforts to acquire data were uncoordinated and the federal government acquired duplicative geospatial data. For example, according to a National Geospatial Advisory Committee official, several federal agencies collected, purchased, or leased address information in a noncoordinated fashion. We concluded in November 2012 that unless the federal agencies were to decide that completing activities to coordinate geospatial investments was a priority, the potential for duplication would continue to exist. OMB has oversight responsibilities for federal IT systems and acquisition activities—including geographic information systems—to help ensure their efficient and effective use. According to OMB Office of E- Government staff members, OMB relies primarily on the annual budget process to identify potentially duplicative geospatial investments. Specifically, OMB requires federal departments and agencies to provide information related to their IT investments (called exhibit 53s) and capital asset plans and business cases (called exhibit 300s). However, as we reported in November 2012, OMB’s Office of E- Government staff members acknowledged that these two sources may not in all cases provide the necessary information to allow OMB to identify potentially duplicative investments or accurately quantify the amount of federal dollars spent on geospatial datasets for three primary reasons. First, according to these staff members some federal agencies may not classify investments in geospatial data as “information technology” (such as satellites), meaning that they would not be captured in exhibit 53s. OMB staff members stated that agencies are to determine what qualifies as an IT investment and stated that there are variations in the way that agencies interpret the definition of IT. Second, agencies do not always appropriately classify geospatial investments as “geospatial services” using the Federal Enterprise Architecture codes. Our analysis of the fiscal year 2013 exhibit 53s for the three departments that we reviewed showed that only 5 of their 24 key datasets—1 of NOAA’s 6 geodetic control datasets and 4 of USGS’s 7 hydrography datasets—were included in the departments’ exhibit 53s. Further, only 1 of these investments was identified with the geospatial services code, as required by OMB’s fiscal year 2013 budget formulation guidance. Third, given that the geospatial data may be only one component of an IT investment or capital asset, even if it were included in the agencies’ exhibit 53s or 300s, we determined that OMB would have difficulties in identifying the geospatial component, and the associated dollars, without having a detailed discussion with individuals responsible for each investment. OMB staff members stated that, as a result, they did not have a complete picture of how much money is being spent on geospatial investments across the federal government because, as noted, what was being reported may not have captured all geospatial spending, and the data had not been reliable. We also reported in November 2012 that according to OMB, although eliminating duplication in geospatial investments was important, OMB’s recent efforts had focused on other commodity IT areas with higher spending and cyber security ramifications. As a result, OMB had not yet established a way to collect complete and reliable information about geospatial investments because this had not been a priority. We concluded that, unless OMB decides that coordinating geospatial investments is designated as a priority, duplicative investments would likely continue. Our November 2012 report made numerous recommendations aimed at improving coordination and reducing duplication of geospatial data. Interior and Commerce generally agreed with our recommendations; Transportation neither agreed nor disagreed. First, we recommended that the Secretary of the Interior, as FGDC Chair, direct the FGDC Steering Committee to: establish a time frame for completing a plan to facilitate the implementation of OMB’s November 2010 management guidance, and develop and implement the plan within the established time frame; develop and implement guidance for identifying planned geospatial investments in the Geospatial Platform, and establish a time frame for doing so; and establish a time frame for creating and updating a strategic plan to improve coordination and reduce duplication, and create and implement the plan within the established time frame. The plan, at a minimum, should include (1) a vision statement for the NSDI; (2) outcome-oriented goals and objectives that address all aspects of the NSDI; (3) a description of how the goals and objectives are to be achieved, including a description of the resources needed to achieve the goals and objectives and how FGDC is to work with other agencies to achieve them; (4) performance measures for achieving the stated goals; and (5) external factors that could affect the achievement of the goals and objectives. In addition, we recommended that the Secretaries of Commerce, the Interior, and Transportation implement the relevant executive order requirements and OMB guidance that apply to their departments and agencies: designate a senior agency official with departmentwide accountability, authority, and responsibility for geospatial information issues; prepare, maintain, publish, and implement a strategy for advancing geographic information and related geospatial data activities appropriate to its mission; develop a policy that requires the department to make its geospatial metadata available on the clearinghouse; develop and implement internal procedures to ensure that the department accesses the NSDI clearinghouse before it expends funds to collect or produce new geospatial data to determine (1) whether the information has already been collected by others and (2) whether cooperative efforts to obtain the data are possible; prepare goals relating to all datasets within the relevant theme that develop and implement a plan for the nationwide population of the relevant theme that addresses all datasets within the theme and that includes (1) the development of partnership programs with states, tribes, academia, the private sector, other federal agencies, and localities that meet the needs of users; (2) human and financial resource needs; (3) standards, metadata, and the clearinghouse needs; and (4) a timetable for the development for the theme; and create and implement a plan to develop and implement relevant theme standards. Further, we recommended that the Director of OMB develop a mechanism, or modify existing mechanisms, to identify and report annually on all geospatial-related investments, including dollars invested and the nature of the investment. In the year since our report was issued, FGDC, OMB, and selected agencies have made some progress in addressing recommendations. For example, in September 2013, FGDC issued guidance directing all FGDC departments to identify planned geospatial investments using the Geospatial Platform. In May 2013, OMB issued guidance to agencies on how to document information on the nature of investments, such as using common standards, specifications, and formats developed by the geospatial community, which would allow others to determine the fitness of the data for their needs. However, because the implementation of this new guidance is still dependent on the use of exhibit 53s and 300s for reporting past, present, and future costs, it is unclear the extent to which federal agencies, OMB, or others will effectively be able to identify how much federal funding is being spent on geospatial systems and data. In addition, the federal departments we reviewed have taken some steps to implement our recommendations. For example, the Departments of Commerce, the Interior, and Transportation have all begun preparing, maintaining, publishing, and implementing strategies for advancing geographic information and related geospatial data activities appropriate to their missions. In addition, the three agencies with theme-lead responsibilities that we reviewed have begun implementing our recommendations. For example, NOAA, USGS, and BTS have all taken some steps to create a plan to develop and implement relevant theme standards. However, until a comprehensive national strategy is put in place and federal departments and agencies establish and implement the policies, procedures, and plans to coordinate their geospatial activities as we recommended, the vision of the NSDI to improve the coordination and use of geospatial information will likely not be fully realized and duplicative investments will likely continue. Further, until OMB establishes a way to obtain reliable information about federal geospatial investments as we recommended, OMB will not be able to readily identify potentially duplicative geospatial investments. In summary, it was slightly over a year ago that we reported that the key players in ensuring coordination on geospatial data investments—FGDC, federal departments and agencies, and OMB—had not fully implemented policies and procedures for coordinating geospatial investments because these efforts were not made a priority. As a result, efforts to acquire data were uncoordinated and the federal government was acquiring duplicative geospatial data. At that time, we noted that unless OMB, FGDC, and federal departments and agencies decide that coordinating geospatial investments is a priority, this situation would likely continue. Now, a year later, there has been some progress in improving policies and procedures for coordinating the geospatial investments. However, much remains to be done to implement and enforce the policies and to achieve cost savings to the federal government. Until FGDC, federal departments and agencies, and OMB decide that investments in geospatial information are a priority, these investments will remain uncoordinated, and the federal government will continue to acquire duplicative geospatial information and waste taxpayer dollars. Chairman Lamborn, Ranking Member Holt, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staffs have any questions about this testimony, please contact me at (202) 512-9286 or at [email protected]. Individuals who made key contributions to this testimony are Colleen Phillips (assistant director), Kaelin Kuhn, Nancy Glover, Jamelyn Payan, and Jessica Waselkow. Description Pertain to, or describe, the dynamic processes, interactions, distributions, and relationships between and among organisms and their environments. Past, current, and future rights and interests in real property including the spatial information necessary to describe geographic extents. Rights and interests are benefits or enjoyment in real property that can be conveyed, transferred, or otherwise allocated to another for economic remuneration. Rights and interests are recorded in land record documents. The spatial information necessary to describe geographic extents includes surveys and legal description frameworks such as the Public Land Survey System, as well as parcel-by-parcel surveys and descriptions. Does not include federal government or military facilities. Meteorological conditions, including temperature, precipitation, and wind, that characteristically prevail in a particular region over a long period of time. Weather is the state of the atmosphere at a given time and place, with respect to variables such as temperature, moisture, wind velocity, and barometric pressure. Features and characteristics of a collection of places of significance in history, architecture, engineering, or society. Includes national monuments and icons. The measured vertical position of the earth surface and other landscape or bathymetric features relative to a reference datum typically related to sea level. These points normally describe bare earth positions but may also describe the top surface of buildings and other objects, vegetation structure, or submerged objects. Elevation data can be stored as a three-dimensional array or as a continuous surface such as a raster, triangulated irregular network, or contours. Elevation data may also be represented in other derivative forms such as slope, aspect, ridge and drainage lines, and shaded relief. Collection of control points that provide a common reference system for establishing coordinates for geographic data. Geographically-referenced data pertaining to the origin, history, composition, structure, features, and processes of the solid Earth, both onshore and offshore. Includes geologic, geophysical, and geochemical maps, stratigraphy, paleontology, geochronology, mineral and energy resources, and natural hazards such as earthquakes, volcanic eruptions, coastal erosion, and landslides. Does not include soils. Political, governmental, and administrative (management) type boundaries that are used to manage people and resources. Includes geopolitical boundaries (county, parish, state, city, etc), tribal boundaries, federal land boundaries and federal regions, international boundaries, governmental administrative units such as congressional districts, international lines of separation, limits, zones, enclaves/exclaves and special areas between States and dependencies as well as all jurisdictional offshore limits within U.S. sovereignty. Boundaries associated with natural resources, demography, and cultural entities are excluded and can be found in the appropriate subject themes. Georeferenced images of the Earth’s surface, which have been collected via aerial photography or satellite data. Orthoimagery is prepared through a geometric correction process known as orthorectification to remove image displacements due to relief and sensor characteristics, allowing their use as base maps for digital mapping and analyses in a geographic information system. Specific imagery data sets created through image interpretation and classification, such as a land cover image, can be found under themes specific to the subject matter. Refers collectively to natural and man-made surface features that cover the land (Land Cover) and to the primary ways in which land cover is used by humans (Land Use). Examples of Land Cover may be grass, asphalt, trees, bare ground, water, etc. Examples of Land Use may be urban, agricultural, ranges, and forest areas. Description The spatial representation (location) of real property entities, typically consisting of one or more of the following: unimproved land, a building, a structure, site improvements and the underlying land. Complex real property entities (aka “facilities”) are used for a broad spectrum of functions or missions. This theme focuses on spatial representation of real property assets only and does not seek to describe special purpose functions of real property such as those found in the Cultural Resources, Transportation, or Utilities themes. Depicts the geography and attributes of the many kinds of soils found in the landscape at both large and small map scales. A living dynamic resource providing a natural medium for plant growth and habitat for living organisms, soil recycles nutrients and wastes, stores carbon, and purifies water supplies. Soil has distinct layers (called ‘horizons’) that, in contrast to underlying geologic material, are altered by the interactions of climate, landscape features, and living organisms over time. Means and aids for conveying persons and/or goods. The transportation system includes both physical and non-physical components related to all modes of travel that allow the movement of goods and people between locations. Means, aids, and usage of facilities for producing, conveying, distributing, processing or disposing of public and private commodities including power, energy, communications, natural gas, and water. Includes subthemes for Energy and Communications. Interior hydrologic features and characteristics, including classification, measurements, location, and extent. Includes aquifers, watersheds, wetlands, navigation, water quality, water quantity, and groundwater information. Features and characteristics of salt water bodies (i.e. tides, tidal waves, coastal information, reefs) and features and characteristics that represent the intersection of the land with the water surface (i.e. shorelines), the lines from which the territorial sea and other maritime zones are measured (i.e. baseline maritime) and lands covered by water at any stage of the tide (i.e. outer continental shelf ), as distinguished from tidelands, which are attached to the mainland or an island and cover and uncover with the tide. 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. | The federal government collects, maintains, and uses geospatial information--information linked to specific geographic locations--to support many functions, including national security and disaster response. In 2012, the Department of the Interior estimated that the federal government was investing billions of dollars on geospatial data annually, and that duplication was common. In November 2012, GAO reported on efforts to reduce duplicative investments in geospatial data, focusing on OMB, FGDC, and three agencies: the Departments of Commerce, the Interior, and Transportation. This statement summarizes the results of that November 2012 report on progress and challenges in coordinating geospatial information and includes updates on the implementation of recommendations made in that report. The President and the Office of Management and Budget (OMB) have established policies and procedures for coordinating investments in geospatial data, however, in November 2012, GAO reported that governmentwide committees and federal departments and agencies had not effectively implemented them. The committee that was established to promote the coordination of geospatial data nationwide--the Federal Geographic Data Committee (FGDC)--had developed and endorsed key standards and had established a clearinghouse of metadata. GAO found that the clearinghouse was not being used by agencies to identify planned geospatial investments to promote coordination and reduce duplication. In addition, the committee had not yet fully planned for or implemented an approach to manage geospatial data as related groups of investments to allow agencies to more effectively plan geospatial data collection efforts and minimize duplicative investments, and its strategic plan was missing key elements. Other shortfalls have impaired progress in coordinating geospatial data. Specifically, none of the three federal departments in GAO's review had fully implemented important activities such as preparing and implementing a strategy for advancing geospatial activities within their respective departments. Moreover, the agencies in GAO's review responsible for governmentwide management of specific geospatial data had implemented some but not all key activities for coordinating the national coverage of specific geospatial data. While OMB has oversight responsibilities for geospatial data, GAO reported in November 2012 that according to OMB staff, the agency did not have complete and reliable information to identify potentially duplicative geospatial investments. GAO also reported that FGDC, federal departments and agencies, and OMB had not yet fully implemented policies and procedures for coordinating geospatial investments because these efforts had not been a priority. As a result, efforts to acquire data were uncoordinated and the federal government acquired duplicative geospatial data. For example, a National Geospatial Advisory Committee representative stated that a commercial provider leases the same proprietary parcel data to six federal agencies. GAO concluded that unless the key entities determined that coordinating geospatial investments was a priority, the federal government would continue to acquire duplicative geospatial information and waste taxpayer dollars. GAO is making no new recommendations in this statement. In November 2012, GAO recommended that to improve coordination and reduce duplication, FGDC develop a national strategy for coordinating geospatial investments; federal agencies follow federal guidance for managing geospatial investments; and OMB develop a mechanism to identify and report on geospatial investments. Since that time, FGDC and several agencies have taken some steps to implement the recommendations. However, additional actions are still needed. |
In order for students attending a college to receive Title IV funds, a college must, among other requirements, be (1) licensed or otherwise legally authorized to provide higher education by a state, (2) accredited by an agency recognized for that purpose by the Secretary of the U.S. Department of Education (Education), and (3) deemed eligible and certified to participate in federal student aid programs by Education. This is commonly referred to as the triad. Under the Higher Education Act, Education does not determine the quality of higher-education institutions or their programs; rather, it relies on recognized accrediting agencies to do so. As part of its role in the administration of federal student aid programs, Education determines which institutions of higher education are eligible to participate in Title IV programs. Education is responsible for overseeing college compliance with Title IV laws and regulations and ensuring that only eligible students receive federal student aid. As part of its compliance monitoring, Education relies on department employees and independent auditors of schools to conduct program reviews and audits of colleges. Moreover, for-profit colleges participating in federal student aid programs must enter a program participation agreement with Education that, among other things, requires the college to derive not less than 10 percent of revenues from sources other than federal student aid (known as the “90/10 Rule”). According to Education, over 2,000 for-profit colleges participate in Title IV programs. In August 2009, we reported that students who attended for-profit colleges were more likely to default on federal student loans than were students from other colleges. Additionally, our August 2010 testimony on for-profit college recruiting practices found that some colleges failed to provide clear information about program duration and cost and exaggerated applicants’ potential salary after graduation, and made other deceptive statements. The Stafford Loans are the largest source of federal financial aid available to postsecondary students. In academic year 2009-10, 35 percent of undergraduate students participated in the program, which provided an estimated $56.1 billion dollars to eligible students through subsidized and unsubsidized loans. To qualify for a subsidized loan, students must have a financial need as determined under federal law. A student’s financial aid need is determined by a formula that subtracts a student’s expected family contribution (EFC) and certain other estimated financial assistance from their total cost of attendance. In contrast to subsidized loans, students can receive unsubsidized loans to pay for educational expenses regardless of their financial need. Depending on their educational expenses and level of financial need, a student may be eligible to receive both subsidized and unsubsidized loans, which is generally referred to as a combined loan. Student eligibility for grants and subsidized student loans is based on student financial need. In addition, in order for a student to be eligible for Title IV funds, the college must ensure that the student meets the following requirements, among others: (1) has a high-school diploma or a recognized equivalent (such as a General Educational Development certification), or completes a secondary-school education in a home-school setting as recognized under state law, or is determined to have an “ability-to-benefit” from the education by a method approved by Education or a state, or the college; (2) is working toward a degree or certificate in an eligible program; and (3) is maintaining satisfactory academic progress once in college. Completion of the Free Application for Federal Student Aid (FAFSA) is the first step in securing federal financial assistance. After Education processes an applicant’s FAFSA, a report is sent to the applicant or made available online. This report includes the applicant’s EFC, the types of federal aid for which the applicant qualifies, and information about any errors—such as questions the applicant did not complete—that Education identified during FAFSA processing. Colleges send applicants award letters after admission, providing students with types and amounts of federal, state, and institutional aid, should the student decide to enroll. As required by law, a college must make available upon request to prospective and enrolled students a statement of any refund policy with which the college must comply; the requirements for the treatment of Title IV funds when a student withdraws; and the requirements and procedures for officially withdrawing from the college. In addition, Education guidance states that a student should be able to estimate how much federal student aid he or she will retain and how much he or she will return upon withdrawing. Finally, a student or prospective student should be informed that if he or she withdraws, charges that were previously paid by federal student aid funds might become a debt that the student will be responsible for paying. Once students have completed or withdrawn from colleges, the Higher Education Act requires that schools provide exit counseling (which may be provided electronically), typically within 30 days, for all students with federally guaranteed loans. According to Education, this counseling is a critical requirement in explaining to borrowers both their rights and responsibilities. In requiring students to be advised of both the wide array of repayment options available and the negative consequences of default, such as adverse credit reports, delinquent debt collection, and litigation, the law seeks to facilitate repayment and prevent defaults. In addition, during the exit interview, colleges must require that the student submit to the institution the following information: the borrower's expected permanent address; the name and address of the borrower's expected employer; the address of the borrower's next of kin; and any corrections needed in the institution's records relating to the borrower's name, address, social security number, references, and driver's license number. The experience of each of our undercover students is unique and cannot be generalized to other students taking courses offered by the for-profit colleges we tested or to other for-profit or nonprofit colleges. During the course of our testing at the selected colleges, we documented our observations related to the following phases of the student experience: enrollment, cost, financial aid, course structure, substandard student performance, withdrawal, and exit counseling. In addition, on the basis of our observations for the courses we tested, 8 of the 15 colleges appeared to follow existing policies related to academic dishonesty, exit counseling, and course grading standards. At the 7 remaining colleges, we found mixed results. For example, at least one issue was identified in which college staff or an instructor appeared to act in a manner inconsistent with college policies, federal regulations, or course grading standards; whereas others acted in a manner consistent with such policies. Of the 7 colleges, as discussed below, instructors at 2 colleges appeared to act in a manner inconsistent with college policies regarding academic dishonesty, instructors at 4 colleges appeared to act in a manner inconsistent with course grading standards, and 3 colleges appeared to act in a manner inconsistent with federal regulations on exit counseling. More specific details on Colleges 1 through 15 can be found in table 2. Enrollment: We attempted to enroll undercover students at 15 colleges, and were successful in enrolling at 12. Two colleges (Colleges 13 and 14) declined our student’s request for enrollment based on insufficient proof of high-school graduation. In both cases, we attempted to enroll using a fictitious home-school diploma, but were told that the college would not accept our home-school credentials. We also attempted to apply using a fictitious diploma from a closed high school, but were rejected becausethe school was considered to lack accreditation. College 15 stated that it did not accept any home-school credentials but accepted our fictitious closed-school diploma and allowed us to begin class, but rescinded our acceptance after 1 week of classes, stating a lack of high-school accreditation as the reason for expulsion. We were not billed for the 1 week of class that we finished, nor did the school appear to receive any student loans on our behalf. In all 3 instances where our fictitious students were ultimately rejected, we were encouraged to pursue a GED in order to be allowed to enroll at the college. At College 10, our student requested part-time enrollment, meaning that the student would take two courses per term. However, we found three courses that were fully accessible to our student through the school’s online student portal website over our single enrollment term. The third class was clearly noted in our activity and grade report as being scheduled for completion during that term. Once our student had completed the class, we were informed by college staff that by accessing the class, the student had effectively converted to being a full-time student. We were further told that our student would be charged for full- time attendance, although the school had only processed financial aid paperwork for the student as a part-time student. All 12 accepted students did not select any elective coursework during their enrollment period. Students were automatically enrolled in courses selected by the school by their schools’ administrative staff and were informed of course start and end dates as they were enrolled. However, College 4 scheduled self-paced courses for our student on a revolving enrollment basis, wherein the student was enrolled in as many as four courses concurrently with the requirement that all coursework be completed and submitted prior to the specific course end date. College personnel stated that they could not provide us with an advance schedule including course start and end dates; they could only provide us with the start and end dates for those courses in which we were currently enrolled or a list of the courses that are required to complete a portion of our selected degree program (without start and end dates). For one class in which we enrolled at this college, the student’s advisor provided us with an incorrect course end date, which resulted in our student missing a key deadline to submit assignments. Cost and Financial Aid: All of our students were eligible for federal student aid in the form of subsidized and unsubsidized student loans and submitted the appropriate documentation to the school in support of this (i.e., FAFSA). Only 10 of our students actually received federal loan disbursements, according to documentation we received; the other 2 students were expelled without the college requesting or receiving any federal student aid funds (Colleges 3 and 12). In 8 of these 10 instances (Colleges 1, 2, 4, 5, 6, 9, 10, and 11), we observed that the colleges received at least one student aid disbursement, of which all or a portion was refunded to Education upon our early withdrawal from our program of study. In the remaining 2 instances (Colleges 7 and 8), the student aid disbursements were fully kept by the school and applied toward the student’s cost of attendance. In no instances did we observe that a college collected federal student aid funds after the withdrawal date of any of our students (that was not fully refunded immediately). However, one college (College 4) told our student that they had not ever received any financial aid funding, even though the student was eligible and had received documentation from their lender indicating that the school had drawn down several thousand dollars of aid. The college did not respond to inquiries regarding this discrepancy, nor did they respond to requests for detailed information regarding the student’s overall cost of attendance. Our students took 31 classes in total at an average cost of $1,287 per class. These costs included such items as tuition, books, and technology fees. Because our students withdrew early from their programs of study, the cost per course may not reflect what the average cost per course would be if the student had completed the full program. Some costs, such as technology fees, may be charged to the student as a lump sum at the start of the program, rather than spread over its lifetime. In addition, one college (College 7) provides a laptop for each student at the time of enrollment, the cost of which is charged to the student. When we specifically told our enrollment advisor that we did not want the college to provide us with a laptop, we were asked to fill out the “laptop agreement form” anyway. When we did, our student was shipped a laptop without further notification or explanation prior to shipping. When we asked about returning it and expressed concern about potentially expensive shipping costs associated with the return, we did not receive a response. One of the colleges we tested (College 6) did not require our undercover student to pay any out-of-pocket costs; all our coursework at this college was covered by student loans. Table 1 contains information on the total costs incurred by each student during their attendance period, made up of subsidized student loans, unsubsidized student loans, and out-of-pocket costs. Total costs of attendance for individual students ranged from $45 to $5,412. Subsidized and unsubsidized student loan amounts represent the total loan amounts accepted by the college on each student’s behalf after any refunds associated with our early withdrawal. Course Structure: The assignments and course structure were similar at all 12 tested schools. Since our students were just starting their respective programs, most classes were introductory in nature, such as Introduction to Business, Introduction to Computer Software, Keyboarding, and Learning Strategies and Techniques. Individual courses ranged in length from 4 weeks to 11 weeks, and our students took from 1 to 4 courses concurrently. Since we attended online courses only, most, if not all, interaction with instructors and other students occurred through the school’s online student portal software, including submission of coursework and later receipt of related feedback. Coursework generally consisted of (1) online discussion forum postings, both responses to original questions posed by the instructor and responses to fellow students; (2) written assignments, generally essays of varying lengths on course-specific topics; (3) skills exercises, such as keyboarding tests or specific computer-application exercises; and (4) multiple-choice quizzes and exams. Some courses also included a “participation” grade, which often included considerations for attendance, completion of ungraded exercises, and attendance at real-time chats or seminars. These real-time chats and seminars, when they occurred, were conducted either through written or audio chats, and allowed for full interaction between the student, the instructor, and peers. At the beginning of all classes, the student was provided with a course syllabus, which outlined the basic purpose and structure of the course, as well as some grading information and course expectations. During enrollment, instructors interacted with our students through mechanisms such as providing postings in the course’s online discussion forums, providing direct feedback on specific assignments through the course e- mail system or gradebook, and providing reminders of assignment due dates or other assignment-related guidance to all students through the course e-mail system. Substandard Performance: While all 12 enrolled students engaged in behaviors consistent with substandard academic performance, each instructor in each class responded to such substandard performance differently. The behaviors our students engaged in included a combination of the following: a failure to attend class and submit assignments, submission of incorrect or unresponsive assignments, or both, and plagiarism. Detailed information on the substandard performance can be found in table 2, but highlights include the following: Examples of Instructor or College Behavior in Accordance with Policies or Standards At College 1, our undercover student logged in to class but did not submit any assignments or participate in discussions. Her instructor repeatedly tried to contact the student through class and personal contact information to provide help and allow for submission of missed assignments. When the student refused to commit to completing assignments, the instructor locked the student out of class. One instructor at College 5 awarded our undercover student a failing grade on an assignment due to a technological failure which prevented the instructor from seeing the student’s correctly submitted assignment. However, when contacted by the student about the discrepancy, the instructor promptly regraded all affected assignments and provided new feedback. College 3 had a conditional admittance policy stating that students will be expelled by the school, with no financial obligation, for failing to maintain a 65 percent average during the first 5 weeks of the program. Our student did not meet the conditional admittance criteria, as her grades were below the 65 percent average at the 5-week mark, and was expelled by the college in accordance with this policy. Examples of Instructor or College Behavior Not in Accordance with Policies or Standards At College 4, our student submitted work in one class that did not meet the requirements of the assignment (such as photos of political figures and celebrities in lieu of essay question responses). The student further failed to participate in required real-time chat sessions. The instructor did not respond to requests for grade details and some substandard submissions appeared to have no effect on the student’s grade, which ultimately resulted in the student passing the class. According to College 6’s policies, students caught cheating will receive no credit on the first dishonest assignment and will be removed from class on a second. Our undercover student consistently submitted plagiarized material, such as articles clearly copied from online sources or text copied verbatim from a class textbook. For the first plagiarized assignment, the instructor told the student to paraphrase, but gave full credit. The instructor gave no credit on two additional plagiarized assignments. The student continued to submit plagiarized work, but the instructor did not note the plagiarism and gave credit for the work. The student received a failing grade for the class, but no action appeared to have been taken by the instructor or college related to the academic misconduct, which appeared to be inconsistent with the college policy on academic dishonesty. Our undercover student at College 10 took two classes in which she was awarded points for assignments that she did not complete, in violation of grading standards for the class. In one class, the student submitted only 2 of 3 required components of the final project, but received full credit for the assignment, resulting in an overall passing grade for the class. In the second class, the student received full credit for assignments that failed to meet technical requirements, including (1) submission length, (2) use of proper software tools, or (3) citation format and accuracy. The student also received full credit for an assignment which had already been submitted in another class and contained a clear notation that it was prepared for the other class. However, the student received a failing grade for this class on the basis of total grades received on all assignments. Withdrawal: Generally, our students who were not expelled for performance or attendance reasons were able to withdraw from their respective colleges without incident. At 3 of the tested schools (Schools 3, 8, and 12), our students were expelled for failure to meet college policies; once for failure to meet conditional acceptance criteria, once for nonattendance, and once for academic performance issues. At the remaining 9 colleges, we requested to be withdrawn. At 8 of the 9 colleges, this withdrawal request was handled without incident. However, one college (College 4) never acknowledged our request to withdraw and instead eventually expelled us for nonattendance nearly a month later. Such a delay may violate federal regulations, which require that the college use the date that the student began the withdrawal process or provided notification or intent to withdraw as the official withdrawal date. One college (College 10) provided our student’s information to a collections agency before providing us with a final bill. When we inquired, college personnel stated that this is how they handle all student accounts. Exit Counseling: Most of our students that received student loans received exit counseling in a timely manner in accordance with federal law. Federal law and regulations dictate that after a student with federal loans has completed or withdrawn from a college, the college must provide exit counseling, typically within 30 days. Students with federal loans that withdraw or are expelled prior to their expected graduation date may receive a disbursement of student loans that would need to be refunded by the college to Education in accordance with the school’s stated Title IV Refund Policy. Two of our three expelled students received no federal student loans and therefore their colleges were not required to provide federally mandated exit counseling (Colleges 3 and 12). Two additional students received disbursements of student loans that were fully refunded to Education. Although it is unclear from statute whether exit counseling is required in this situation, one college provided exit counseling (College 1) and one did not (College 4). Of the 8 students who received disbursements of federal student aid that were applied toward their educational expenses, 5 received the federally mandated exit counseling from their colleges in a timely manner, generally in the form of a website or a short written document. Two of these colleges (Colleges 5 and 7) provided additional follow-up letters in the months following the original exit counseling. The remaining 3 students (Colleges 6, 10, and 11) received no exit counseling. When we inquired with one of these schools (College 10) about exit counseling, school staff told us that the exit counseling had been provided during the entrance interview. Because the regulations concerning exit counseling specifically state that it must be conducted shortly before or after withdrawal, this practice would be inconsistent with federal law. We have referred the names of the colleges that did not provide exit counseling to the Department of Education. Table 2 contains details about our undercover testing at the 15 colleges that we tested. Specifically, for each college, the table includes information about the program in which the student was enrolled; the time frame for attendance; the student’s final eligibility for student aid; the student’s substandard behavior scenario(s); observations on college responses to substandard behavior scenario(s); final grades; exit counseling; and any college policies specifically relevant to the college’s actions. The names of the classes each student took have been generalized to protect the identities of the 15 tested schools. A “D-minus” is considered the minimum passing grade for each class. 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 relevant congressional committees and the Department of Education. This report will also be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions about this report or need additional information, please contact me at (202) 512- 6722 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs can be found on the last page of this report. Because of your interest in the student experience at for-profit colleges, we agreed to conduct undercover testing by enrolling in online classes under degree-granting programs. We selected 15 for-profit colleges and, once enrolled, engaged in behaviors consistent with substandard academic performance. As part of an undercover investigation, our tests were designed to obtain observations from entities that were unaware of our true identities. However, there exists a possibility that tested entities were able to determine that our students were fictitious and therefore altered their behavior based on the assumption that they were under observation. In order to determine the population of colleges eligible for selection, we queried the publicly available Integrated Postsecondary Education Data System (IPEDS), the core postsecondary education data collection program for the National Center for Education Statistics (NCES) to identify schools meeting the following characteristics: (1) U.S. only; (2) Title IV Participating; and (3) 4-year or above private for-profit, 2-year or above private for-profit, or less than 2-year private for-profit. From this query, we identified 2,770 institutions at which 1,804,246 students were enrolled in fall 2008. Because IPEDS data are sometimes reported on a per-campus basis, it is possible for a parent college to have multiple listings, and therefore these 2,770 records do not represent 2,770 different colleges. To identify the parent college, we used a 15-character name-based summarization, resulting in 1,346 parent colleges. To conduct our work, we tested 15 colleges, selected in three stages. In determining which colleges to test, we used the following enrollment and program logistical requirements: (1) the selected college must allow students to complete online-only courses in pursuit of an associate’s or bachelor’s degree; (2) the expected enrollment period (one term, as defined by the college) needed to be limited in length to no more than 10 weeks; and (3) the selected college must allow students to enroll over the phone or Internet. Since, IPEDS does not contain information on these college characteristics, during each stage of the selection, allowances were made to take into account the possibility of selecting a college that could not be tested. A determination as to whether the college offers online courses in pursuit of a degree was made based on queries of the respective colleges’ websites. Identification of the colleges’ expected enrollment period was done through online or telephone inquiries. Determination as to whether the college allowed phone or Internet enrollment was made by attempting to enroll. First, we selected the 5 largest for-profit colleges, by student population, based on student enrollments for fall 2008. For this purpose, we used the parent college-level summarization of campus-level data. In total, these 5 colleges represented 654,312 of the 1,804,246 students (36 percent) and 325 of the 2,770 campuses reporting for fall 2008 (12 percent). All 5 colleges were further found to offer online-only coursework in pursuit of a degree, with limited enrollment period lengths and online and telephone enrollments, and were therefore fully eligible for testing. Next, we selected 1 for-profit college based on unsolicited allegations received by GAO. We received 94 unique unsolicited allegations of misconduct at for-profit colleges between June 10, 2010, and October 30, 2010. We selected the college that had the most specific allegations of misconduct that had not already been selected under the first part of this selection methodology. This college met all the logistical requirements for selection. We considered 1 other for-profit college based on allegations received, but did not select it for testing due to logistical issues we identified as an impediment to testing (i.e., lack of online-only coursework). Finally, we selected the remaining 9 for-profit colleges using a systematic selection process. Although the selection in each of the first two stages was done at the college level, the selection in the third stage was done at the campus level. For the selection of the remaining 9 colleges, we randomly sampled from the population of 2,770 campuses that were neither selected nor eliminated due to known logistical issues through the previous two selection methods and had Fall 2008 enrollment of at least one student, and in which the campus (as reported to IPEDS), served as the selection unit. Because of the potential that colleges selected randomly would not meet logistical requirements, we selected a sample of 150 campuses to increase the likelihood that 9 testable colleges would be selected. Of the 150 campuses, only 24 were found to offer online-only coursework in pursuit of a degree. Each of these 24 campuses was associated with a different parent college. Additional phone-based research was conducted on these 24 to verify conformity with logistical requirements. Based on that research, a further 8 colleges were removed for reasons including: (1) term length in excess of 10 weeks; (2) physical classroom attendance requirements; (3) college would not provide required logistical information without in-person interviews; (4) infeasible program start date; and (5) requirement for prospective students to submit field-specific certification credentials. To select the 9 colleges from the remaining 16, we contacted all 16 colleges on November 23, 2010, to determine the next available start date for an online-only degree-granting program. We then selected the 9 colleges with the soonest start dates. During the course of testing, 2 of these selected colleges were replaced with the next available schools (by start date) as a logistical consideration. At each of the 15 selected colleges, we attempted to enroll using fictitious identities and one or two possible fictitious pieces of evidence of high- school graduation–a home-school diploma or a diploma from a closed high school. If the student’s application at any particular school was denied using both pieces of fictitious graduation documentation, we took no further action. We attempted to enroll in degree-granting programs that were expected to include objectively-graded coursework (such as multiple-choice tests), such as business, medical billing, and paralegal studies programs. All fictitious students we successfully enrolled in for- profit colleges participated in degree programs that did not allow for elective course selection during the first term; our fictitious students took whatever classes the college required. We enrolled in each college for approximately one term, as defined by the college. To engage in behaviors consistent with substandard academic performance, we used one or more of the following strategies for each student: (1) failure to attend class, (2) failure to submit assignments, (3) submission of objectively incorrect assignments (e.g, submitting incorrect answers on multiple-choice quizzes), (4) submission of unresponsive assignments (e.g., submitting pictures when prompted to submit an essay), and (5) submission of plagiarized assignments. We documented the college’s and instructor’s response to these behaviors (as applicable), including any failure to follow established college policies as related to academic performance or academic misconduct. We did not evaluate the relative academic rigor of courses or any other degree program materials, nor did we evaluate the statements or behaviors of enrollment officials, except in such instances that affected the student experience in the classroom setting. As applicable, we documented the colleges’ withdrawal procedures and whether the colleges provided required exit counseling for students that received financial aid. We tested each college once. The experience of each of our undercover students is unique and cannot be generalized to other students taking courses offered by the for-profit colleges we tested or to other for-profit or nonprofit colleges. Our investigative work, conducted from October 2010 through October 2011, was performed in accordance with standards prescribed by the Council of the Inspectors General on Integrity and Efficiency. | Once comprised of local, sole-proprietor ownership, the nation's for-profit institutions now range from small, privately owned schools to publicly traded corporations. Enrollment in such colleges has grown far faster than in traditional higher-education institutions. Moreover, during the 2009-2010 school year, for-profit colleges received almost $32 billion in grants and loans provided to students under federal student aid programs, as authorized under Title IV of the Higher Education Act of 1965, as amended. Because of interest in the student experience at for-profit colleges, GAO was asked to conduct undercover testing by enrolling in online classes under degree-granting programs. To conduct this testing, GAO selected 15 for-profit colleges using a selection process that included the 5 largest colleges and a random sample and attempted to enroll using fictitious identities. Once enrolled, each fictitious student engaged in behaviors consistent with substandard academic performance. Each fictitious identity enrolled for approximately one term, as defined by the college. The experience of each of GAO's undercover students is unique and cannot be generalized to other students taking courses offered by the for-profit colleges we tested or to other for-profit or nonprofit colleges. GAO intended to test colleges that were unaware of its true identity. However, there exists a possibility that these colleges identified GAO's fictitious students and altered their behavior based on the assumption that they were under observation. This product contains no recommendations. Where applicable, GAO referred information to the Department of Education for further investigation. During the course of undercover testing, GAO documented its observations related to enrollment, cost, financial aid, course structure, substandard student performance, withdrawal, and exit counseling. Overall, GAO observed that 8 of the 15 colleges appeared to follow existing policies related to academic dishonesty, exit counseling, and course grading standards. At the 7 remaining colleges, GAO found mixed results. For example, one or more staff at these colleges appeared to act in conflict with school policies regarding academic dishonesty or course grading standards, or federal regulations pertaining to exit counseling for student loans, while other staff acted consistent with such policies. Enrollment: GAO attempted to enroll its students using fictitious evidence of high-school graduation--either a home-school diploma or a diploma from a closed high school--at all 15 colleges and successfully enrolled in 12. Two declined GAO's request for enrollment based on insufficient proof of high-school graduation. Another allowed GAO's student to begin class, but rescinded acceptance after 1 week, citing lack of high-school accreditation. Cost and Financial Aid: GAO's students took 31 classes in total at an average cost of $1,287 per class. These costs included such items as tuition, books, and technology fees. All 12 students were eligible for federal student aid, but only 10 actually received disbursements; the other students were expelled without receiving disbursements. We did not observe that a college collected federal student aid funds after the withdrawal date of any of our students (that was not fully refunded immediately). Course Structure: GAO's students were enrolled in introductory classes, such as Introduction to Computer Software and Learning Strategies and Techniques. Courses ranged in length from 4 to 11 weeks, and students took from one to four courses concurrently. Courses generally consisted of online discussion forum postings; writing assignments; multiple-choice quizzes and exams; and skills exercises, such as keyboarding tests or computer exercises. Substandard Academic Performance: GAO's students engaged in substandard academic performance by using one or more of the following tactics: failure to attend class, failure to submit assignments, submission of objectively incorrect assignments, submission of unresponsive assignments, and plagiarism. At 6 colleges, instructors acted in a manner consistent with school policies in this area, and in some cases attempted to contact students to provide help outside of class. One or more instructors at 2 colleges repeatedly noted that the students were submitting plagiarized work, but no action was taken to remove the student. One or more instructors at the 4 remaining colleges did not adhere to grading standards. For example, one student submitted photos of celebrities and political figures in lieu of essay question responses but still earned a passing grade. Withdrawal and Exit Counseling: Three of GAO's students were expelled for performance or nonattendance. Eight of the 9 students withdrew from their respective colleges without incident. At the remaining school, GAO's request to withdraw was never acknowledged and the student was eventually expelled for nonattendance. 3 students did not receive federally mandated exit counseling, advising students of repayment options and the consequences of default. |
Hanford’s aging underground tanks contain about 54 million gallons of highly radioactive waste. Over the years, more than 1 million gallons of waste have leaked into the soil. DOE currently estimates the total cost of cleaning up the tank waste at more than $50 billion (in actual year dollars). Since 1989, DOE has spent about $3.5 billion on this effort. To convert the waste into a form for more permanent storage, the waste will be separated into high-level and low-activity components and then, through a process called vitrification, converted into a glass-like material that can be poured into steel containers where it will harden. The immobilized high-level waste will be stored on-site for eventual shipment to a national repository, while the low-activity waste will be permanently disposed of on the Hanford Site. DOE plans to use private contractors to conduct the vitrification work and over the last several years has developed a contracting approach. In February 1996, DOE issued a Request for Proposals for the tank waste project. DOE envisioned that under this approach, two contractors would build and operate demonstration facilities that would treat at least 6 percent of the waste. DOE referred to this part of the waste treatment effort as phase I. DOE estimated that phase I would last at least until 2007 and cost about $3.2 billion for the two fixed-price contracts and another $1.1 billion in contract support costs, for a total of about $4.3 billion. In September 1996, DOE awarded a fixed-price contract for $27 million to each of the two contractor teams to begin phase I by developing preliminary facility designs and other preliminary project plans. One team was led by BNFL and the other team was led by Lockheed Martin Advanced Environmental Systems (Lockheed). In phase II, contractors would compete for a contract to process the remaining tank waste. DOE’s experience during the initial part of phase I led to a change in the contracting approach. In May 1998, after reviewing the preliminary designs and plans submitted by the two competing teams, DOE decided to continue phase I with only one contractor—BNFL. DOE and outside expert reviewers found that the approach set forth by the Lockheed team presented an unacceptably high technical risk in attaining DOE’s cleanup goals, requiring additional development and using technologies that, in some cases, were largely unproven. In contrast, DOE concluded that BNFL’s technical approach was sound, using technologies for waste treatment and vitrification that were well developed and had been used in other waste treatment situations. On August 24, 1998, DOE signed a fixed-price contract with BNFL to continue with phase I by developing an approach that would process at least 10 percent of Hanford’s tank waste by 2017. The contract cost was estimated at about $6.9 billion (in constant 1997 dollars). The contract is considered a fixed-price contract because DOE and BNFL agreed to a target fixed-price per unit of processed waste. This price may be adjusted in the year 2000 after technical aspects of the project become more clearly known. DOE estimated that its other costs related to supporting BNFL’s efforts would be about $2 billion, bringing the project’s total estimated cost to about $8.9 billion. DOE’s August 1998 contract with BNFL is a substantial departure from DOE’s original privatization strategy. DOE said its contracting approach evolved as it received feedback from private companies and financial advisors, as well as input from the two contractor teams that submitted proposals under the original approach. According to DOE, changes to its initial approach were made to optimize the technical approach and to make the project financially feasible or to reduce the likelihood of performance problems. These changes fall into four main areas: competition, financial issues, facility issues, and schedule revisions. Table 1 summarizes these changes, and the sections that follow discuss why DOE made them. Unlike DOE’s original approach, the current approach is not competitive. Because DOE found that the approach set forth by the Lockheed team was unacceptable, DOE authorized only BNFL to proceed through the remainder of phase I. The extent to which competition will be present in phase II is unknown. DOE’s approach to financing the project has shifted. Instead of requiring the contractor to obtain all needed financing without recovery from DOE if the project fails, DOE is now planning to repay BNFL’s debts above its equity, insurance, and other limited funds if BNFL defaults on its loans and DOE terminates the contract. DOE officials said that the government’s commitment to repay the contractor’s debt was needed, in large part, to make the project financially feasible. DOE concluded that requiring 100 percent private financing without government backing of the private debt could increase the financing costs so much that the project would not be affordable. DOE also concluded that an increased governmental role in backing the debt would reduce the overall cost of the project, but DOE had no specific estimate of the amount of the reduced costs. Government backing of the private debt is an unusual feature for a fixed-price contract because the government normally does not agree to pay a contractor’s debt as an allowable cost. DOE has also shifted its financing strategy from providing payment to the contractor only upon delivering the processed waste, to one where BNFL may now receive a payment of up to $50 million before waste processing begins. DOE said that such interim payments will help reduce the total project cost by reducing long-term financing costs and providing an incentive for BNFL to reduce the actual costs of waste processing. Finally, neither contractor was willing to commit to a fixed-unit price and schedule by May 1998 without adding significant contingency to the price. The August 1998 contract identified a target price and set August 2000 as the date at which the unit price will be fixed and BNFL’s funding commitments will be established. DOE determined that this delay would strengthen the feasibility and economics of the project, although agency officials also indicated that information gained during this delay could also lead to increased prices. DOE is contracting for waste processing services that will be much different from what was initially envisioned. DOE originally planned that two contractors would build temporary waste processing facilities during phase I that would test each contractor’s technological approach. These facilities were estimated to have a useful life of approximately 10 years and were considered “throw-away” buildings. According to DOE, both BNFL and Lockheed concluded that shorter-term, throw-away facilities were not feasible and that longer-life facilities were needed to provide the required levels of safety, operability, and maintainability. The contract now requires the waste treatment facilities to be designed to operate for a minimum of 30 years and have the capability to increase capacity. DOE said that although this approach means much more expensive facilities than originally anticipated and, therefore, an increase in project costs for phase I, longer-life, expandable facilities allow DOE more flexibility and options in how the waste cleanup is completed. In addition to more permanent, costly facilities, the new contract extends the design period and delays the start of construction about 19 months beyond what was originally planned. DOE expected that construction of the facilities would begin by December 1999. However, in their January 1998 proposals, both BNFL and Lockheed indicated that additional time was needed to further develop project design and plans for meeting regulatory and permitting requirements. The contractors believed that adhering to the original schedule would carry too many uncertainties, and that they would be unable to obtain needed project financing unless a more realistic schedule could be negotiated. DOE believes that the change will allow further design development before construction begins, thereby reducing the risks associated with design uncertainties. Current schedule and cost estimates for the project are substantially greater than DOE’s original estimates. In 1996, DOE estimated that in the first phase of the project, two contractors would process 6 percent of the waste by 2007 and up to 13 percent of the waste by 2011. DOE is now estimating that phase I will last until at least 2017, an extension of up to 10 years. Several interim steps in phase I also have revised completion dates. (See table 2.) One change in the project schedule was an extension allowing BNFL more time to design and construct permanent, more durable waste pretreatment and treatment plants. BNFL proposed extending the design phase by 24 months. BNFL reasoned that the additional design time would help reduce the risks associated with a fast-track design/construct project and was needed because more extensive structures were being proposed. BNFL’s proposal to build more durable facilities with a longer useful life also required a longer construction time. BNFL proposed this approach, and DOE agreed to it, because (1) BNFL said that nuclear and worker safety requirements could not be efficiently incorporated into the demonstration facilities initially proposed and (2) permanent facilities provided advantages in processing the tank waste that would remain after phase I. The lengthened construction added about 4 years to the original schedule. Also, it will take BNFL about 10 years to process the waste, or about 5 years longer than if two contractors were doing so. In addition, BNFL included additional schedule contingency to deal with possible start-up and production problems. Estimated costs for the project have also increased significantly. The total project costs for phase I, including DOE’s support costs, increased from $4.3 billion in the original estimate to process 6 percent of the waste to $8.9 billion in the current estimate to process 10 percent of the waste, as measured in constant fiscal year 1997 dollars. (See table 3.) The waste processing facilities now being designed will cost nearly $1 billion more to build than the demonstration facilities DOE originally proposed. Because of the longer period during which investors will expect a return on investments, equity and debt financing costs are expected to increase from about $1 billion to more than $3 billion. As part of its revision of the project’s cost and schedule, DOE analyzed whether the BNFL fixed-price approach was likely to save money when compared with two alternatives: a management and operations (M&O) contract or a cost-reimbursement contract with performance-based incentives. In July 1998, DOE estimated the range of savings under its revised approach for phase I at 26 to 36 percent when compared with these two alternatives. The savings estimate of 36 percent was based on comparing the proposed BNFL fixed-price approach with an M&O approach based on past Hanford management and operating contractor cost data; the estimate of 26 percent was based on a comparison with the estimated cost for BNFL to perform the work under a cost-reimbursement contract. Our review of DOE’s most recent estimates indicate that the savings amounts should be viewed with considerable caution. For example: M&O contracting approach should not be used as a comparison because an M&O contracting strategy is no longer an approach that DOE would seriously consider using. Until recently, DOE has generally used M&O contractors to manage its facilities. DOE’s M&O approach involved paying an on-site contractor for management and operating services regardless of what was accomplished. However, DOE is shifting to management and integration contracts involving performance measures and incentive-based contracts. DOE officials at Hanford told us that they used an M&O contract estimate because they had historical experience with M&O contracts and had an idea what the costs would be. However, we believe DOE’s cost savings analysis could be more meaningful if it included a range of contracting options that DOE would actually consider using, such as various combinations of government and private financing. Because of the high cost of private financing on this project and DOE’s agreement to assume the risk associated with the debt, direct federal funding of part or all of the project may actually lower total project costs without significantly increasing the government’s level of risk. DOE discussed government versus private financing in its report to the Congress on this project but did not present information on the differences in total project costs. According to DOE officials, during the next 2 years they will further evaluate the trade-offs between using government and private debt to determine the best overall mix of equity, debt, and government financing for the project. Rough estimates are presented as precise numbers. Cost projections for two of the contract alternatives DOE considered in its analysis are based on what are called “rough order of magnitude” estimates. The margin of error for these estimates is plus or minus 40 percent, meaning that the actual cost could be up to 40 percent less than or greater than the estimate presented. Because the order of magnitude estimates are subject to so much variability, it is difficult to assign much credence to an overall savings estimate based on these numbers. Cost growth estimates are not used consistently. For the comparison between a fixed-price contract and a cost-reimbursement contract with performance incentives, DOE assumed that cost growth would be 68 percent for the cost-reimbursement contract, and the fixed-price contract would have no cost growth. However, other evidence indicates that fixed-price contracts may have greater cost growth than cost-reimbursement contracts. Analysis does not reflect full range of cost savings estimates. Although the potential cost savings DOE reported to the Congress show a range of 26 to 36 percent, DOE documents supporting the analysis show a range of 10 to 36 percent. According to DOE’s Director of the Office of Project and Fixed Asset Management, DOE did not disclose the lower number in its report to the Congress because it did not believe the lower number was adequately supported. This is not the first time DOE has based cost savings on questionable analytical practices. In January 1997, we reported on the accuracy of the information DOE provided to the Congress to support the Department’s fiscal year 1997 request for privatization funds. DOE claimed that six privatization projects had saved $1.1 billion. However, we found that DOE had understated some project costs, used incorrect cost data, and made cost comparisons using projects of different scopes. In addition, our 1996 report on Hanford’s tank waste project also discussed the problems associated with DOE’s practice of presenting rough order of magnitude numbers as point estimates. Under the revised contract approach, DOE faces a substantial financial risk that could be in the billions of dollars. This risk comes mainly in the form of an agreement to pay BNFL for much of the debt incurred in constructing and operating the waste treatment facilities if BNFL defaults on its loan payments and DOE terminates the contract. This agreement has the same practical effect as a loan guarantee and is a dramatic departure from the original privatization strategy. If DOE had provided a guarantee for BNFL’s loans from a private lender, the Federal Credit Reform Act would have required DOE to estimate the net present value of the subsidy cost of the loan guarantee over the term of the loan and to have budget authority available for this full cost before the guarantee could be provided. DOE officials told us they agreed to back BNFL’s loans because lenders told DOE that BNFL would not be able to obtain affordable financing without it. The officials said the increased governmental role would likely reduce the contract’s overall cost by allowing BNFL to borrow at lower rates. So far, the amount of DOE’s potential liability is unknown, because the amount of borrowing that will be covered under the commitment will likely not be determined until the contract price is established and financial closure occurs in August 2000. However, BNFL’s vice president and project manager told us that DOE’s potential liability could be as much as $3 billion. He said that in the case of a default, $3 billion is about the maximum debt that would be outstanding after BNFL’s equity and contingency funds were applied. Apart from this financial risk, DOE also faces other financial risks that are not as significant as a default by BNFL, but could increase the project’s overall price. For example, DOE is subject to making idle facility payments to BNFL if DOE is unable to supply waste from the tanks. Also, the contract contains provisions for renegotiating the agreed-upon price if certain changes occur that could affect cost or schedule, such as DOE’s failure to provide required support services, changes in environmental law, or other events that are beyond the control of the contractor. Some of these risks would also exist under a more traditional contracting arrangement. DOE’s financial risks hinge on a number of factors that could potentially affect the project. We identified six main types of factors, which we believe merit continued attention as the project proceeds. BNFL officials acknowledge that although the technology they plan to use has been successfully applied in other settings, it has been tested only on small amounts of Hanford waste in laboratories, and has not been used at production facilities to vitrify the unique types of waste at Hanford. Under DOE’s original approach, the success of the selected technologies was to be demonstrated in temporary plants; in DOE’s revised approach, permanent plants will be built. However, BNFL has developed various other approaches to deal with the need to ensure that the technology will work. These include conducting tests on certain aspects of the technology at existing facilities at other DOE sites and in the United Kingdom and constructing a prototype melter for the low-activity waste vitrification process. These efforts are expected to continue as the vitrification facilities are being designed and built. BNFL has assured DOE that its technology will be fully tested and demonstrated before beginning operations of its full-scale, high-level waste treatment plant in February 2007 and its low-activity waste treatment plant in January 2008. To ensure that technologies are fully demonstrated, DOE expects to hire experts to review BNFL’s demonstration plans and testing results. While DOE Hanford officials also expect DOE headquarters to commission an independent review of BNFL’s testing results, no plans for this review have been developed. Under its revised approach, DOE retains a significant part of the risk for the success of this technology. In the worst case, if demonstration activities fail or if they prove inadequate to ensure the success of full-scale operations, the overall project may fail, and DOE will be liable for paying off a significant portion of BNFL’s debt after BNFL’s resources are exhausted. If demonstration activities show that the technology is usable but flawed, treatment facilities may require expensive retrofitting to make them viable. This could raise the cost of the fixed-price contract that DOE will negotiate with BNFL. Although the revised approach gives BNFL additional time to design the waste treatment and vitrification facilities, the schedule still poses some potential risk. To give BNFL more time to design the facilities, DOE set back the start of construction by about 2 years. However, even with this change, construction will begin well before all of the design work is completed. BNFL officials estimate that overall design work will be less than 50 percent complete at the start of construction. DOE and BNFL officials expressed confidence in the time line of the revised approach. The officials said that the schedule is comparable to other nuclear facilities BNFL has successfully built and operated. However, BNFL officials also acknowledged that conducting simultaneous design, construction, and technology testing carries some risk. To reduce this risk, BNFL performs a periodic risk assessment to ensure that design and technology testing concerns will be addressed as quickly as possible in the next 24 months. Because of our experience in analyzing similar schedules that have contributed to problems on other DOE projects, we believe that the construction schedule is a potential factor affecting DOE’s risk. Specifically, DOE projects such as the Defense Waste Processing Facility at Savannah River, the Pit-9 cleanup project at the Idaho National Engineering and Environmental Laboratory, and the Spent Fuel Storage Project at Hanford experienced cost overruns and schedule changes that suggest designs should be developed enough to mitigate such results. There do not appear to be agency or industry guidelines on the extent to which facility designs for complex, one-of-a-kind nuclear processing facilities like vitrification plants should be complete before construction begins. In an analysis of an earlier DOE proposal to build a waste vitrification plant at Hanford, we raised similar concerns about concurrent design and construction and pointed out that for an advanced light water reactor, the Electric Power Research Institute recommended that construction not begin until the detailed design is 90 percent complete. A manager of the Institute’s Nuclear Power Group told us that advanced light water reactors are similar in complexity to a vitrification plant. Another factor potentially affecting the success of the project—and therefore DOE’s financial risk—is whether the safety and other regulatory requirements can be successfully met. For example, DOE’s Regulatory Unit raised 90 issues with safety documents that BNFL submitted in January 1998. DOE’s manager of the Regulatory Unit described the quality of the BNFL safety documents as “poor” and said that the next set of safety documents, submitted in August 1998, was also poorly done. These latter documents were subsequently withdrawn by BNFL. The DOE manager said that problems with safety documents could affect the project schedule and cost and that BNFL needed to make immediate improvements in its approach to safety. Several additional safety documents are required before BNFL can begin construction of the facilities in the year 2001. Unless the required safety documentation is approved, BNFL will be unable to start construction on schedule. DOE’s Regulatory Unit is working to prevent problems we found on two recent major projects—the Pit 9 project in Idaho and the Spent Fuel Storage Project at Hanford—where problems with the safety basis of the work delayed project schedules and caused additional rework. The BNFL project manager attributed the safety documentation problems primarily to the early level of project design and said that BNFL will greatly increase the staff addressing safety-related issues during the rest of phase I. BNFL also has recently hired an experienced nuclear facilities licensing manager to lead this effort. DOE has also taken steps to help ensure that BNFL is addressing safety issues. For example, DOE has negotiated into the contract provisions which (1) require periodic meetings between its regulatory staff and BNFL to discuss safety issues and (2) provide for DOE attendance at BNFL’s safety committee facility design review meetings. The project also presents another regulatory challenge. DOE planned to have the Occupational Safety and Health Administration (OSHA) regulate worker safety at the plant. However, in May 1998, OSHA declined to assume responsibility, citing a need first for statutory and regulatory changes to be in place, as well as a full complement of the resources required. If OSHA does not regulate worker safety, then DOE must do so. The manager of DOE’s Regulatory Unit said that if this issue is not resolved by January 2000, his unit will assume responsibility for regulating worker safety so that construction can begin on schedule. DOE is responsible for the following major support activities: sampling and analyzing tank waste (characterization); providing infrastructure, which includes roads, water, electricity, and wastewater treatment; retrieving waste, which requires DOE to retrieve waste from the tanks and deliver it to BNFL while keeping the chemical makeup of the waste within specified ranges; and storing and disposing of waste after processing, which requires DOE to temporarily store the high-level waste and permanently store low-activity waste. DOE estimates that support activities will cost about $2 billion including about $600 million for waste retrieval, $40 million for characterization, and about $370 million for waste storage and disposal. Although support activities are essential to project success, many of them are still in the planning stages, and potential problems are not yet apparent. At this time, the areas that appear to be most prone to problems are waste retrieval and waste storage and disposal. DOE’s ability to successfully retrieve waste for processing depends, among other things, on the availability of double-shell tank space for storage and transfer activities. According to DOE and contractor officials, double-shell tank space is a major uncertainty because double-shell tanks are also being used for other cleanup activities at the site. If the capacity needed for waste storage exceeds the space available in the 28 double-shell tanks, DOE’s ability to supply waste to the private contractor for processing will be affected. The storage of immobilized high-level waste in Hanford’s canister storage building poses another risk to DOE’s ability to successfully support the project. The risk is that the installation of equipment and subsystems needed to store immobilized high-level waste in the canister storage building could conflict with a schedule for another DOE project—storing spent nuclear fuel removed from its current deteriorating storage facilities. DOE’s site support contractor concluded that these two problems have a high risk of adversely affecting the project. As a result, DOE could have to make idle facility payments. In response, the site support contractor identified a set of mitigating actions that it believes will reduce the risk that the problems will adversely affect the project. DOE’s ability to fund the project within its own budget is an important factor in ensuring that lack of funding does not lead to project termination. DOE estimates that it will need more than $10 billion in actual year dollars from fiscal year 1999 through 2017 to fund the $6.9 billion project cost—an average of $537 million annually. During 7 of those years, payments to BNFL are expected to exceed more than $1 billion per year. This funding represents a substantially increased need for funding at the Hanford Site, where current annual budgets for all on-site cleanup activities total about $1 billion. If DOE is unable to provide funding for the privatization project when needed, the contract would likely be terminated, triggering DOE’s liability to pay BNFL for the amounts borrowed against the company’s assets. DOE officials said that they did not yet have a detailed funding plan for how they would find the additional funding within their budget. However, assuming no significant increase from the Congress, DOE indicated that a major source of funds would likely be funding made available when other DOE sites, such as Rocky Flats and Fernald, are cleaned up and closed. Given DOE’s track record in completing environmental cleanup projects, however, we are concerned that the funds may not be available when they are needed. Another issue that could potentially affect DOE’s ability to ensure that sufficient funding is available for the project relates to how the new contracting approach is classified in the budget. Because of budget limitations contained in the Budget Enforcement Act, cost estimates are prepared for programs, including projects in DOE’s privatization program, to ensure that the limitations are not exceeded. Federal agencies such as DOE may acquire long-term assets in several ways, and each acquisition strategy may be scored differently. For example, if the federal agency offered a federal government guarantee to a private lender for a contractor’s debt financing, the agency would have to estimate the subsidy cost of the loan guarantee. This is a complex process and is based on the risk of a default or nonpayment of the loans and other factors. The agency would then need the budget authority for the full net present value of the subsidy cost before it could make the guarantee. Although the tank waste project is not structured as an explicit loan guarantee, there is an increase in the government’s potential liability associated with making BNFL’s loans an allowable contract cost in the case of a default. Neither DOE nor the Office of Management and Budget has estimated this potential additional cost. This scoring is of consequence because it affects how much funding DOE will have to have on hand for the project, and when. The remediation of Hanford’s tank waste is a very costly, complex, and risky effort regardless of the contracting approach DOE selects. In an effort to balance risks and realize cost savings, DOE selected a fixed-price approach. Federal acquisition regulation guidelines note that fixed-price contracting works best when the possibility is low for changes with cost and schedule implications. However, the BNFL contract cites at least 15 events, such as regulatory changes or failure to provide waste on a timely basis, that could cause cost or schedule increases. The consequence of such changes is that they would constitute a potential basis for adjusting the fixed price or paying agreed-upon additional amounts. Federal guidelines state that another factor contributing to the successful use of fixed-price contracting is competition, which helps determine a price that minimizes the cost to the government while providing a fair profit to the contractor. DOE’s revised approach removes competition as a check on price. Without competition, DOE may not have the same assurance of obtaining the best value for the negotiated price. To compensate for the lack of competition, DOE has required BNFL to provide certified cost or pricing information for evaluating BNFL’s basis for its proposed fixed-unit prices. Our reviews of DOE contracts have demonstrated that entering into a fixed-price contract is no guarantee that DOE will be successful in minimizing the cost to the government. Managing this large, complex project presents a significant challenge to DOE. The agency’s continuing challenge will be to translate the plans it has made into sustainable oversight efforts that are capable of overcoming problems that have plagued many past waste cleanup projects. DOE has had difficulty managing other large projects. Our past reviews have shown a consistent pattern of poor management and oversight by DOE. For example, in our 1996 report on DOE’s major system acquisition projects (generally projects costing $100 million or more), we reported that at least half of the ongoing projects and most of the completed ones had cost overruns and/or schedule slippage. Some of the reasons for cost overruns and schedule slippage included inadequate project oversight and insufficient attention to technical, institutional, and management issues. In addition, our reviews of individual DOE cleanup projects such as the Defense Waste Processing Facility at Savannah River, the Pit 9 cleanup at Idaho Falls, and the Spent Fuel Storage Project at Hanford all identified problems with DOE’s oversight activities as factors contributing to project difficulties. At least in part to respond to these past difficulties, DOE has developed several systems and processes to manage the tank waste project at Hanford and has subjected its plans to outside review. Despite these efforts, however, outstanding issues concerning technical staff, site support activities, and project administration may keep DOE from being fully prepared to oversee the project. Technical staff: DOE has established a team eventually expected to number about 80 technical and managerial staff to oversee the project. This team, the Waste Disposal Division at Hanford, will have authority both for managing the BNFL contract and for overseeing the support activities of the contractors that provide day-to-day management of the site. As of August 31, 1998, the Division had about 30 vacancies, including key staff such as the Deputy Project Manager and five of nine DOE staff in the contract management group. DOE’s Director of Contract Reform and Privatization said that the Hanford unit does not have all of the technical skills necessary to ensure success in overseeing the project. He was especially concerned about the shortage of contract expertise related to administering fixed-price contracts. According to DOE’s contracting officer at Hanford, none of the current DOE staff are experts in fixed-priced contracting, although he hopes to be able to hire staff with these skills soon. Staff with these and other skills are needed very soon because DOE will be negotiating critical details of the contract, including the fixed price, during the extended design phase of the project, which is currently under way. DOE officials at Hanford plan to fill the vacancies during fiscal year 1999. Site support activities: Also critical to project success will be the support that site contractors must provide in preparing infrastructure improvements, retrieving waste, and removing and storing the containers of vitrified material. DOE must ensure that Fluor Daniel, the main contractor managing the Hanford site, is able to provide the support necessary for the project. In August 1997, DOE directed Fluor Daniel to conduct an extensive study (called a “readiness to proceed”) to determine what was needed to support the vitrification effort and to identify potential problems. At the conclusion of the study, outside reviewers commissioned by DOE and Fluor Daniel concluded that the support could be provided if adequate funding was forthcoming. However, DOE and tank farm officials said that the project is funded at about $23 million less than needed for fiscal year 1999. DOE has requested full funding for fiscal year 2000, but the budget has not yet been finalized. According to the Director of the Waste Disposal Division, failure to fully fund support activities in the next couple of years could delay the project. Project administration: Carefully administering the contract may also be critical to ensuring that DOE and the contractor work together effectively. Our review of another large cleanup project, DOE’s Pit 9 project in Idaho, disclosed that substantially different views about the degree of oversight, involvement, and interaction that was appropriate for the contract were held by DOE, the contractor managing the contract for DOE, and the subcontractor responsible for carrying out the project. Due in part to this problem, the Pit 9 project has failed to meet cost and schedule targets and the parties are now involved in lawsuits to settle their claims. In part because of the Pit 9 failure, DOE paid considerable attention to developing an approach to overseeing BNFL’s operations. For example, to resolve procedural and other issues that may come up, DOE required BNFL to establish four teams specifically covering project management; contract and finance matters; interfaces; and environment, safety, and health-related matters. To help with the complicated interrelationships between DOE and its contractors, DOE has also followed a systems engineering process that involves using “interface control documents” for those areas where DOE or the site contractor have interrelationships with the BNFL contract. Overall, the project has 23 such documents covering areas such as infrastructure, emergency response, and permitting. The contract also ensures DOE’s access to key information. For example, BNFL will be conducting numerous tests to ensure that its treatment processes will work. The contract stipulates that BNFL must deliver completed test reports to DOE for numerous activities, such as validation of chemical processes, qualification of proposed products, and effectiveness of a nonradioactive pilot melter. Finally, DOE has subjected its entire management process to both internal and external review. As a first step, in January 1998, DOE issued a self-assessment report on the Division’s readiness to proceed. The report concluded that the management systems were behind schedule and identified six key actions to be taken, including revising the project management plan and developing a staffing plan. DOE then convened independent assessments to look at various aspects of the authorization to proceed. As of September 15, 1998, 20 of 91 recommendations made by the reviewers were still open, including the need to establish interfaces between the division and headquarters organizations and requiring training in administering fixed-price contracts. The potential problem here is not with DOE’s efforts to date but with its willingness to fully implement the oversight plans it has developed for the project. Our work over several years and on a variety of DOE activities has disclosed a consistent pattern of DOE’s failure to fully implement the plans that it develops. In a number of instances, we have tied project or program difficulties directly back to these failures to implement key management and oversight components. For example, in a 1993 testimony on the environmental restoration management contract approach, we found several DOE management and oversight weaknesses, including not fully implementing project management plans. In a 1997 report, we found that two projects at the Fernald, Ohio, site had weaknesses, including insufficient DOE oversight of the contractor, inadequate testing of the technology, and delays in completing planning documents. These problems contributed to a $65 million cost overrun and almost 6 years of schedule slippage. More recently, in a review of DOE’s management of contaminated soils above the groundwater at Hanford, we found that although DOE drafted a management plan by 1994, it never implemented the plan. Four years later, after admitting that the tank waste has leaked to the groundwater, DOE has still not implemented a comprehensive management strategy. Remediating Hanford’s radioactive tank waste will be difficult and very costly. In addition, given the nature of the tank waste and the challenges associated with converting it to a more stable form for long-term storage, the project involves substantial risk of encountering problems that could result in further increases in schedule and cost. Because of contract clauses that provide for adjustments in contract price, these risks are largely shouldered by DOE. Furthermore, in order to make private financing of the project feasible, DOE has also decided to pay, as an allowable cost, any debt costs that BNFL is unable to pay in case it defaults on its loans and DOE terminates the contract. As a result, DOE’s potential liability could amount to several billion dollars. Given these circumstances, it is important that DOE have in place a skilled project oversight team fully prepared to face the challenges ahead. However, problems already exist in implementing the staffing plan and securing adequate funding for the contract’s support services. We are concerned that if these problems are not addressed quickly, they may adversely affect the project. Although a contract has been signed, the $6.9 billion is an estimated cost because design and financing issues have not been finalized and the final unit price has not been set. Since this important information will be developed over the next 21 months, the end of the design phase in August 2000 is another critical point to assess the project before the most significant project costs are incurred. We recommend that the Secretary of Energy take immediate action to fully implement the Department’s management and oversight plan for the Hanford tank waste project, including ensuring that (1) the oversight team is fully staffed with the expertise required and (2) adequate funding is available to provide the site support services called for in the contract. Because key aspects of the project and the associated contract are still being developed, significant changes in project cost, schedule, and overall approach could occur before the price is set. The end of the extended design phase in August 2000 provides another decision point at which these and other aspects of the project could be reviewed before the most significant project costs are incurred. Therefore, the Congress may wish to require DOE to include in its annual status report on privatization contracts (1) the results of BNFL’s technology demonstration and testing using Hanford’s waste, (2) a reassessment of the cost-effectiveness of the proposed approach including the results of DOE’s analysis of different financing alternatives, and (3) DOE’s overall preparedness to effectively oversee the project. We provided a draft of this report to DOE for review and comment. DOE generally agreed with the report’s conclusions and recommendations and also provided several comments and technical clarifications to the report. The full text of DOE’s comments and our evaluation of them are included in Appendix I. To determine how DOE’s current project strategy has changed from the original proposal, we reviewed the contract between DOE and BNFL and DOE’s report issued to the Congress in July 1998. We also reviewed DOE, BNFL, and other contractor documents related to the tank waste project. In addition, we interviewed DOE and contractor officials at Hanford and in Washington, D.C., to discuss the changes in the contract. To determine how the project’s schedule, cost, and savings estimates have changed from the original proposal, we reviewed DOE’s documentation providing original schedule, cost, and savings estimates and compared those to the current contract as outlined in the report to the Congress. We also interviewed DOE and BNFL officials and outside financial experts to understand the changes that have occurred to the project’s schedule, cost, and savings estimates. To determine the risks that DOE is now assuming with the change in contract approach, we analyzed the contract, DOE’s report to the Congress, and DOE and contractor documents describing the risks to the project. We also interviewed those officials, in addition to officials at the Office of Management and Budget and the Congressional Budget Office to discuss the risks and budget issues associated with the change in contract approach. To determine the steps that DOE is taking to carry out its responsibilities for overseeing the project, we reviewed DOE’s report to the Congress describing how the Department is organized to manage the project, as well as Department and contractor plans for managing the project. In addition, we reviewed internal and outside assessments of DOE’s efforts to oversee the project. Finally, we interviewed contractor and DOE officials, including the Director of DOE’s Office of Contract Reform and Privatization. Our review was performed from June through September 1998 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretary of Energy. We will also make copies available to others on request. The following are GAO’s comments on DOE’s letter. Regarding our comments on the lack of competition for the remainder of phase I, DOE emphasized that competition played an important role in reducing costs early in the project and that DOE had instituted other controls on the BNFL contract to help control and reduce costs such as requiring certified cost or pricing data. DOE also emphasized that its decision to back BNFL’s debt was essential for BNFL to obtain private financing for the project. We believe our report adequately states these views. Concerning the payment of up to $50 million that DOE will make during the extended design phase, DOE stressed that the payment will be made only for specific deliverables under the contract and that DOE does not consider this to be a progress payment. We clarified this in our report. DOE said that it was important to mention that the revised project schedule actually accelerated by 2 to 3 years the milestone for beginning to treat high-level waste as set forth in the Tri-Party Agreement. We modified the report to clarify that some milestones would be delayed while one milestone, the date to start high-level waste processing, would be advanced. Regarding the changes in cost estimates, DOE said that the two approaches involved processing plants of substantially different useful lives and, therefore, capacity, which would ultimately bring down the unit cost of operation. We presented processing quantities and costs only for phase I because the current contract is only for phase I and BNFL intends to recover all of its costs during phase I operations. Costs related to phase II operations are not known. DOE also said the cost estimates for phase I should be compared on a present-value basis because the two time frames are quite different. Our analysis does compare the two costs on a present-value basis, in constant fiscal year 1997 dollars. DOE disagreed with our statement that direct federal funding of the project may not significantly increase the government’s level of risk. DOE said that direct federal funding would be accompanied by a significant increase in the government’s level of risk. However, it is not clear how much of an increase in risk there is between private debt which is in effect guaranteed by the government and direct federal funding of the project. DOE did not quantify this difference in risk or compare it to the significantly lower financing costs that could be achieved through direct federal funding of the project. Our point was that DOE needs to conduct such an analysis in order to ensure that it has a cost-effective approach to funding the project. DOE said that this analysis will be accomplished during the next phase of the project. DOE said that our reference to a 1993 study by Independent Project Analysis, Inc., was incomplete because we did not mention the reason why cost growth on fixed-price contracts averaged 75 percent. The study found that fixed-price contracts were used on poorly defined projects, which led to changes during construction contributing to increased costs and schedules. DOE asserted that a similar condition does not exist on the Hanford tank waste contract. We added to our report the causes for cost growth identified in the study. However, we disagree with DOE’s assertion that similar conditions do not exist on the Hanford project. Instead, the project risks and uncertainties we discuss in this report increase the chances that the Hanford tank waste project could also experience cost and schedule increases. Finally, DOE felt that we inaccurately stated the risks associated with two DOE support activities—waste retrieval and storage of high-level waste. DOE said that Phase I waste will come almost entirely from double-shell tanks and, therefore, tank capacity for storage and transfer of the waste should not be a problem. However, sufficient double-shell tank space must be available to blend and stage the waste before delivering it to BNFL in batches. In May 1998, the Hanford Site support contractor determined that there was a high risk of having inadequate tank storage capacity to meet the needs of this project and at the same time support other site initiatives such as the project to pump liquids from single shell tanks into the double-shell tanks and the need to continue to receive waste into the tanks from other Hanford activities. As part of the multi-year planning process, the contractor is currently reevaluating this issue. Regarding the on-site storage of high-level waste, DOE is correct in saying that the risk of having a problem is reduced by the extended schedule. However, DOE’s contractor still described it as a high risk in May 1998 due to the modifications required to the storage building which will have to be made during the same years that the spent fuel program is moving its canisters into the building. While DOE may be correct that potential waste retrieval and storage problems can be managed, they clearly represent a risk to the project and illustrate the need for an aggressive risk management effort. 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 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 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. | Pursuant to a congressional request, GAO provided information on the Department of Energy's (DOE) revised contracting approach for its Hanford Tank Waste Project, focusing on: (1) how DOE's current approach has changed from its original privatization strategy; (2) how this change has affected the project's schedule, cost, and estimated savings over conventional DOE approaches; (3) what risks DOE is now assuming with this change in approach; and (4) what steps DOE is taking to carry out its project oversight responsibilities. DOE contracted with BNFL, Inc. to treat about 10 percent of Hanford's tank waste. GAO noted that: (1) the project as currently envisioned is substantially different from DOE's 1996 initial privatization strategy; (2) although the project award was made on the basis of a fixed-price contract, further competition between contractors and short-term demonstration facilities has been eliminated in favor of more permanent facilities that could operate for 30 years or more and, therefore, would be available to treat additional tank waste; (3) the design phase as well as the date when DOE and BNFL are to reach agreement on final contract price have been extended by 2 years to August 2000; (4) BNFL's specific project financing arrangements, which were to be established in May 1998, have been deferred until August 2000; (5) to ensure that BNFL can obtain affordable private financing, DOE has agreed to repay much of the project debt if BNFL defaults on its loans and DOE terminates the contract; (6) this is an unusual feature of a fixed-price contract because the government normally does not agree to pay a contractor's debt as an allowable cost; (7) the revised approach extends the completion date for processing the first portion of the waste from 2007 to 2017, and total costs rise from $4.3 billion to $8.9 billion; (8) the increased costs are mainly the result of DOE's decision to build permanent facilities that will take longer and cost more to design and build, and the higher financing costs and contractor profits involved in operating these facilities over a longer period of time; (9) DOE estimated that this approach would save 26 to 36 percent over contracting approaches it has used in the past; (10) because of questions about DOE's methodology for estimating savings, considerable caution is needed in assuming how much the revised approach will save; (11) the contract now calls for DOE to pay BNFL for most of the debt incurred in building and operating the facility if BNFL should default on its loans; (12) thus, DOE faces a financial risk not initially contemplated on the project that could be in the billions of dollars; (13) DOE agreed to assume this risk because it did not think BNFL would be able to obtain affordable financing unless the government provided some assurance that the loans would be repaid; (14) given that the project still has a number of technical uncertainties, DOE's financial risks are significant; (15) DOE has identified additional expertise it needs and has developed several management tools to strengthen its oversight of the project; and (16) the success of the project will depend on how well DOE implements these plans. |
WMATA began rail operations in 1976. As of 2011, it operates the nation’s second largest rail transit system and sixth largest bus system. WMATA provides service in the District of Columbia, suburban Maryland, and Northern Virginia. In fiscal year 2011, WMATA based its budget on a projected ridership on its rail transit and bus systems of 346 million trips. The rail transit system consists of 106.3 route miles and 86 passenger stations and a fleet of over 1,100 rail cars. A planned expansion of the rail transit system will add 11 stations and extend the system 23 miles in Northern Virginia, providing service to Dulles International Airport and Loudoun County, Virginia. (Figure 1 shows WMATA’s rail transit route system and proposed fiscal year 2011 jurisdictional subsidies.) WMATA’s Metrobus service operates 320 routes on 135 lines throughout the Metro region, utilizing 12,000 bus stops and 2,398 shelters. In addition, WMATA offers a shared-ride, door-to-door paratransit service for people whose disability prevents them from using bus or rail transit. The paratransit system operates a fleet of over 600 vehicles and is expected to provide 2.7 million passenger trips in fiscal year 2011. WMATA is also the single largest escalator/elevator operator in North America operating 589 escalators and 271 elevators. WMATA’s funding comes from rider fares and parking and a variety of federal, state, and local sources including grants from the federal government and annual contributions by each of the local jurisdictions that WMATA serves. (See fig. 1.) WMATA’s fiscal year 2011 budget totals about $2.2 billion. Of the total amount, about 33 percent, or $712.3 million, is for capital improvements and about 63 percent, or $1.45 billion, is for operating expenses. WMATA was created in 1967 by an interstate compact—matching legislation passed by Virginia, Maryland, the District of Columbia, and the U.S. Congress—that describes its high-level purpose, powers, general structure, funding, and authorities. The compact, as amended, creates a 16-member board of directors (8 voting and 8 alternate members) to govern WMATA and designates an appointing authority for each signatory to appoint 2 voting members and 2 alternate members to the board. (See table 1.) As of June 2011, GSA—which is responsible for selecting the board members representing the federal government—had appointed 2 voting members and 1 alternate, but had not appointed a second alternate. The District of Columbia also has a single vacancy for an alternate member, leaving board membership at 14. Nine of the 14 active members, including 7 voting members were appointed between January 2010 and May 2011. Also, according to the compact, the board must elect a chair at the beginning of every year. The chair has historically rotated between the three local jurisdictions each year; however, beginning in January 2011, board procedures allow for anyone to be elected chair, including the previous year’s chair or a federal board member. The compact also provides the board with broad policy-making authority, specifically in the areas of planning, budgeting, and financing. To help carry out these functions, the board has established committees, such as safety and security, customer service and operations, and finance and administration. (See fig. 2.) WMATA board procedures allow that alternate board members can vote in committee meetings, but can only vote in full board meetings in the absence of “their” voting member. In addition, the board is responsible for appointing a general manager/chief executive officer (GM/CEO) and executive leadership team to manage day-to-day operations and to develop policies and procedures, draft a budget, and conduct all other tasks related to operating and maintaining the transit system. Figure 3 shows the organization of WMATA’s executive leadership. Three reports issued in 2010 identified weaknesses in WMATA’s management and board oversight and called for change in WMATA’s governance structure and procedures. The Riders’ Advisory Council (RAC) and the Greater Washington Board of Trade and Metropolitan Washington Council of Governments sponsored Task Force (Governance Task Force) both issued reports critiquing WMATA’s board and management. Examples of recommendations from both reports include: (1) board roles and responsibilities should be more clearly defined and (2) the board should redefine the general manager position as WMATA’s chief executive officer and that person should oversee WMATA’s daily management. (See app. II for additional information on the recommendations made by these reports.) In addition, a National Transportation Safety Board (NTSB) report on a fatal June 2009 accident discussed how shortcomings in WMATA’s internal communications, recognition of hazards, assessment of risk from those hazards, and implementation of corrective actions are evidence of the absence of a safety culture within the organization. The report partially attributes this situation to WMATA’s governance due to inadequate or deficient oversight by the board. WMATA board members, officials, and other stakeholders have reported that the board sometimes focuses on management’s day-to-day responsibilities rather than higher level board responsibilities such as policy, oversight, and strategic planning. This lack of strategic focus may have resulted from inadequate delineation and documentation of the board’s responsibilities, as well as inadequate communication among board members. Governance practices based on previous GAO work and other relevant studies state that an effective transit board: focuses on policy making, principally specific elements such as guidance and strategic issues as well as oversight and monitoring of management and performance; clearly defines and formally documents its roles and responsibilities and has a clear view of its role in relationship to that of management. All activities, such as meetings and agenda items, should focus members on policy making and away from day-to-day management issues; delegates day-to-day management of the agency to the GM/CEO and other informs and educates its members and provides orientation to new board members; and acts as a cohesive group, eliminating personal agendas. Current and former board members and senior officials with whom we spoke believed that the WMATA board and individual board members have sometimes focused on the day-to-day operations of the transit agency and become involved in areas that should be the responsibilities of management. Specific cited examples of board involvement in management’s responsibilities include hiring and firing employees beyond senior management; approval of a minor personnel policy; and involvement and debate of specific detailed decisions such as station tiles, bicycle facilities, and transit car seat colors. Consistent with leading governance practices, WMATA board procedures state, “No Member individually shall direct or supervise the GM/CEO or any WMATA employee or contractor managers.” However, WMATA officials told us that rather than acting as a cohesive group, individual board members had directed staff to make changes to presentations prior to board meetings. These officials also reported that some individual board members had what they believed to be excessive contact with midlevel managers requesting specific information rather than working through established channels such as the board chairman, GM/CEO, or other senior management. Several board members and WMATA officials also commented that the frequency of board meetings can be inefficient and symptomatic of a lack of a strategic focus by the board. Several board members believed that the board meets too often, which can be an indication that it is too involved in running the agency. Officials and board members also stated that preparing for board activities—while important—can reduce the time staff have available to conduct day-to-day operations and analysis, or monitor and improve the performance of the transit system. Between April 30, 2010, and May 1, 2011, the WMATA board met 84 times—17 board meetings and 67 committee meetings or executive sessions. By comparison, the WMATA board met more frequently than five of the six transit agencies we visited. Only New York’s MTA—which carries approximately 8 times the number of daily riders—met more frequently. (See fig. 4.) (Additional information comparing the six transit agencies with WMATA is found in app. III.) Board members and stakeholders, such as RAC and the Governance Task Force, told us that the lack of strategic focus by the board may be in part attributed to inadequate delineation and documentation of board roles, inadequate communication among board members, and other factors. Roles and responsibilities for the board are delineated in two primary documents: the compact and board procedures. As mentioned earlier, the compact provides the board with specific tasks and authorities such as developing a mass transit plan, capital and current expense budgets, and a financing plan; selecting a GM/CEO, an independent auditor, and an audit committee; and adhering to legal requirements such as the Davis-Bacon Act. The compact also states that “subject to policy direction by the board,” the GM/CEO “shall be responsible for all activities” of WMATA. In addition, board procedures further delineate that the board “determines agency policy and provides oversight for the funding, operation and expansion of safe, reliable, and effective transit service within the Transit Zone.” Although the compact and board procedures provide some guidance, there is a perception among WMATA officials, some board members, and other stakeholders that the described roles and responsibilities are too broad and not clearly defined. The Governance Task Force found that “the lack of delineation of responsibilities has created an environment where there is no clear understanding of who is accountable for issues such as day-to- day management, communication, operations, and safety.” In addition, some board members we spoke with told us that while the existing documentation generally provides clarity, it should be improved. For example, throughout the history of WMATA, the board has made specific delegations of authority to the GM/CEO covering such issues as procurements and personnel policies. However, according to board members and WMATA’s general counsel, these delegations—and other board resolutions—are not organized or readily accessible to the board. Inadequate board communication including failure to orient, inform, and educate new and existing board members has also contributed to the lack of a strategic focus of the board, according to board members. For example, in the past, orientation for new board members has been informal, driven primarily through the initiative of the new board members themselves. In comparison, officials at four of the six transit agencies we visited told us that they provide a formal orientation for new board members. For example, as a result of MARTA’s orientation process, a MARTA official stated that roles and responsibilities for the board are clear and well-defined. Their orientation includes (1) presentations by the senior executive team on subjects such as the MARTA Act and its specific criteria and allowances as well as the bylaws, (2) discussion of the roles and responsibilities of board members, (3) an explanation of meeting structure, and (4) a tour of key facilities. In contrast, at WMATA, we observed that current efforts to inform and educate board members, such as discussion during meetings, have not consistently proven to be effective in informing board members of their role relative to management’s role in day-to-day operations. Other factors might have also contributed to the lack of a strategic focus for the board. For example, in the past, WMATA’s board procedures were subject to change by the annually rotated chairperson. One senior WMATA manager told us that each time the procedures change it takes time for the board members to adjust. In addition, the Congressional Research Service noted that the model of the WMATA board—which is closer to a public utility model than a private sector model—requires action in decisions such as fare setting, route selection, and frequency of service determinations that are normally viewed as day-to-day decisions in the private sector. The WMATA compact delineates that the board should develop and adopt a mass transit plan that includes specific elements such as routes, schedules, and fares. In contrast, officials at SEPTA told us that, although the SEPTA board also plays a role in approving budgets, service plans, and some procurements, SEPTA’s enabling legislation articulates that the board’s focus is to be on long-term planning and policy rather than the day-to-day administration of the agency’s business. Additionally, WMATA’s board does not conduct a self-assessment. According to leading governance practices, effective transit boards monitor their progress on an annual basis and conduct a thorough self- assessment every 3 to 5 years. Such an assessment would not only evaluate progress in terms of the transit system’s performance, but also evaluate the effectiveness of the board’s organization, structure, and functioning, and its impact on performance. The WMATA board does not do this type of an assessment; two board members with whom we spoke pointed out that the only form of board assessment is the replacement of board members by their appointing authorities. As a result, the board is lacking a key mechanism for regular, ongoing measurement of its performance. By comparison, New York’s MTA board is required by law to complete an annual board self-assessment whereby the board as a whole and each of the committees, individually, assesses its effectiveness. In addition, MTA’s Office of Inspector General (OIG) has statutory authority that makes it permissible for it to audit and investigate the board of directors, or its members if the need arises; past oversight efforts have included reviewing the board’s oversight of MTA capital mega-projects. MTA’s Inspector General told us that the ability to use such a broad, general authority in this manner is an important oversight mechanism for MTA. By comparison, the WMATA board has not adopted procedures to allow the WMATA OIG to investigate claims against the board, including alleged wrongdoing by board members or alleged instances of the board not following procedures or protocols. Some WMATA board members agreed that the board should focus on policy making and should have a role in setting goals, strategic planning, budgeting, oversight, and monitoring performance. Specifically, these board members commented that the board should be more focused on setting and evaluating performance metrics based on a strong strategic planning process, an area that has been lacking in the past. Starting in December 2010, the board and management began taking steps to further identify and delineate roles and responsibilities including the establishment of the Governance Committee. Additionally, in April 2011, the board released draft bylaws intended to be permanent and amendable only by a majority vote of the board. If adopted and then effectively implemented, the draft bylaws would address some of the issues described above. For example, the draft bylaws assign roles and responsibilities for the board, board members, and the chair and mandate an orientation program, a self-evaluation of the board, and standardization of communication procedures and conduits. require the board to act as a cohesive group, focusing on policy making, strategic planning, and oversight, as well as its specific roles in creating and adopting a budget, determining a fare structure and service levels, and developing a business plan. clarify that the GM/CEO has been delegated the authority and is primarily responsible for the overall administration and operation of WMATA subject to policy direction and oversight from the board. In addition, the board has requested that WMATA’s general counsel organize and catalog board resolutions that delegate authority to the GM/CEO. The board has also organized a new, more formal, orientation program for new board members and plans to draft amended board procedures and a revised code of ethics. To help carry out its role as an oversight body, WMATA’s board is structured to have access to information that could help facilitate effective oversight of management and the agency’s operations. According to leading governance practices, a board needs to have an effective oversight process, supported by timely and accurate information and clear communication channels. The types of oversight information available to the board are important because they can provide the board with understanding about areas in need of attention and improvement regarding the operations and finances of the agency. However, past board practices such as infrequent meetings of the Audit and Investigations Subcommittee and the lack of routine briefings on the status of recommendations from outside parties may have impaired the ability of the board to use this information to effectively carry out its oversight role. The board receives or has access to several key sources of information related to finance, operations, and safety that could facilitate effective oversight. For example, in 2006, WMATA established the OIG to conduct and supervise audits, program evaluations, and investigations. The inspector general is appointed by the board and reports directly to it. The board also receives information that could facilitate effective board monitoring and oversight from two important external entities. At the federal level, the Federal Transit Administration (FTA) conducts a triennial review, a procurement systems review, and a financial management review. In the most recent series of these reviews, in 2007 and 2008, FTA recommended improvements in several areas, including preventative maintenance; internal controls related to real property, facilities, and equipment; procurement policies and procedures; and WMATA’s cost allocation plan and grant budget accounting. FTA officials stated that these types of findings and recommendations were typical of those found at other transit agencies. Additionally, the Tri-state Oversight Committee was created in 1997 by state-level agencies in Virginia and Maryland and the District of Columbia to jointly oversee rail safety and security at WMATA. In 2007, the committee made several findings and observations, many of which dealt with updating agency documentation or policies, such as the system safety program plan. More recently, in 2010, the committee reported that WMATA has worked to resolve outstanding safety issues and findings from previous internal and external safety reviews and investigations. Additionally, there are other mechanisms for the board to obtain relevant information from stakeholders, including RAC, the Jurisdictional Coordinating Committee (JCC), and a regular public comment period during board meetings. Internally, the board’s six committees provide procedures and communication channels to facilitate the flow of guidance and oversight information to the board in areas such as finance, safety, security, and customer service. For example, one of the board’s key governance areas is its responsibility to annually adopt a capital budget for the agency. The Finance and Administration Committee—with its overall responsibility for monitoring the financial integrity and viability of WMATA—recommends capital and operating budget approval to the board, monitors capital and operating budget implementation and management, develops budget preparation guidance, and recommends proposed budgetary changes to the board. Additionally, the committee recommends policies for fare setting and oversees the operation and development of fare collection mechanisms, among other things. The Audits and Investigations Subcommittee, which is part of the Finance and Administration Committee, serves as the main avenue for information that can be used to facilitate the board’s oversight of financial reporting and audit processes—including the financial reporting and related audits and OIG reports—which are reported or otherwise available to the board. According to the subcommittee chair, the subcommittee provides input, along with management, into an internal audit plan developed by the OIG each year prior to the adoption of the annual budget and uses the OIG’s quarterly reports to monitor the status of corrective actions taken by WMATA on outstanding OIG recommendations. The subcommittee chair also noted that the subcommittee uses an independent auditor’s report on WMATA’s financial statements and single audit report to facilitate its oversight of the quality and integrity of WMATA’s internal controls, compliance systems and accounting, auditing, and financial reporting processes. Furthermore, the subcommittee chair explained that the board also uses this information to monitor the status of corrective actions taken on past recommendations made by the external auditor. The board’s Audits and Investigations Subcommittee is the board’s main channel for audit information and provides the opportunity for financial oversight information to reach the board. However, the subcommittee has met relatively infrequently. The subcommittee met once in 2008 and twice in both 2009 and 2010—including meeting with the OIG to discuss safety and investigative matters and to discuss and accept the external auditor’s annually required report on the audit of WMATA’s financial statements. Additionally, the current placement of the subcommittee within a full committee differs from other transit agency practices. By comparison, some transit agencies we visited had an audit committee that met more often and had the audit and financial reporting function elevated to a committee. For example, the audit committees at SEPTA and New York’s MTA met four and seven times, respectively, over the last year; while Boston’s MBTA met less often. However, given the variety in other transit agencies’ practices and the lack of clear criteria on how often audit committees should meet, there is no clear standard against which to measure WMATA’s practices. According to the board procedures, the Safety and Security Committee is responsible for providing safety and security policy direction; oversight to assure that all facilities, equipment, and operations of the transit system are safe and secure; and safety and security goals for the GM/CEO and the agency. To carry out its duties, the committee reviews WMATA’s system safety program plan for consistency with safety goals and receives periodic reports from the Tri-State Oversight Committee. It also works with FTA and NTSB, as appropriate, to review the status of WMATA safety with the goal of assuring that all safety recommendations from any internal or external safety review or investigation are handled expeditiously and effectively. The committee has met regularly since October 2010, according to the agency. A 2010 report by NTSB highlighted problems with the flow of safety oversight information. That report states that the WMATA board chairman told NTSB that prior to the June 2009 accident the board did not receive routine briefings on safety recommendations or corrective action plans; rather the board counted on the GM/CEO to identify relevant issues that required the board’s attention. In response, NTSB recommended that the board evaluate actions taken in response to recommendations and corrective action plans from NTSB, FTA, and the Tri-State Oversight Committee. WMATA has several offices, including the OIG, tasked with internal and external recommendation tracking. The Safety and Security Committee receives regular reports from the agency’s Chief Safety Officer and Chief of Police on the status of the responsiveness of the agency to internal and external safety findings, including the status of corrective action plans, as well as any significant accidents or incidents. WMATA officials told us that they are developing an updated safety recommendation tracking system, and NTSB has closed this recommendation as implemented. Additionally, NTSB concluded that, before the June 2009 accident, the board did not exercise oversight responsibility for the safety of the WMATA system, leading it to recommend that the board elevate its safety oversight role by developing a policy statement to explicitly and publicly assume the responsibility for continual oversight of system safety. WMATA has implemented this recommendation. The board’s other committees have additional oversight responsibilities. For example, the Customer Service and Operations Committee is responsible for overseeing transit system performance and service standards; the quality of operations programs and procedures; and customer service, communication, and outreach activities, including public and media relations. The objective of the committee is to help ensure that WMATA operational activities and programs are designed to provide reliable, effective and clean transit service, responsive to customer needs. The Policy, Program Development and Intergovernmental Relations Committee is responsible for coordination of regional planning issues and planning for transit service, access, and system expansion, among other things. As mentioned earlier, in April 2011, the recently created Governance Committee released draft bylaws which, if adopted, would elevate the Audits and Investigations Subcommittee to a full committee, streamline board communications by standardizing communication procedures and channels, and formalize the board’s relationship with advisory committees such as JCC and RAC. While there is no single approach to best support all transit agency oversight, officials at MTA noted that they also used additional ways to support their oversight functions that they believed had benefits. For example, officials told us that, pursuant to state statute, the agency uses an independent engineer to evaluate key technical or capital-intensive projects, assess risk, and act as a control on those projects. One WMATA board member indicated a desire to have access to independent expertise for consultation, noting that such resources could improve the board’s effectiveness. Additionally, the Governance Task Force and RAC have recommended that WMATA change elements of its board structure—such as increasing the size of the board and changing the role of alternates—to improve its governance. Our analysis, however, indicates that most of the recommended changes have trade-offs—there are both benefits and drawbacks to them. We compared the various recommendations to leading governance practices, approaches taken by other transit agencies, and the views of board members and stakeholders. Board members and stakeholders indicated that proposed changes to the board’s structure and processes—such as eliminating alternate board members, changing the size of the board, or eliminating the jurisdictional veto—have trade-offs, and we did not find consistent support among leading governance practices or other transit agencies that these changes would improve governance. Some other proposed changes such as uniform compensation and coordinated board member appointments will require action by the three jurisdictions. To accomplish that task, the Governance Task Force recommended that the signatories and the appointing authorities form a WMATA Governance Commission to make improvements to the authority’s governance structure and hold the board accountable for its performance. Such an additional oversight body could help facilitate coordination among the jurisdictions. However, we did not identify governance leading practices, or find other transit agencies with a comparable oversight board over a board of directors. Furthermore, such a commission was viewed by some stakeholders we spoke with as redundant because it would be comprised of most of the same membership that is responsible for appointing the board of directors. Appendix II discusses selected recommendations in more detail. WMATA has developed elements of strategic planning over the past 4 years, but the agency’s board and management could improve their strategic focus and long-term planning processes. Leading organizations that we have analyzed use strategic planning to articulate a comprehensive mission as well as to identify and achieve long-range goals and objectives for all levels of the organization. While strategic planning practices may vary among organizations according to agency-specific needs and missions, according to leading strategic planning practices we identified, effective strategic planning generally includes a mission statement, long- term goals and objectives, and strategies to achieve the goals; covers the major functions and operations of an agency; and establishes a multiyear time frame and performance metrics for gauging progress. According to the literature, the process for strategic planning should also include assessing the organization’s external and internal environments, conducting a stakeholder analysis and involving the board and key stakeholders in the strategic planning process, identifying key strategic issues facing the organization, developing a process for implementing and managing these issues, and reassessing the strategic planning process. WMATA has not succeeded in past attempts at strategic planning. WMATA officials acknowledged several failed efforts at strategic planning, which they said occurred because of a lack of management support and employee buy-in, a lack of specific actions to execute the plans, and a focus on tactical versus strategic decision making. According to a senior WMATA official, however, the agency is in the process of developing a strategic planning and performance management system, which consists of a strategic framework, a GM/CEO’s annual execution plan, and internal departmental execution plans. The strategic framework is a one-page document, available on WMATA’s Web site, which outlines the agency’s mission statement, along with 5 goals and 12 objectives. The agency’s departmental execution plans are internal documents—not available on the Web site—that identify actions, measures, targets, and responsibility for meeting WMATA’s strategic goals and objectives. The final component of WMATA’s strategic planning system is the GM/CEO’s execution plan, which a senior WMATA official told us identifies annual safety, operational, and financial performance measures and targets. According to a senior WMATA official, as of May 2011, this document was being reviewed by the board. It was not made available to us. WMATA has developed several elements of effective strategic planning through its strategic framework and execution plans, such as a mission statement, goals, objectives, strategies, and metrics. The agency’s strategic framework includes a mission statement for the agency, which was approved by the board, along with goals and objectives for the programs and operations of the agency. WMATA also has developed some processes for implementing and managing its strategic issues through departmental execution plans. These plans contain strategies for key actions that are linked to the strategic goals and objectives. WMATA has also linked the prioritization of its capital needs to its strategic goals and objectives, as part of aligning its activities to support the agency’s goals. Furthermore, the departmental execution plans also include performance metrics and targets for tracking progress on the agency’s key actions for achieving its goals and objectives, some of which are publicly available and regularly reported to the board. WMATA’s strategic planning and performance management system does not include some strategic planning elements of leading organizations that we have studied, such as stakeholder awareness and involvement, environmental assessments, a long-term time frame and regular updating, program evaluations, and up-to-date performance metrics. Specifically: Board and stakeholder awareness and involvement are lacking. According to strategic planning practices we identified, a strategic planning process at a transit agency should be driven by the board, as part of its role in setting the direction and priorities of the organization. Board involvement in the strategic planning process allows the board to help the system identify and maintain focus on strategic priorities. Board leadership can also help implementation of strategic actions proceed more effectively by providing support from an agency’s highest level. Furthermore, boards can help an agency identify and assess external opportunities and challenges as part of their responsibility for relating an organization to its external environment. Several other major transit agencies we studied use board-driven strategic planning processes to establish the direction of the agency. For example, the strategic goals and plan for San Francisco’s BART are formally adopted by the agency’s board and serve as the guiding document for the agency’s budget process. WMATA’s strategic framework was not developed with board input and did not include a process to identify priorities and direction from the board. For example, several WMATA board members told us that the board has not been involved in strategic planning. Some board members also were not aware of the agency’s strategic planning efforts, as several members told us they were not clear on the nature of WMATA’s strategic planning process or if the agency had a strategic plan at all. As discussed earlier, the board’s documented roles and responsibilities also do not delineate a role for the board in strategic planning. Board members expressed an interest in being more involved in strategic planning and setting the direction of the agency. WMATA’s Governance Committee has also cited strategic planning as an upcoming task for the board. A senior WMATA official also told us the board is in the process of reviewing and approving the GM/CEO’s 2011 execution plan. However, without prior board involvement, WMATA’s strategic planning process may not appropriately reflect the views of parties potentially affected by or interested in the agency’s activities. WMATA has also not fully communicated its strategic planning process to some of its internal stakeholders. Strategic planning processes can be important tools for communicating an organization’s intentions internally and ensuring the entire organization is moving in the same direction, according to strategic planning practices we identified. Further, a strategic planning process that affects an entire organization should involve an organization’s key decision makers. WMATA’s strategic plans have not been communicated to all key decision makers. For example, a senior WMATA official noted that the agency’s strategic planning efforts did not account for workforce attrition and he was unaware of the internal execution plan for WMATA’s Human Resources department, which includes actions to identify retirement forecasts for employees. Without good communication, WMATA cannot ensure its strategic planning process fully articulates the agency’s mission, goals, and objectives to its internal stakeholders. A lack of transparency also exists among some external stakeholders, such as the jurisdictions and the general public, in terms of understanding the agency’s strategic actions, priorities, and vision. According to strategic planning practices we identified, stakeholder analysis and involvement are important aspects of an effective strategic planning process. A stakeholder analysis can help an organization identify and incorporate the various criteria their external stakeholders use to judge the organization and how the organization is performing against those criteria. A senior WMATA official told us that JCC, which consists of representatives from the three local jurisdictions, was consulted on the agency’s strategic goals, performance measures, and reporting, but some officials from the jurisdictions told us they were not aware of the agency’s strategic planning efforts and did not believe the agency engaged in any strategic planning. Such awareness may be hindered because, of the three components of WMATA’s strategic planning process, only the one-page strategic framework is publicly available. More publicly available information on WMATA’s strategic planning process could improve awareness of the agency’s efforts and challenges among external stakeholders. In commenting on a draft of this report, WMATA noted that in June 2011 it launched a new strategic planning initiative that will include input from external stakeholders. Senior officials at several transit agencies told us or have stated publicly that stakeholder involvement and awareness of their strategic planning efforts have created greater external understanding and support for the agency and helped regional stakeholders understand their decisions and needs. For example, officials with New York’s MTA told us that regional stakeholder awareness of the agency’s strategic planning efforts and future needs have increased stakeholder buy-in for the agency’s planning. Research on transit agency strategic planning has also shown that stakeholder awareness of strategic planning can help define the agency’s core role and responsibilities to the community. Additionally, if an organization does not understand and effectively meet its stakeholders’ performance criteria, then the agency may not satisfy its stakeholders and could receive less support from them. Internal and external environmental factors that could affect goals are not clearly assessed. WMATA’s strategic planning and performance management system does not clearly state key internal and external risk factors that could significantly affect the achievement of its goals and objectives. We have previously reported that for strategic planning to be done well, organizations must assess their internal and external environments. An agency should study its internal environment to identify strengths and weaknesses of the organization. Organizations should also identify external opportunities and challenges, as many external forces that fall beyond an organization’s influence can affect its chances for success. Some of the external factors that may be identified in these assessments could be economic, demographic, social, or environmental and may be stable, predictable, or variable. Other transit agencies we studied take into account factors that may affect the achievement of their goals. For example, the strategic plan for SEPTA in Philadelphia includes an analysis of the internal and external factors, such as a potential loss of dedicated funding and unfunded mandates for the agency, that could impact the agency’s strategic objectives. SEPTA’s plan states that this assessment helps the agency identify the strengths, weaknesses, opportunities, and threats to the agency from its environment. While WMATA has taken into account threats to its capital program by assessing the potential risks for the delivery of its capital projects, it has not conducted an external environment assessment for the rest of its strategic planning and performance management system, though a WMATA official told us the agency has plans to do so in the future. Without such assessments, WMATA may not be able to respond effectively to changes in its environment. Time frame and updating of strategic plan are unclear. WMATA’s strategic planning efforts do not clearly establish a long-term, multiyear outlook and do not include a schedule for updating or revising the agency’s strategic goals, objectives, and strategies. While strategic planning practices we identified vary on prescribing a specific time frame necessary for strategic plans, the ones that did identify a time frame state that strategic planning efforts should look at least 4-6 years into the future. Several other transit agencies, such as BART and MTA, have multiyear plans and regularly update their strategic plans. For example, MTA officials told us they plan 4 and 5 years into the future and annually review the agency’s priorities. MTA officials said this process helps the agency’s board focus on long-term issues and avoid short-sighted decisions. In commenting on a draft of this report, WMATA noted that its new strategic planning process will develop a multiyear vision and multiyear business and operational plans. WMATA uses a 10-year plan for its capital program linked to the agency’s strategic goals and objectives. But it is not clear from our review of the strategic framework or departmental execution plans if WMATA planned several years into the future for all of its major operations and departments. For example, WMATA does not include any multiyear goals or actions in its departmental execution plans that extend beyond fiscal year 2012. In addition, WMATA officials told us that, as a result of insufficient long-term planning, priorities such as new technology, staff, and capital needs are approved—and sometimes underfunded—during the annual budget process rather than planned for strategically. In terms of regular updating, senior WMATA officials told us that the GM/CEO’s execution plan will include performance metrics and targets the board will annually review. The agency’s strategic framework and departmental execution plans do not include procedures for regular review and update. Ensuring a multiyear time frame and regular updating of the agency’s strategic planning system can encourage the board and staff to have a more long-range view in decision making and priority setting. Long-term planning and regular updating could help WMATA address some problems with the transit system. According to senior WMATA officials, board members, and other stakeholders, WMATA has historically concentrated on system expansion and has not sufficiently focused on the long-term maintenance of the system. The agency has well-documented maintenance issues, such as problems with the system’s escalators breaking down frequently. Additionally, WMATA’s GM/CEO has stated publicly that the agency lacks a long-term, systematic plan for its track rebuilding program and is unable to plan major track maintenance for more than 6 months in advance. One WMATA official told us that certain maintenance projects and technological upgrades undergo an inefficient and lengthy process from conception to implementation. Program evaluations are not systematic. While WMATA does perform some evaluations that assess the effectiveness of its programs, these evaluations are not conducted on a regular basis or uniformly across the agency and the agency’s strategic planning documents do not describe or identify any program evaluations used for establishing or revising the agency’s goals and objectives. We have previously reported that program evaluations can be a potentially critical source of information in assessing the appropriateness and reasonableness of goals, the effectiveness of strategies, and the implementation of programs. A systematic evaluation of how a program was implemented can also provide important information about the success or failure of a program and suggest ways to improve it. A senior WMATA official told us that the agency conducts performance spotlights on areas with negative performance indicators, as a way of evaluating and identifying the causes and possible solutions to an indicator’s performance. However, the agency’s strategic planning documents and comments from a senior official do not describe or identify any program evaluations used for establishing or revising the agency’s goals and objectives or for evaluating the progress towards achieving those goals. Some performance metrics are outdated and were not developed with board involvement. WMATA has made significant progress in performance management, but some weaknesses remain. Strategic planning practices we identified state that strategic planning processes should be linked to performance measurement and include metrics for gauging progress toward the attainment of each of the plan’s long-term goals. This is necessary for monitoring whether goals are being achieved and if changes are necessary. To its credit, WMATA created an Office of Performance in 2010 to develop a performance management framework for the agency’s operations through enhanced performance measurement and reporting. The office has created a “vital signs” report, which is a scorecard of 12 key performance indicators for WMATA. The board also receives regular reports from the office on the agency’s performance. Additionally, the office has worked to establish consistency throughout the agency by standardizing the tracking of information for performance measurement. Further, WMATA’s performance metrics and targets are linked to the agency’s strategic goals and objectives. Although WMATA board members and officials indicated that the office is a good start to improving the performance management of the agency, some of WMATA’s performance metrics and targets are out of date and the board has not been fully involved in assessing the metrics and their criteria. As part of its strategic planning efforts, WMATA has established performance metrics and targets in its departmental execution plans for measuring each key action for achieving the agency’s goals and objectives. Performance metrics and targets need to be updated to anticipate changes in the agency’s resources and operating environment. Senior WMATA officials have acknowledged that some of the agency’s performance metrics and targets are based on data and information that is out of date. To address this issue, in May 2011, a senior WMATA official told us management has proposed revised performance targets to the board’s Customer Service and Operations Committee. According to leading strategic planning practices, as part of a board’s role in overseeing the agency and monitoring progress towards the achievement of strategic goals, a board should review an agency’s performance measures on a regular basis. For example, BART’s board works with management to revisit goals and performance metrics on an annual basis. By comparison, the WMATA board has not conducted a comprehensive assessment of the criteria used for setting the agency’s performance measures. A senior WMATA official has told us that the agency’s performance targets will be reevaluated by the board on an annual basis or if operating conditions change. Without such review and input from the board, WMATA’s performance metrics and targets may not reflect the agency’s current challenges or accurately measure WMATA’s progress towards achieving its goals and objectives. As a result of compact changes, WMATA’s board expanded in August 2009 to include two members and two alternates representing the federal government; as of June 2011, the agency responsible for making the appointments—GSA—had appointed two federal board members and one alternate. GSA officials noted the lack of compensation for board members deters some possible candidates, particularly for alternates. GSA officials told us they based appointments on the following qualifications: the appointees must (1) be WMATA riders, (2) be able to serve part-time and without additional compensation for their service, and (3) possess transportation experience. Such qualifications do not follow leading governance practices that call for linking the composition and skill set of a board to the entity’s particular challenges and strategic vision. Furthermore, GSA has not developed a documented process for fulfilling its obligation under the compact to appoint federal board members. Without documenting the steps and criteria for identifying and screening candidates and selecting board members, GSA cannot be assured that it is appointing qualified board members who have knowledge of the federal interest in WMATA and federal employees who ride the system. Once federal board members are appointed, GSA officials told us that GSA does not have a role in providing staff support and providing guidance on the federal views. By comparison, other WMATA board members are provided staff support from their appointing jurisdictions. One federal board member told us that he sometimes coordinates with the U.S. Department of Transportation on issues; however, the relationship is not formal. WMATA faces challenges in many areas, including projected shortfalls in meeting long-term capital costs, increases in ridership levels, and plans for system expansion. In addition, following the fatal June 2009 rail accident, WMATA board members and management have been tasked by NTSB and other stakeholders with making WMATA a safer system. However, the absence of a clear delineation of the board’s roles and responsibilities for providing oversight of management as well as the absence of a board- driven strategic vision raise concerns about WMATA’s ability to systematically and effectively confront its many challenges. WMATA currently has some elements of effective governance in place. However, board members and WMATA senior officials described a culture in which there is a lack of clarity about the roles of the board and individual board members, which has resulted in their overreach into management responsibilities. Such a culture limits the ability of the board to provide leadership, direction, and a strategic vision to management. Without a long-term strategic vision, board members approve priorities such as new technology and capital needs during the annual budget process rather than proactively prioritize needs over the long term. Recent changes in the board, as well as the development of the Governance Committee and draft bylaws, present an opportunity to better formalize and document the roles and responsibilities of the board and management and to collaboratively create and implement a long-term, strategic vision for WMATA. In addition, regular evaluations by the board of its own effectiveness relative to WMATA’s performance could help facilitate understanding by board members of how well the board is functioning and how to improve board activities and interactions. Successfully addressing these issues could better position WMATA to meet the agency’s future challenges. In addition, GSA, which became responsible for appointing federal members to WMATA’s board in 2009 as a result of changes to WMATA’s compact, has subsequently appointed two members and one of two alternates. Qualifications for appointment include riding WMATA and possessing transportation experience. Such qualifications, although important, do not follow leading governance practices that call for a board to have the skill set to deal with the agency’s particular challenges. In addition, GSA has not documented a process or specific criteria for making the appointments and it, therefore, lacks assurance that it appoints qualified board members. In order to improve the strategic focus of WMATA’s board and improve the agency’s performance, the board of directors working with the GM/CEO should take the following three actions: 1. As WMATA takes steps to clarify the roles and responsibilities of the board and management in its draft bylaws, it needs to ensure that a clear delineation of the roles and responsibilities of each are adopted and effectively implemented. 2. Improve the agency’s strategic planning process by (1) defining and documenting roles for the board, management, and stakeholders in strategic planning; (2) ensuring that the strategic plan is sufficiently long term; (3) ensuring that board-approved strategic goals and objectives are linked to updated performance measures; (4) including internal and external assessments and program evaluations; and (5) reviewing the strategic plan on a regular basis and updating it as needed. 3. Conduct a regular assessment of the board’s performance, including elements such as an evaluation of the effectiveness of the board’s organization, structure, and functioning, and its impact on performance. In addition, we recommend that the Administrator of the General Services Administration document specific criteria for identifying and selecting candidates to represent the federal government on WMATA’s board. We provided a draft of this report to WMATA, GSA, the Department of Transportation, and NTSB for their review and comment. WMATA and GSA provided written comments, which are reproduced in appendix IV and appendix V, respectively. WMATA and the Department of Transportation also provided technical comments, which we incorporated into the report as appropriate. NTSB had no comments. WMATA recognized the balance that we have striven for in the report between areas of concern in WMATA’s recent past and the progress the agency has recently made on those issues. However, WMATA felt the report could be strengthened by additional information on WMATA’s recent actions. We revised the report to include additional WMATA actions, such as launching a new strategic planning process that will take a multi-year perspective. GSA agreed, in part, with our recommendation and findings. GSA disagreed with our statement that it cannot assure that it is appointing qualified board members. We acknowledge the effort GSA has taken to identify and appoint board members; however, past efforts do not assure that future replacements for existing board members will be qualified and appointed in a timely manner. We are sending copies of this report to interested congressional committees, the Secretary of the Department of Transportation, the Administrator of the General Services Administration, the Chairman of the National Transportation Safety Board, and the Chairman and GM/CEO of WMATA. In addition, this 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 or would like to discuss this work, please contact me at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Individuals making key contributions to this report are listed in appendix VI. Our objective was to assess the Washington Metropolitan Area Transit Authority’s (WMATA) governance in terms of the board’s roles and responsibilities, oversight, strategic planning, and governance structure, and identify changes, if any, that should be made. Specifically, we addressed the following question: How do roles and responsibilities, oversight, and strategic planning elements of WMATA’s practices align with leading governance practices? In addition, we provide information on the appointment of federal members to WMATA’s board. For the purpose of this work, we focused on WMATA’s governance in terms of the board’s structure, communication, policies, practices, and documentation relating to its oversight of management and carrying out of its organizational mission. In addition, we analyzed management’s role in certain areas, such as strategic planning; however, we did not fully assess the adequacy of management’s role in effectively operating the agency. We selected leading governance practices relevant to transit agencies from several sources, including those practices used in previous GAO work on public and private sector governance challenges at several organizations and non-GAO studies, reports, and recommendations concerning the governance of transit agencies, other similar organizations, and corporations. Additionally, we selected strategic planning practices from the Transit Cooperative Research Program, previous GAO work, and other sources as appropriate. We then consolidated and categorized governance practices and recommendations along similar themes, such as structure, oversight, and strategic planning (see table 2). To determine how WMATA’s practices align with these leading governance practices, we reviewed and compared the composition and structure of the WMATA board and senior management, communication between the board and management, policies and other documentation in place to guide agency practices, and internal and external oversight practices to the governance and strategic planning practices. We conducted semistructured interviews with WMATA senior management listed in table 3. We also conducted semistructured interviews with local jurisdictions, current board members, oversight agencies, and other groups conducting governance reviews. In addition, we conducted semistructured interviews with officials from transit agencies and other stakeholder groups—such as metropolitan planning organizations—in Atlanta, Boston, Chicago, New York, Philadelphia, and San Francisco. We chose these agencies based on similarities to WMATA along characteristics, such as size and makeup of the board, annual ridership, services provided, budget issues, and complexity of the service area. We conducted this performance audit from September 2010 to June 2011 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. This appendix provides additional discussion of selected recommendations from the Metropolitan Washington Council of Governments and Greater Washington Board of Trade sponsored Task Force (Governance Task Force) and includes the Riders’ Advisory Council (RAC) response or related recommendation, when applicable. The WMATA compact provides that the authority shall be governed by a board with 8 board members, 2 appointed by each signatory, and 2 from the federal government. In addition, each signatory and the federal government should appoint 2 alternate board members. The total membership of the board is 16, including board members and alternate board members. The WMATA board procedures allow that alternate board members can vote in committee meetings and attend and participate in full board meetings, but can only vote in absence of “their” voting member. The role of alternate members of WMATA’s board is greater than that envisaged by the compact, and it is unusual to have alternate members on a transit board. Therefore, WMATA should “eliminate the role of alternates and increase the number of primary members from two to three for each Appointing Authority, resulting in a 12-member Board, with one member appointed by the Chief Executive of each Signatory.” According to some corporate governance guidelines, boards should have no fewer than 5 members and no more than 15. Other transit agencies we visited ranged in size from 5 to 17 voting members (see table 4). WMATA’s use of alternate board members is unique among the transit agencies we visited. We did not find leading governance practices on the use of alternates or nonvoting board members. WMATA’s 8 voting member board compares with private sector corporate governance guidelines; however, including alternates, WMATA’s board is among the largest boards that we reviewed, and larger than the size recommended by corporate governance guidelines. A 12-member board with no alternates, as recommended, would align with corporate governance guidelines. In addition, eliminating alternates would create a board comparable with four of the six transit agencies we visited. While the Governance Task Force report recommended a change in the role of alternates and number of primary board members, the report did not find the current size of the board a problem. RAC also commented that the current size of the board functions well and alternates provide for representation for more riders. Eliminating the role of alternates and increasing the number of primary members as recommended are changes that would require a compact amendment. Board members and stakeholders told us that there are trade-offs to changing the size of the board. One board member offered that the current size of the board is structurally weak and can make consensus-building more difficult. However, another board member noted that the extension of the rail system to Loudoun County will add another jurisdiction to the rail service area. Therefore, reducing the size of the board would make it difficult to envelop the additional jurisdiction. Board members varied in their views on the role of alternates. Several board members commented that if the board has alternates—as currently required by the compact—then those board members should be active and informed on board business, and the current role of the alternates provides that opportunity and can be a good way to learn about the authority. Other board members commented that alternates bring knowledge and value to the board and that alternates allow committee work to be distributed among more members. However, two board members believed that the time and commitment needed to be an alternate is too high given that alternates cannot vote in board meetings. Two others suggested that the compact be changed to allow alternates to become voting members. Staff from each appointing authority told us that board positions can be hard to fill. Staff from the General Services Administration (GSA) further stated that filling alternate positions, in particular, can be difficult. The WMATA compact provides that board members shall be appointed by the Northern Virginia Transportation Commission, for Virginia; by the Council of the District of Columbia, for the District of Columbia; and by the Washington Suburban Transit Commission, for Maryland. Federal board members are appointed by GSA. The WMATA compact does not have any specific requirements for board members, except that one of the federal board members must be a regular rider of the transit system. There is no requirement that jurisdictions coordinate on board appointments. There are no criteria or procedures in the current appointment process to ensure the WMATA board collectively has the balance of attributes it needs to perform effectively. Therefore, jurisdictions should have a “coordinated process for appointing a board with the right balance of attributes to serve WMATA and the region.” Leading governance practices state that an effective transit board is balanced along several dimensions and that it is important to have board members who are political, as well as those with business, financial, legal, and marketing backgrounds. Requirements for balance of experience on boards at transit agencies we visited or spoke with vary, but some have legislative or procedural requirements for expertise on their boards. For example: In Boston, MBTA’s enabling legislation requires that among its board of directors, two shall be experts in public or private transportation finance; two shall have practical experience in transportation planning and policy; and one shall be a registered civil engineer with at least 10 years experience. In New York, beginning in June 2009, newly appointed MTA board members were required to have experience in one or more of the following areas: transportation, public administration, business management, finance, accounting, law, engineering, land use, urban and regional planning, management of large capital projects, labor relations, or have experience in some other area of activity central to the mission of the authority. Additionally, geographic representation requirements apply. In Chicago, CTA board members cannot hold government (local, state, federal) office; rather, they must come from the local private sector and community. In San Francisco, BART board members are directly elected based on geographic regions. Despite the lack of requirements, WMATA’s board includes members with diverse backgrounds or experience in transit, local and federal government, business, and nonprofit organizations. In addition, the jurisdictional nature of the appointing process ensures geographically diverse representation. Several current WMATA board members agreed that having a mix of expertise on the board is beneficial; however, the board members disagreed about whether expertise requirements were beneficial, or even possible. One board member told us that the current board has as much transit expertise as it has ever had, while another pointed out that board members with transit expertise tend to get too involved in operations. Under the WMATA compact, if both voting members from the same jurisdiction vote against an action, this would constitute a jurisdictional veto. The Governance Task Force found that the threat of using the veto has sometimes acted as an impediment to making the best regional decisions. Therefore, the board should “limit use of the veto to matters relating to the budget or system expansion.” Additionally, “the signatories should determine the appropriate role of the veto in WMATA’s decision-making process and give serious consideration to eliminating it entirely.” We were unable to find clear leading governance practices related to a jurisdictional veto and none of the other transit agencies we visited use a similar veto. WMATA board members we spoke with had varied views of the current and future role of the jurisdictional veto. These views include that the jurisdictional veto is: helpful, because the threat of a veto can force consensus; necessary to protect jurisdictions; redundant, because a jurisdiction could also withhold funding as a “de facto” veto; should be limited to route planning and budget issues; and should be eliminated. WMATA’s General Counsel pointed out that the compact provides for limited exceptions to the use of the veto. One such exception is for the mass transit plan, which serves as the plan for system expansion. However, in this case, a jurisdiction could later decline to approve operational funding for the system expansion, so the region has always moved by consensus on system expansion, even though the jurisdictional veto does not apply to approving a plan for system expansion or a plan of finance for the system expansion. RAC, in its report, differed from the Governance Task Force’s recommendations, commenting that while “the veto may rankle and appear to create the opportunity for ‘gridlock,’ WMATA is above all else a cooperative endeavor between three signatories with their own interests. It must ensure that no one is put at a disadvantage to ensure ongoing support from leaders and residents of all three. Messy as it is, the veto is necessary and should stay.” The elimination of the jurisdictional veto would require a compact change. According to the compact, the board must elect a chair at the beginning of every year. The board recently changed its procedures to end a policy that required the chair to rotate between jurisdictions every year. A term length of 1 year is too short for the chair to assume true leadership. Therefore, “the board should increase the term length of the chair from one to two years.” In addition, responsibilities should be clearly defined to ensure “the chair has sufficient authority to assume a true leadership role.” Leading governance practices state that a strong chairperson is essential for an effective transit board and note that it is the chair’s role to lead and motivate the board in achievement of the transit system’s mission, strategic goals, and performance. Practices at other transit agencies vary—for example, MARTA has similar rotations among jurisdictions, although they are not required by legislation or procedures. Other transit agencies have structures allowing for stronger chairs. For example, officials at SEPTA told us that the SEPTA board has a strong chair, who helps organize board activities, creates a clear chain of command within the board, and helps ensure communication with management and dissemination of information to board members. Board members had differing views on chair rotation and the role of the chair including comments that (1) the change to a longer term chairmanship will have little impact, (2) the current role of the chair is not a strong position, and (3) that it is most important that the chair think regionally. However, two board members, respectively, commented that a stronger, or longer-term, chair will lead to improvements. Three other board members, respectively, told us that the annual rotation did not make sense, resulted in a lost sense of responsibilities, and the practice needs to be changed. The board recently updated procedures to eliminate the need to rotate the chairmanship. However, the compact requires that a chair be elected each year. The compact does not require that the chair be a different board member each year; however, a compact change would be required to lengthen the term of the chair. Board procedures or other board-approved documentation could be adjusted to strengthen the role of the chair. RAC made a similar recommendation, writing that “the Board chair should no longer automatically rotate. Instead, Board members should elect the best chair each year. Reelection of capable chairs is encouraged for continuity.” The WMATA compact states that “members of the board and alternates shall serve without compensation but may be reimbursed for necessary expenses incurred as an incident to the performance of their duties.” However, some board members receive some remuneration by their appointing jurisdiction. The lack of consistency among the appointing authorities as regards compensation arrangements is illogical and runs contrary to the spirit of regional cooperation. Therefore, “a uniform compensation policy” should be developed “for all members of the WMATA board.” Leading governance practices state that boards should have uniform compensation policies. The majority of transit boards are voluntary and members either are not compensated or receive a modest per diem. Board members we spoke with had varying perspectives on the issue of compensation. Several board members commented either that financial support for service on the board should be uniform, or that board members should receive no support, or both. However, some board members that receive support told us that the stipend they receive helps offset the expenses of participating on the board. The WMATA board currently has no fixed oversight body, other than the jurisdictional appointing authorities that can change board members. WMATA’s signatories and appointing authorities do not meet, and they have never agreed to uniform expectations or role descriptions for their board members. This has resulted in a lack of clear delineation of responsibilities among WMATA’s governing entities. Therefore, “the Signatories and the Appointing Authorities should come together to form a WMATA Governance Commission, to make improvements to the authority’s governance structure and hold the board accountable for its performance. The Commission would be responsible for undertaking several of the Governance Task Force recommendations.” We did not identify governance leading practices or find other transit agencies with a comparable oversight board over a board of directors. Among the transit agencies we visited, Boston MBTA is part of the state government. Other transit agencies we visited, such as San Francisco BART and Chicago CTA, are independent agencies with varying degrees of accountability to other local agencies. Many of the board members we spoke with were unclear about the purpose of the governance commission, concerned about its purpose, or generally disapproved of the concept. Staff from the Governance Task Force told us that the proposed governance commission was not designed to be an additional level of bureaucracy, rather a forum for key stakeholders to gather and discuss issues. A governance commission could fill an existing gap in accountability and oversight over board members. However, such a commission could be viewed as redundant because it would be comprised of most of the same membership that is responsible for appointing the board of directors. Tables 5 through 11 include data on the transit agencies we visited or spoke with and show how those agencies compare to WMATA across several data points, including ridership and budget. In addition to the contact named above, Teresa Spisak (Assistant Director), Matthew LaTour, Jessica Evans, Colin Fallon, William King, Susan Sachs, and Mindi Weisenbloom made key contributions to this report. | The Washington Metropolitan Area Transit Authority's (WMATA) public rail transit and bus systems are vital to the national capital region. However, the 35-year-old rail system has experienced safety and reliability problems, including fatal accidents. A 16-member board of directors governs WMATA, setting policies and providing oversight. Recent reports have noted weaknesses in WMATA's governance structure and recommended changing it. GAO assessed WMATA's governance in terms of the board's roles and responsibilities, oversight, and strategic planning. To do so, GAO compiled leading practices from previous GAO work on public and private sector governance, non-GAO transit governance studies, and strategic planning standards; then compared WMATA's approach to those practices. GAO also spoke with six transit agencies selected based on board composition and ridership, among other things. Although some requirements and guidance for board roles and responsibilities are provided in the WMATA compact and board procedures, WMATA board members, officials, and other stakeholders have reported that sometimes the board focuses on management's day-to-day responsibilities rather than higher level board responsibilities such as oversight and strategic planning. This focus may have resulted from, for example, inadequate delineation and documentation of the board's responsibilities as well as inadequate communication among board members. In addition, while leading governance practices state that effective transit boards monitor the effectiveness of the board's organization, structure, and functioning through a regular board selfassessment, WMATA's board does not do so. As a result, the board lacks a key mechanism for regular, ongoing measurement of its performance. In April 2011, the board released draft bylaws that clarify the roles and responsibilities for the board and propose that the board chair coordinate a board selfevaluation. These draft bylaws represent a good first step toward addressing some of the concerns discussed in this report but will need to be adopted and then effectively implemented to achieve their desired effect. The board's oversight role is supported by the board's committee structure, which provides a communication channel for information to reach the board. Past board practices such as infrequent meetings of the Audit and Investigations Subcommittee and the lack of routine briefings on outside safety recommendations may have impaired the ability of the board to use information about areas in need of improvement regarding the operations and finances of the agency. However, given the variety in other transit agencies' practices and the lack of clear criteria on how often audit committees should meet, there is no clear standard against which to measure WMATA's practices. The board's draft bylaws propose changes to the organization of the board's committee structure. WMATA has developed elements of strategic planning over the past 4 years, but the agency's board and management could enhance their strategic focus and long-term planning processes to improve performance. WMATA acknowledged several failed past efforts at strategic planning. WMATA officials said that prior attempts failed due to a lack of management support, employee buy-in, and specific actions to execute the plans; and a focus on tactical versus strategic decision making. WMATA management has developed several elements of strategic planning, such as a mission statement, goals, objectives, and strategies. However, the agency's strategic planning process could benefit from more board and stakeholder involvement, internal and external environmental assessments, longer time frames, program evaluations, and updated performance metrics. In June 2011, the board launched an effort to overhaul its strategic planning process. GAO recommends among other things that the WMATA board of directors follow through with its efforts to clarify the roles and responsibilities of the board; conduct a regular self-assessment of the board's effectiveness; and improve its strategic planning process by actions such as increasing the board's involvement in the process and updating the agency's performance metrics. WMATA reviewed a draft of this report and noted that it has taken recent actions that begin to address some issues covered in this report. |
In our June 2003 testimony on the FBI’s reorganization before the House Appropriations Subcommittee on Commerce, Justice, State, the Judiciary and Related Agencies, we reported that the FBI had made progress in its efforts to transform the agency, but that some major challenges continued. We also noted that any changes in the FBI must be part of, and consistent with, broader, government-wide transformation efforts that are taking place, especially those resulting from the establishment of the Department of Homeland Security and in connection with the intelligence community. We also noted that to effectively meet the challenges of the post- September 11, environment, the FBI needed to consider employing key practices that have consistently been found at the center of successful transformation efforts. These key practices are to ensure that top leadership drives the transformation, establish a coherent mission and integrated strategic goals to guide the transformation, focus on a key set of principles and priorities at the outset of the transformation, set implementation goals and a time line to build momentum and show progress from day one, dedicate an implementation team to manage the transformation use the performance management system to define responsibility and ensure accountability for change, establish a communication strategy to create shared expectations and report related progress, involve employees to obtain their ideas and gain their ownership for the transformation, and build a world-class organization that continuously seeks to implement best practices in processes and systems in areas such as information technology, financial management, acquisition management, and human capital. Today, we continue to be encouraged by the progress that the FBI has made in some areas as it continues its transformation efforts. Specifically worthy of recognition are the commitment of Director Mueller and senior- level leadership to the FBI’s reorganization; the FBI’s communication of priorities; the implementation of core reengineering processes to improve business practices and assist in the bureau’s transformation efforts; the dedication of an implementation team to manage the reengineering efforts; the development of a strategic plan and a human capital plan; the efforts to involve employees in the strategic planning and reengineering processes; and the FBI’s efforts to realign its activities, processes, and resources to focus on a key set of principles and priorities. While the FBI has embedded crosswalks and timelines in their various transformation plans that relate one plan to another, we still encourage the development of an overall transformation plan that will pull all of the pieces together in one document. This document can be both a management tool to guide all of the efforts, as well as a communication vehicle for staff to see and understand the goals of the FBI. It is important to establish and track intermediate and long-term transformation goals and establish a timeline to pinpoint performance shortfalls and gaps and suggest midcourse corrections. By demonstrating progress towards these goals, the organization builds momentum and demonstrates that real progress is being made. We will continue to review this issue. When we last testified in June 2003, the FBI was in the process of compiling the building blocks of a strategic plan. At that time it was anticipated that the plan would be completed by the start of fiscal year 2004. Although delayed by about 5 months, the FBI has since completed its strategic plan. FBI officials indicated that the implementation of two staff reprogrammings and delays in the appropriation of its fiscal year 2003 and fiscal year 2004 budget, as well as initiatives undertaken to protect the homeland during the war in Iraq, delayed the completion of the strategic plan. Overall we found the plan has some important strengths as well as some areas in which improvements could be made. The strategic plan includes key elements of successful strategic plans, including a comprehensive mission statement; results-oriented, long-term goals and objectives; and approaches to achieve the goals and objectives. The FBI plan presents 10 strategic goals that appear to cover the FBI’s major functions and operations, are related to the mission, and generally articulate the results in terms of outcomes the FBI seeks to achieve. For example, one of the plan’s strategic goals is “protect the United States from terrorist attack;” another goal is “reduce the level of significant violent crime.” The plan also lists strategic objectives and performance goals for each long-term strategic goal. However, the performance goals do not appear to be outcomes against which the FBI will measure progress; rather they appear to describe approaches or be key efforts that FBI will undertake to achieve its long-term strategic goals and objectives. Importantly, the plan acknowledges that the FBI faces competing priorities and clearly articulates its top 10 priorities, in order of priority. The strategic plan also frequently discusses the role partnerships with other law enforcement, intelligence, and homeland security agencies will play in achieving the plan’s goals. The plan discusses the FBI’s approach to building on its internal capacity to accomplish its mission-critical goals by improving management of human capital, information technology, and other investigative tools. The plan also discusses the external factors, such as global and domestic demographic changes and the communications revolution, which have driven the development of its strategic goals. Although the FBI has addressed several key elements in its strategic plan, the plan needs more information on other elements of strategic planning that we have identified as significant to successful achievement of an organization’s mission and goals. FBI officials indicated that some of these elements are available in other documents and were not included in the plan for specific reasons. As the FBI moves forward with its new strategic planning and execution process, it should consider addressing in its strategic plan the following key elements: Involving Key Stakeholders: As we have previously testified, any changes at the FBI must be part of, and consistent with, broader governmentwide transformation efforts that are taking place, especially those resulting from the establishment of the Department of Homeland Security and in connection with changes in the intelligence community. Successful organizations we studied based their strategic planning, to a large extent, on the interests and expectations of their stakeholders. Federal agency stakeholders include Congress and the administration, other federal agencies, state and local governments, third-party service providers, interest groups, agency employees, and, of course, the American public. Involving customers served by the organization—such as the users of the FBI’s intelligence—is important as well. The FBI strategic plan does not describe which stakeholders or customers, were involved or consulted during the plan’s development or the nature of their involvement. Such information would be useful to understanding the quality of the planning process FBI has undertaken and the extent to which it reflect the views of key stakeholders and customers. Consultation provides an important check for an organization that they are working toward the right goals and using reasonable approaches to achieve them. Relationship between Strategic and Annual Goals: Under GPRA, agencies’ long-term strategic goals are to be linked to their annual performance plans and the day-to-day activities of their managers and staff. OMB guidance states that a strategic plan should briefly outline (1) the type, nature, and scope of the performance goals being included in annual performance plans and (2) how these annual performance goals relate to the long-term, general goals and their use in helping determine the achievement of the general goals. Without this linkage, it may not be possible to determine whether an agency has a clear sense of how it will assess the progress made toward achieving its intended results. It is not clear from the plan how the FBI intends to measure its progress in achieving the long-term strategic goals and objectives because the plan’s strategic objectives and performance goals are not phrased as performance measures and the plan does not describe or make reference to another document that contains annual performance measures. The plan also lacks a discussion of the systems FBI will have in place to produce reliable performance and cost data needed to set goals, evaluate results, and improve performance. According to an FBI official and documents the FBI provided, the FBI has developed “performance metrics” for each of its strategic goals. External and Internal Factors that Could Affect Goal Achievement: While the plan clearly communicates how its forecast of external drivers helped to shape the FBI’s strategy, the plan does not discuss the external and internal factors that might interfere with its ability to accomplish its goals. External factors could include economic, demographic, social, technological, or environmental factors. Internal factors could include the culture of the agency, its management practices, and its business processes. The identification of such factors would allow FBI to communicate actions it has planned that could reduce or ameliorate the potential impact of the external factors. Furthermore, the plan could also include a discussion of the FBI’ s plans to address internal factors within its control that could affect achievement of strategic goals. The approach the FBI plans to take to track its success in achieving change within the agency should be an integral part of FBI’s strategy. A clear and well- supported discussion of the external and internal factors that could affect performance could provide a basis for proposing legislative or budgetary changes that the FBI may need to accomplish the FBI’s goals. Role of Program Evaluation in Assessing Achievement of Goals and Effectiveness of Strategies: Program evaluations can be a potentially critical source of information for Congress and others in ensuring the validity and reasonableness of goals and strategies, as well as for identifying factors likely to affect performance. Program evaluations typically assess the results, impact, or effects of a program or policy, but can also assess the implementation and results of programs, operating policies, and practices. The FBI’s strategic plan does not explicitly discuss the role evaluation played in the development of its strategic plan or its plans for future evaluations (including scope, key issues, and time frame), as intended by GPRA. The FBI has redesigned its program evaluation process and updated the performance metric for each program. This information could have been, but was not included in the strategic plan. As discussed elsewhere in this testimony, the FBI has a series of reengineering efforts under way that relate to six core processes they are seeking to transform. A discussion of how these reengineering efforts relate to and support the achievement of the FBI’s strategic goals would be a useful addition to the FBI’s strategic plan. We believe that an organization’s strategic plan is a critical communication tool and the credibility of the plan can be enhanced by discussing, even at a summary level, the approach the organization took in addressing these elements. As noted earlier, employee involvement in strategic planning, and transformation in general, is a key practice of a successful agency as it transforms. FBI executive management seems to have recognized this. Field office managers and field staff we spoke with last year generally reported being afforded the opportunity to provide input. For example, field management in the 14 field offices we visited in 2003 reported that they had been afforded opportunities to provide input into the FBI’s strategic planning process. In addition, 68 percent of the special agents and 24 of the 34 analysts who completed our questionnaire in 2003 reported that they had been afforded the opportunity to provide input to FBI management regarding FBI strategies, goals, and priorities by, among others, participating in focus groups or meetings and assisting in the development of the field offices’ annual reports. FBI managers in the field offices we visited and 87 percent of the special agents and 31 of the 34 analysts who completed our questionnaire indicated that FBI management had kept them informed of the FBI’s progress in revising its strategic plan to reflect changed priorities. FBI management also seems to have been effective in communicating the agency’s top three priorities (i.e., counterterrorism, counterintelligence, and cyber crime investigations) to the staff. In addition to the awareness of management staff in FBI headquarters and field offices, nearly all of the special agents and all of the analysts who answered our questionnaire indicated that FBI executive management (i.e., Director Mueller and Deputy Director Gebhardt) had communicated the FBI’s priorities to their field offices. Management and most of the agents we interviewed in the field were aware of the FBI’s top three priorities. Further, over 90 percent of special agents and 28 of the 34 analysts who completed our questionnaire generally or strongly agreed that their field office had made progress in realigning its goals to be consistent with the FBI’s transformation efforts and new priorities. In prior testimony, we highlighted the importance of the development of a strategic human capital plan to the FBI’s transformation efforts, noting that strategic human capital management is the centerpiece of any management initiative, including any agency transformation effort. We noted that a strategic human capital plan should flow from the strategic plan and guide an agency to align its workforce needs, goals, and objectives with its mission-critical functions. We also noted that human capital planning should include both integrating human capital approaches in the development of the organizational plans and aligning the human capital programs with the program goals. In a September 2003 letter to the FBI director, we specifically recommended that the FBI: (1) hire a human capital officer to guide the development of a strategic human capital plan and the implementation of long-term strategic human capital initiatives and (2) replace its current pass/fail performance management system with one that makes meaningful distinctions in employee performance. Although the FBI has not yet hired a human capital officer, it has developed a strategic human capital plan. This plan contains many of the principles that we have laid out for an effective human capital system. For example, it highlights the need for the FBI to fill identified skill gaps, in such areas as language specialists and intelligence analysts, by using various personnel flexibilities including recruiting and retention bonuses. Concerning the hiring of a human capital officer, the FBI has efforts under way to recruit and hire a qualified candidate. The FBI said that it recognizes the need to review and revise its performance management system to be in line with its strategic plan, including desired outcomes, core values, critical individual competencies, and agency transformation objectives. It also recognizes that it needs to ensure that unit and individual performance are linked to organizational goals. A key initiative that has been undertaken by the FBI in this regard is the planning of a system for the Senior Executive Service that is based on, and distinguishes, performance. We have not reviewed the Senior Executive performance management system, but it should include expectations to lead and facilitate change and to collaborate both within and across organizational boundaries are critical elements as agencies transform themselves. As yet, the performance management system for the bulk of FBI personnel remains inadequate to identify meaningful distinctions in performance. The FBI’s human capital plan indicates that the FBI is moving in the direction of addressing this need, and we are encouraged by this. Clearly, the development of a strategic human capital plan is a positive step in this direction. However, the FBI, like other organizations, will face challenges as it implements its human capital plan. As we have noted before, when implementing new human capital authorities, how it is done, when it is done, and the basis on which it is done can make all the difference in whether such efforts are successful. Information technology can be a valuable tool in helping organizations transform and better achieve mission goals and objectives. Our research of leading private and public sector organizations, as well as our past work at federal departments and agencies, shows that successful organizations’ executives have embraced the central role of IT as an enabler for enterprise-wide transformation. As such they adopt a corporate, or agencywide, approach to managing IT under the leadership and control of a senior executive—commonly called a chief information officer (CIO)— who operates as a full partner with the organizational leadership team in charting the strategic direction and making informed IT investment decisions. In addition to adopting centralized leadership, these leading organizations also develop and implement institutional or agencywide IT management controls aimed at leveraging the vast potential of technology in achieving mission outcomes. These include using a systems modernization blueprint, commonly referred to as an enterprise architecture, to guide and constrain system investments and using a portfolio-based approach to IT investment decision making. We have also observed that without these controls, organizations increase the risk that system modernization projects (1) will experience cost, schedule, and performance shortfalls; (2) will not reduce system redundancy and overlap; and (3) will not increase interoperability and effective information sharing. FBI currently relies extensively on the use of IT to execute its mission responsibilities, and this reliance is expected to grow. For example, it develops and maintains computerized systems, such as the Combined DNA (deoxyribonucleic acid) Index System to support forensic examinations, the Digital Collection System to electronically collect information on known and suspected terrorists and criminals, and the National Crime Information Center and the Integrated Automated Fingerprint Identification System to identify criminals. It is also in the midst of a number of initiatives aimed at (1) extending data storage and retrieval systems to improve information sharing across organizational components and (2) expanding its IT infrastructure to support new software applications. According to FBI estimates, the bureau manages hundreds of systems and associated networks and databases at an average annual cost of about $800 million. In addition, the bureau plans to invest about $255 million and $286 million in fiscal years 2004 and 2005, respectively, in IT services and systems, such as the Trilogy project. Trilogy is the bureau’s centerpiece project to (1) replace its system infrastructure (e.g., wide area network) and (2) consolidate and modernize key investigative case management applications. The goals of Trilogy include speeding the transmission of data, linking multiple databases for quick searching, and improving operational efficiency by replacing paper with electronic files. The FBI Director recognizes the importance of IT to transformation, and as such has made it one of the bureau’s top 10 priorities. Consistent with this, the FBI’s strategic plan contains explicit IT-related strategic goals, objectives, and initiatives (near-term and long-term) to support the collection, analysis, processing, and dissemination of information. Further, the FBI’s newly appointed CIO understands the bureau’s longstanding IT management challenges and is in the process of defining plans and proposals to effectively execute the FBI’s strategic IT initiatives. Nevertheless, the bureau’s longstanding approach to managing IT is not fully consistent with leading practices, as has been previously reported by us and others. The effect of this, for example, can be seen in the cost and schedule shortfalls being experienced on Trilogy. Our research of private and public sector organizations that effectively manage IT shows that they have adopted an agencywide approach to managing IT under the sustained leadership of a CIO or comparable senior executive who has the responsibility and the authority for managing IT across the agency. According to the research, these executives function as members of the leadership team and are instrumental in developing a shared vision for the role of IT in achieving major improvements in business processes and operations to effectively optimize mission performance. In this capacity, leading organizations also provide these individuals with the authority they need to carry out their diverse responsibilities by providing budget management control and oversight of IT programs and initiatives. Over the last several years, the FBI has not sustained IT management leadership. Specifically, the bureau’s key leadership and management positions, including the CIO, have experienced frequent turnover. For instance, the CIO has changed five times in the past 24 months. The current CIO, who is also the CIO at the Department of Justice’s Executive Office of the U.S. Attorneys (EOUSA), is temporarily detailed to the FBI for 6 months and is serving in an acting capacity while also retaining selected duties at EOUSA . In addition, the IT official responsible for developing the bureau’s enterprise architecture, the chief architect, has changed five times in the past 16 months. As a result, development and implementation of key management controls, such as enterprise architecture, have not benefited from sustained management attention and leadership and thus have lagged, as described in sections below. In addition, the FBI has not provided its CIO with bureauwide IT management authority and responsibility. Rather, the authority and responsibility for managing IT is diffused across and vested in the bureau’s divisions. As our research and work at other agencies has shown, managing IT in this manner results in disparate, stove-piped environments that are unnecessarily expensive to operate and maintain. In the FBI’s case, it resulted, as reported by Justice’s Inspector General in December 2002, in 234 nonintegrated applications, residing on 187 different servers, each of which had its own unique databases, unable to share information with other applications or with other government agencies. According to the acting CIO, the FBI is considering merging bureauwide authority and responsibility for IT in the CIO’s office with the goal of having this in place in time to formulate the bureau’s fiscal year 2006 budget request. In our view, this proposal, if properly defined and implemented, is a good step toward implementing the practices of leading organizations. However, until it is implemented, we remain concerned that the bureau will not be positioned to effectively leverage IT as an bureauwide resource. As discussed in our framework for assessing and improving enterprise architecture management, an architecture is an essential tool for effectively and efficiently engineering business operations (e.g., processes, work locations, and information needs and flows) and defining, implementing, and evolving IT systems in a way that best supports these operations. It provides systematically derived and captured structural descriptions—in useful models, diagrams, tables, and narrative—of how a given entity operates today and how it plans to operate in the future, and it includes a road map for transitioning from today to tomorrow. Managed properly, an enterprise architecture can clarify and help optimize the interdependencies and interrelationships among a given entity’s business operations and the underlying systems and technical infrastructure that support these operations; it can also help share information among units within an organization and between the organization and external partners. Our experience with federal agencies has shown that attempting to modernize systems without having an enterprise architecture often results in systems that are duplicative, not well integrated, unnecessarily costly to maintain, and limited in terms of optimizing mission performance. We reported in September 2003, that the FBI did not have an enterprise architecture to guide and constrain its ongoing and planned IT investments. We also reported that the necessary management structures and processes—the management foundation, if you will—to develop, maintain, or implement an architecture were not in place. At the time, the bureau was beginning to build this foundation. For instance, the bureau had designated a chief architect, established an architecture governance board as its steering committee, and chosen a framework to guide its architecture development. However, it had yet to complete critical activities such as ensuring that business partners are represented on the architecture governance board, establishing a formal program office, adopting an architecture development methodology, and defining plans for developing its architecture. Further, it had not addressed other important activities, including developing written and approved architecture policy and integrating architectural alignment, into its IT investment management process. FBI officials told us then that the architecture was not a top priority and it had not received adequate resources and management attention. Consequently, we recommended, among other things, that the FBI director immediately designate development, maintenance, and implementation of an enterprise architecture as a bureau priority and manage it as such. Since our report, the FBI has made architecture development an explicit imperative in its strategic plan, and it has made progress toward establishing an effective architecture program. For instance, the FBI director issued a requirement that all divisions identify a point of contact that can authoritatively represent their division in the development of the architecture. In addition, a project management plan has been drafted that identifies roles and responsibilities and delineates plans and a set of actions to develop the architecture. The FBI is also in the process of hiring a contractor to help develop the architecture. Current plans call for an initial version of the architecture in June 2004. However, until the enterprise architecture is developed, the FBI will continue to manage IT without a bureauwide, authoritative frame of reference to guide and constrain its continuing and substantial IT investments, putting at risk its ability to implement modernized systems in a way that minimizes overlap and duplication and maximizes integration and mission support. Federal IT management law provides an important framework for effective investment management. It requires federal agencies to focus more on the results they have achieved through IT investments, while concurrently improving their acquisition processes. It also introduces more rigor and structure into how agencies are to select and manage IT projects. In May 2000, GAO issued a framework that encompasses IT investment management best practices based on our research at successful private and public sector organizations. This framework identifies processes that are critical for successful IT investment, such as tracking IT assets, identifying business needs for projects, selecting among competing project proposals using explicit investment criteria, and overseeing projects to ensure that commitments are met. Using GAO’s framework, the Inspector General evaluated the FBI’s IT investment management process in 2002, including a case study of Trilogy, and concluded that the process at that time was immature and had hindered the bureau’s ability to effectively manage IT. Specifically, the Inspector General reported that the bureau lacked a basic investment management foundation. For instance, the bureau did not have fully functioning investment boards that were engaged in all phases of investment management. In addition, the bureau had not yet developed an IT asset inventory, the first step in tracking and controlling investments and assets. In a January 2004 follow-on report, the Inspector General credited the bureau with developing a plan to implement the recommendations and assigning responsibility to the Project Management Office to execute it, but noted that the office had not been granted authority to carry out this task. Project Management Office officials stated that as of February 24, 2004, they had not yet been provided such authority. According to the acting CIO, the FBI is currently in the process of hiring a contractor to assist with implementing all IT investment management processes bureauwide, including addressing remaining Inspector General recommendations. Until these steps are completed and mature investment processes are in place, the FBI will remain challenged in its ability to effectively minimize risks and maximize the returns of investments, including ensuring projects do not experience cost, schedule, and performance shortfalls. As discussed in the previous sections, the FBI has efforts proposed, planned and under way that, once implemented, are intended to establish an IT leadership and management controls framework that is consistent with those used by leading organizations. Until this is accomplished, however, the bureau will largely be relying on the same management structures and practices that it used in the past and that produced its current IT environment and associated challenges. As previously stated, these practices increase the risk that system modernization projects will not deliver promised capabilities on time and within budget. A prime example is Trilogy, the FBI’s ongoing effort to, among other things, modernize its systems infrastructure and investigate case management applications. It consists of three components: Transportation Network Component, which is communications network infrastructure (e.g., local area networks and wide area networks, authorization security, and encryption of data transmissions and storage), Information Presentation Component, which is primarily desktop hardware and software (e.g., scanners, printers, electronic mail, web- browser), and User Applications Component, which includes the investigative case management applications ) that are being consolidated and modernized. This component is commonly referred to as the Virtual Case File, which when completed, is to allow agents to have multi- media capability that will enable them to among other things scan documents and photos into electronic case files and share the files with other agents electronically. To date, the FBI’s management of Trilogy has resulted in multiple cost overruns and schedule delays. The table below details the cost and schedule shortfalls for each of the three components that comprise Trilogy. In summary, the FBI established its original project commitments in November 2000 but revised them in January 2002 after receiving additional funding ($78 million) to accelerate the project’s completion. About this time, the FBI also revised the Trilogy design to introduce more functionality and capability than original planned. Based on the January 2002 commitments, the first two components of Trilogy were to be completed in July 2002, and the third was to be completed in December 2003. However, the project’s components have collectively experienced cost overruns and schedule delays totaling about $120 million and at least 21 months, respectively. These Trilogy shortfalls in meeting cost and schedule commitments can be in part attributed to the absence of the kind of IT management controls discussed earlier. Specifically, in its study of the FBI’s investment management processes which included a case study of Trilogy, the Inspector General cited the lack of an enterprise architecture and mature IT investment management processes as the cause for missed Trilogy milestones and uncertainties associated with the remaining portions of the project. In our view, a major challenge for FBI going forward will be to effectively manage the risks associated with developing and acquiring Trilogy and other system modernization priorities discussed in its strategic plan, while the bureau is completing and implementing its enterprise architecture and other IT-related controls and is adopting a more centralized approach to IT management leadership. As we pointed out in our June 2003 testimony and our follow-up letter to the FBI in September 2003, a key element of the FBI’s reorganization and successful transformation is the realignment of resources to better ensure focus on the highest priorities. Since September 11, the FBI has permanently realigned a substantial number of its field agents from traditional criminal investigative programs to work on counterterrorism and counterintelligence investigations. Additionally, the bureau has had a continuing need to temporarily redirect special agent and staff resources from other criminal investigative programs to address higher-priority needs. Thus, staff continue to be redirected from other programs such as drug, white collar, and violent crime to address the counterterrorism- related workload demands. The result of this redirection is fewer investigations in these traditional crime areas. We want to make clear that we in no way intend to fault the FBI for the reassignment of agents from drug enforcement, violent crime, and white collar crime to higher-priority areas. Indeed, these moves are directly in line with the agency’s priorities and in keeping with the paramount need to prevent terrorism. In 2002, the FBI Director announced that in keeping with its new priorities, the agency would move over 500 field agent positions from its drug, violent crime, and white collar crime programs to counterterrorism. The FBI has transferred even more agent positions than it originally announced and has augmented those agents with short-term reassignment of additional field agents from drug and other law enforcement areas to work on counterterrorism. As figure 1 shows, about 25 percent of the FBI’s field agent positions were allocated to counterterrorism, counterintelligence, and cyber crime programs in prior to the FBI’s change in priorities. Since that time, as a result of the staff reprogrammings and funding for additional special agent positions received through various appropriations, the FBI staffing levels allocated to the counterterrorism, counterintelligence, and cyber program areas have increased to about 36 percent and now represent the single largest concentration of FBI resources and the biggest decrease is in organized crime and drugs. The FBI’s staff reprogramming plans, carried out since September 11, have now permanently shifted 674 field agent positions from the drug, white collar crime, and violent crime program areas to counterterrorism and counterintelligence. In addition, the FBI established the Cyber program, which consolidated existing cyber resources. Despite the reprogramming of agent positions in fiscal year 2003 and the additional agent positions received through various supplemental appropriations since September 11, agents from other program areas continue to be temporarily redirected to work on leads in the priority areas, including counterterrorism-related leads. This demonstrates a commitment on the part of the FBI to staff priority areas. As figure 2 shows, the average number of field agent workyears charged to investigating counterterrorism-related matters has continually outpaced the number of agent positions allocated to field offices for counterterrorism since September 11. The FBI’s current policy is that no counterterrorism leads will go unaddressed even if addressing them requires a diversion of resources from other criminal investigative programs such as the drug, violent, and white collar crime. As we previously reported, as the FBI gains more experience and continues assessing risk in a post-September 11 environment, it should gain more expertise in deciding which matters warrant additional investigation or investment of investigative resources. However, until the FBI develops a mechanism to systematically analyze the nature of leads and their output, the FBI will have to continue its substantial investment of resources on counterterrorism-related matters to err on the side of safety. We are not intending to imply that, even with more information from past experience, that all leads should not be investigated, but more analytical information about leads could help prioritize them. Neither the FBI nor we were in a position to determine the right amount of staff resources needed to address the priority areas. However, the body of information that might help to make these determinations is growing. Since the September 11 attacks, the FBI has updated its counterterrorism threat assessment and has gained additional experience in staffing priority work. This development, along with an analysis of the nature of all leads (those that turn out to be significant and those that do not) and the output from them, could put the bureau in a better position to assess the actual levels of staff resources that the agency need in counterterrorism, counterintelligence, and cyber programs. Of course, any new terrorist incidents would again, upset the balance and require additional staff in the priority areas. An FBI counterterrorism manager we spoke with during a recent field office visit said that to develop a system to determine which terrorist leads to pursue and which ones to not pursue would be a complex task. He noted that in the past there would have been some citizen contacts that the FBI may not have generally pursued, but said that now any lead, regardless of its nature, is followed up. He observed that following up on some of these leads have resulted in the arrests and convictions of terrorists. For example, the FBI manager recounted a telephone lead from a tour boat operator who reported concerns about a passenger who was taking photographs of bridges and asking unusual questions about infrastructure. That lead started an investigation that led to the arrest of, and criminal charges against, the suspect, who was alleged to be plotting a terrorist attack. According to FBI officials, information from leads is collected in a database that can be searched in a number of ways to help in investigations. To the extent that more systematic and sophisticated analysis routines can be developed and applied to these data (or any expansions of this data set) the FBI may be able to develop richer information about the relative risk of leads. This information could help prioritize work and manage scarce resources. While we agree with the FBI counterterrorism manager we cited above who labeled this a complex task, the potential value of the output, given that resources are always limited, seems worth the investment. The level of effort in counterterrorism is further reflected in the number of counterterrorism matters that have been opened following September 11. As figure 3 shows, the number of newly opened counterterrorism matters has remained significantly above the pre-September 11 levels, peaking in the second quarter of fiscal year 2003 and dropping somewhat in the most recent quarters. Use of field agent staff resources in other traditional criminal investigative programs (such as drug enforcement, violent crime, and white collar crime) has continuously dropped below allocated levels as agents from these programs have been temporarily reassigned to work on counterterrorism-related matters. As would be expected, the number of newly opened drug, violent crime, and white collar crime cases has fallen in relation to the decline in the number of field agent positions allocated or assigned to work on these programs. The change in priorities and the accompanying shift in investigative resources have affected the FBI’s drug program the most. Nearly half of the FBI field agent drug positions have been permanently reallocated to priority program areas. Since September 11, about 40 percent of the positions allocated to FBI field offices’ drug program have been reallocated to counterterrorism and counterintelligence priority areas. As figure 4 shows, just prior to September 11, about two-thirds (or 890) of the 1,378 special agent positions allocated to FBI field offices for drug program matters were direct-funded. The remaining one-third (or 488) of the special agent positions was funded by the Organized Crime and Drug Enforcement Task Force program (OCDETF). As of the first quarter of fiscal year 2004, the number of direct-funded positions allocated to FBI field offices for the drug program had decreased over 60 percent, going from 890 to 337. OCDETF-funded agent positions, which have remained constant, now account for about 60 percent of the FBI field offices’ drug program staff resources. While this reduction represents a substantial decline in the number of field agent positions allocated to drug work, in fact, the reduction in drug enforcement workyears was actually larger than these figures reflect. Specifically, as needs arose for additional agents to work counterterrorism leads, field agents assigned to drug program squads were temporarily reassigned to the priority work. As figure 5 shows, at the extreme, during the first quarter of fiscal year 2002 (just after the events of September 11), while 1,378 special agent positions were allocated to drug work, only about half of these staff resources worked in the FBI drug program. In mid-fiscal year 2003, the allocated number of drug agent positions and the average number of field agent workyears charged to drug matters started to converge toward the new targeted levels. Since that time, however, the FBI has had to redirect additional field agents allocated to its drug program to counterterrorism and other priority areas. As of the second quarter of fiscal year 2004, about a quarter (225 of 825) of the agents assigned to the FBI’s drug program were actually working in higher- priority areas. The reduction in drug enforcement resources has reduced both the number of drug squads in FBI field offices as well as the number of FBI agents supporting the High-Intensity Drug Trafficking Area (HIDTA) program initiatives, according to FBI officials. The significant reduction in agent strength in the drug enforcement area is likely to be an important factor in the smaller number of FBI drug matters opened in fiscal year 2003 and the first quarter of fiscal year 2004. As figure 6 shows, the number of newly opened drug matters went from 2420 in fiscal year 1998 to 950 in fiscal year 2002 and to 587 in fiscal year 2003. The openings for the first quarter of fiscal year 2004 indicate a rate for the entire year at about fiscal year 2003 levels. Similarly, as figures 7 and 8 show, the average number of field agent workyears charged to violent crime and white collar crime matters also declined below the number of allocated agent workyears as these agents too have been temporarily redirected to counterterrorism-related matters. Similarly, as figures 7 and 8 show, the average number of field agent workyears charged to violent crime and white collar crime matters also declined below the number of allocated agent workyears as these agents too have been temporarily redirected to counterterrorism-related matters. As figures 9 and 10 show, the number of newly opened violent crime and white collar crime matters has declined since September 11. The FBI’s transformation effort is driven in part by challenges facing the federal government as a whole to modernize business processes, information technology, and human capital management. It is also driven by the need to make organizational changes to meet changes in its priorities in the post-September 11 environment. This effort will require a structure for guiding and continuously evaluating incremental progress of the FBI’s transformation. It must also be carried out as part of, and consistent with, broader government-wide transformation efforts that are taking place, especially those resulting from the establishment of DHS and in connection with the intelligence community. The FBI has made substantial progress, as evidenced by the development of both a new strategic plan and a strategic human capital plan, as well as its realignment of staff to better address the new priorities. Although the new strategic plan and strategic human capital plans include cross walks to each other, we still believe that an overall transformation plan is more valuable in managing the transformation process. The FBI is also making progress in strengthening its management of IT, including establishing institutional IT management controls and considering changes to the scope of CIO’s authority over IT spending. Impacts of the FBI shift in field agent resources on crime programs including the FBI’s drug, white collar, and violent crime programs should be monitored. Our ongoing work, which we expect to complete later this year, will provide information on whether other federal and state resources are replacing lost FBI resources in the traditional crime areas and on whether reductions in FBI drug program field agents have had an impact on the price, purity, availability, and use of illegal drugs. Mr. Chairman and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to answer any questions you and the Subcommittee members may have. For further information about this statement, please contact Laurie E. Ekstrand, Director, Homeland Security and Justice Issues, on (202) 512-8777 or at [email protected] or Charles Michael Johnson, Assistant Director, Homeland Security and Justice, on (202) 512-7331 or at [email protected]. For further information on governmentwide Information Technology issues, please contact Randolph C. Hite, Director, Information Technology Architecture and Systems Issues, on (202) 512- 6256 or at [email protected]. For further information on governmentwide human capital or transformation issues, please contact J. Christopher Mihm, Director, Strategic Issues, on (202) 512-6806 or at [email protected]. Major contributors to this testimony included William Bates, R. Rochelle Burns, Katherine Chu-Hickman, Orlando Copeland, Elizabeth Curda, Benjamin Jordan, Deborah Knorr, Jessica Lundberg, Paula Moore, Gary Mountjoy, Lisa Shibata, Sarah E. Veale, and Angela Watson. Strategic planning and execution (6) HQ organizational structure Capital (human and equipment) (17) Career development/succession planning Executive development and selection program (EDSP) Preparation for legal attaché assignment Time utililization record keeping system (TURK) Information management (4) Investigative programs (6) Intelligence (2) Security Management (5) Continuity of operations planning (COOP) Repository for Office of Professional Review (OPR) appeals/security violations 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. | The September 11, 2001, terrorist attacks precipitated a shift in how the FBI uses its investigative resources to prevent future terrorist incidents. The attacks led to the FBI's commitment to reorganize and transform itself. Today's testimony discusses the FBI's progress in carrying out its transformation process. Specifically, it addresses FBI's (1) progress in developing a comprehensive transformation plan; (2) efforts to update its strategic plan; (3) development of a strategic human capital plan; (4) information technology management leadership and practices; and (5) realignment of staff resources to priority areas and the impact of the realignments on the FBI's drug and other criminal investigation programs. We commend the FBI for its progress in some areas of its transformation efforts since we last testified on this subject in June 2003. We believe that commitment from the top, a dedicated implementation team, involvement of employees in the process, and the achievement of key milestones are encouraging signs of progress. However, we continue to encourage the development of a comprehensive transformation plan that would consolidate the crosswalks between the various aspects of transformation. This could help management oversee all aspects of the transformation. The FBI's strategic plan has been completed. Overall we found the plan has important strengths as well as some areas in which improvements could be made. For example, the plan includes key elements of successful strategic plans (i.e. a comprehensive mission statement and results-oriented, longterm goals and objectives.). However, the plan is missing some elements that could have made it more informative. Officials advised us that some of these elements are available elsewhere (i.e. lists of stakeholders and performance measures). The absence of these elements makes the plan less comprehensive and useful. The FBI has also developed a strategic human capital plan that contains many of the principles that we have laid out for an effective human capital system (i.e. the need to fill identified skill gaps by using personnel flexibilities). However, the FBI has yet to hire a human capital officer to manage the implementation of this process and the performance management system for the bulk of FBI personnel remains inadequate to discern meaningful distinctions in performance. The FBI recognizes the importance of information technology (IT) as a transformation enabler, making it an explicit priority in its strategic plan and investing hundreds of millions of dollars in initiatives to expand its systems environment and thereby improve its information analysis and sharing. However, FBI's longstanding approach to managing IT is not fully consistent with the structures and practices of leading organizations. A prime example of the consequences of not employing these structures and practices is the cost and schedule shortfalls being experienced on Trilogy, the centerpiece project to modernize infrastructure and case management applications. Recent FBI proposals, plans, and initiatives indicate that it understands its management challenges and is focused on addressing them. Another key element of the FBI's transformation is the realignment of resources to better focus on the highest priorities--counterterrorism, counterintelligence and cyber investigations. The FBI resources allocated to priority areas continue to increase and now represent its single largest concentration of field agent resources--36 percent of its fiscal year 2004 field agent positions. |
The United States’ passenger transportation system consists of a number of different modes, including mass transit systems, roads, aviation, waterways, and railroads—each of which plays a critical role in providing the American public with the mobility needed to sustain the nation’s economic viability. Intermodal transportation refers to a system that connects the separate transportation modes and allows a passenger to complete a journey using more than one mode. An efficient intermodal capability provides a passenger with convenient, seamless transfer between modes; the ability to connect to an extended transportation network; and high frequency of service among the different modes. As shown in figure 1, an intermodal connection at an airport might involve a passenger arriving at the airport by private shuttle service, flying to another airport, and then transferring to local transit rail service to reach a final destination. Opportunities also exist for using intermodal service to access nationwide transportation systems, such as Amtrak. While intermodal refers to the use of any two modes of transportation and therefore a trip that involves taking a private car or shuttle to the airport followed by air travel could be considered intermodal, for the purposes of this report, we are focusing on direct connections between airports and public bus and rail systems. Because the ease of transfer between modes is critical to how likely passengers are to use a bus or rail system, we considered a direct connection to consist of a transfer point (such as a bus stop or rail station) that is accessible from airport terminals either by walking, an automated people mover, or direct shuttle. Historically, federal transportation policy has focused almost exclusively on individual modes rather than intermodal connections. Federal transportation funding programs are overseen by different agencies within DOT—FAA oversees aviation, FTA transit, Federal Railroad Administration railways, and Federal Highway Administration (FHWA) highways—and no specific federal funding programs have been established that target intermodal projects for passengers at U.S. airports. In the United States, the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) established an overall approach for surface transportation planning and decision making that gave local and state governments greater control over transportation decisions in their own regions than was done in the past. The act also viewed different transportation modes as part of a larger transportation network, but maintained separate funding for the individual modes. ISTEA established specific planning guidelines for metropolitan areas to prioritize the highway and transit needs of the entire region with the goal of promoting an integrated transportation system. The Transportation Equity Act for the 21st Century (TEA-21), enacted in 1998, retained the basic policy and programs established by ISTEA and provided state and local governments the flexibility to use highway funds to support transit investments. DOT’s Office of Intermodalism was established under ISTEA; however, this office deals mainly with intermodal freight issues and airports have had very limited involvement in that discussion. Federal policy for aviation is established through other legislation. The planning and funding of U.S. airports is addressed under Vision 100- Century of Aviation Reauthorization Act. This act authorizes funds for airport development and capital improvements, and while it does encourage the development of intermodal connections between airports and other local surface transportation systems, the primary focus of funding is on runway and terminal infrastructure. The planning for these projects is usually undertaken by airports, with no federal requirements for local and state surface transportation agency involvement as required by ISTEA and TEA-21. The Rail Passenger Service Act of 1970 created Amtrak to provide nationwide passenger rail service, and the federal government has provided funding for both capital and operating expenditures to Amtrak. Amtrak operates a 22,000 mile passenger rail system, primarily over tracks owned by freight railroads. As of January 2002, there were 10 federally designated high-speed rail corridors nationwide. These designated corridors are eligible for federal funds to upgrade rail infrastructure to support high-speed rail service, although most upgrades have not been completed and the amount of high-speed rail service in the United States remains limited. The corridors are dispersed throughout the country and include service between some of the largest U.S. cities. For example, the Northeast Corridor provides service between Washington, D.C., New York, and Boston, and the Pacific Northwest Corridor provides service between Eugene, Oregon and Vancouver, Canada. In comparison to U.S. transportation policy, European Union policy and some European governments have focused on developing high-speed train service between major European cities as an alternative to air and car travel. This effort has also included developing intermodal ground connections between passenger high-speed rail systems and airports, an example of which is shown in figure 2. Since 1992, the European Union has periodically published a common transportation policy in response to increased ground and air congestion that has resulted from the unequal growth of road and air traffic compared with rail and maritime traffic. This growth in air traffic and the capacity constraints at most key European airports have caused the European Union to examine the potential of intermodal transportation. A key component of the European Union's intermodality policy is improving the connections between air and rail, thereby transforming competition between those modes into complementary service using high-speed train connections at European airports. While the European Union has developed a common transportation policy and provides limited funding for transportation networks that can connect to airports, the actual implementation and development of transportation infrastructure remains the responsibility of individual member nations. For example, a priority European Union project is the construction of a high-speed rail network across Europe that will connect key airports, such as Brussels, Frankfurt, Cologne/Bonn, Paris Charles de Gaulle, and Amsterdam Schiphol. Although this project crosses a number of member states and is one of the European Union’s priority projects, individual member states are responsible for funding the majority of the infrastructure and overseeing the construction of sections within their borders. For example, Belgium is responsible for providing the infrastructure from Brussels to the borders of France, Germany, and the Netherlands. In addition, in 2003, the European Union established the Rail Air Intermodality Facilitation Forum with the objective of developing recommendations to encourage the integration of rail and air service regarding operations, ticket sales, and legal issues. (See app. II for additional information on intermodal connections at European airports.) State and local transportation agencies have primary responsibility for developing intermodal capabilities at U.S. airports. The federal government has not established specific goals or funding programs to develop intermodal capabilities at airports, but it does provide oversight and funding when projects fit the criteria for funding programs focused on one or more individual modes. The private sector’s role may include funding and, in some cases, project development through contractual agreements with state and local agencies. In line with federal transportation legislation’s focus on state and local government decisionmaking, intermodal capabilities at U.S. airports are typically initiated and developed by state and local transportation agencies, including some combination of state departments of transportation, local transportation planning bodies (i.e., metropolitan planning organizations), airports, and local transit agencies. While the roles of any one stakeholder can vary, the development of most projects involves similar steps (see table 1), and one or more of these state and local transportation agencies will take the lead in moving a project through these steps. During our research at 16 airports, we found three common themes regarding the roles of various stakeholders, although the extent of different stakeholders' involvement varied among projects. First, almost all airports are heavily involved with the development of intermodal capabilities on airport property. This is especially true if the project involves construction of a major intermodal facility such as an automated people mover connecting the airport terminals to a transit station. For example, the Port Authority of New York and New Jersey was the lead agency in planning, building, and operating the Air Train system at New York’s John F. Kennedy International Airport. The Air Train system is an automated people mover that links the airport’s terminals to two transit rail stations, thereby providing passengers a connection from the airport to local transit systems (see fig. 3). The second theme we found is that local transit agencies are heavily involved in intermodal connections that are part of a new or existing transit system. Depending on the specific transit system, the involvement of the transit agency could include providing local bus service or shuttle service to the airport or could include building and operating a new heavy or light rail line to the local airport. For instance, Portland, Oregon’s local transit agency, Tri-Met, was a major stakeholder in the development of the Metropolitan Area Express light rail line extension to the Portland International Airport. Tri-Met provided about $46 million towards the development of the extension, managed the project during construction, took ownership of most of the extension, and operates the service to the airport. Finally, we found that other local and state transportation agencies, such as state departments of transportations or local metropolitan planning organizations, can be involved in these projects, including in certain cases taking the lead in planning and obtaining funding. For example, the Wisconsin Department of Transportation served as the lead agency in planning an Amtrak station at the General Mitchell International Airport in Milwaukee. Fairfax County, Virginia, secured funding to cover part of the cost of a section of a planned local rail line extension to Dulles airport by approving a tax on commercial and industrial properties that was voluntarily proposed by a group of landowners. In some cases, these state or local agencies may take the lead because they have the best access to federal funding. The federal government has not established specific goals or funding programs to develop intermodal capabilities at airports. Its role, therefore, is primarily one of funding and oversight of projects through separate transportation programs within DOT agencies. Although there is no federal funding program specifically for intermodal projects, many intermodal projects at airports fit the funding criteria for one or more federal programs focused on surface transportation or aviation. State and local transportation agencies and airports may receive funding from one or several of these federal programs to develop their intermodal capabilities. (See table 2.) Appendix III provides additional information on the financing of intermodal projects at airports. To carry out its oversight responsibility, the federal government ensures that the design and construction of intermodal facilities complies with federal laws and regulations, including environmental, safety, security, and mobility requirements, such as the Americans with Disabilities Act. For example, the National Environmental Policy Act of 1969 requires, among other things, that the project sponsor prepare an environmental impact statement for projects that receive federal funds. This environmental impact statement must consider alternatives and mitigation measures that would lessen the project's impacts. For intermodal projects, FAA, FTA, or FHWA will typically act as the lead agency, depending on how the project is funded—ensuring that environmental documents are properly prepared and that all environmental concerns are adequately addressed before granting approval for the project’s construction. FTA also established a requirement that projects receiving funding through the New Starts program conduct post implementation evaluations, which are subsequently provided to FTA. In addition, FAA ensures that intermodal projects meet airport safety requirements, and the Department of Homeland Security’s Transportation Security Administration establishes security requirements that may affect the use of intermodal facilities at airports. Finally, the federal governmen’s role in developing intermodal capabilities at airports includes increasing awareness of intermodalism at airports through workshops and funding research. For example, conferences for FAA regional offices have included topics such as the eligibility of ground access projects at airports for federal funding programs. In addition, FTA has provided funding to the Transit Cooperative Research Program to conduct two studies on improving public transportation access to large airports. The private sector’s role in developing intermodal projects at airports may include funding through lease revenues; contracting to design, build, or operate intermodal capabilities; and participating in the transportation decision-making process through public participation. For example, a private developer will fund through lease revenues about 18 percent of the cost to develop the Metropolitan Area Express light rail extension at the Portland, Oregon, airport. In another example, in 2001, the Florida Department of Transportation awarded contracts to private companies for the design and construction of the rental car facility—one component of Miami airport’s planned intermodal bus and rail facility. With respect to contracting arrangements with the private sector, Miami airport is also requesting proposals to design, build, operate, and maintain an automated people mover from the airport terminal to the planned intermodal facility. Airlines, in particular, can play an important role in the development of intermodal projects at airports. Use and lease agreements between airlines and airports are a major revenue source for most large airports, and because of this financial arrangement, airlines may have influence in or participate in airport decisionmaking. The ability of airlines to participate in decisionmaking depends on the specific airport and the structure of the lease agreement. For example, some airports have lease agreements that can require airports to obtain airline approval before making airport capital expenditure decisions. Based on our survey of all large and medium and certain small hub U.S. airports, most airports have direct connections to rail or bus systems, with some airports having direct connections to more than one type of ground transportation. The vast majority of these direct connections are to local transportation systems such as local bus or rail service. Direct connections to nationwide ground transportation from airports are limited, with less than one-third of airports reporting direct connections to either nationwide bus or rail stations. While over one-fourth of airports reported proposals and plans to improve their intermodal capabilities, most of these airports plan to develop or enhance direct connections to a local bus or rail system. (See app. IV for complete survey results.) Most airports reported having some direct intermodal connections, with a number of airports responding that they had connections to multiple types of transportation modes. (See fig. 4.) Five airports, located in the New York City area, Miami, Philadelphia, and Palm Beach, reported direct connections to local and nationwide bus and rail systems. In contrast, seven airports reported having no direct connections. Those airports that have no intermodal connections are all medium hub airports with fewer than 5 million enplanements in 2003. Two of these airports have plans to develop intermodal service. Louis Armstrong New Orleans International Airport plans to add stops for local transit buses, and Jacksonville International Airport plans to add connections to the local transit bus and light rail systems. Appendix V provides a complete list of airports with the types of connections and planned connections. Most of the major U.S. airports reported having direct connections to one or more local transportation systems in their area, such as local bus or rail service, with 26 airports reporting having both. The most common type of public transportation system available to and from the airport is local bus service. Sixty-four airports reported having a direct connection to local bus service. However, according to airport officials we interviewed, the level of bus service provided varies. For example, Seattle-Tacoma International Airport has five public bus routes that serve the airport from the surrounding communities, while General Mitchell International Airport in Milwaukee has only one route that serves the airport. The Boston Logan Express bus service offers nonstop airport connections to and from Boston’s General Edward Lawrence Logan Airport and four locations, serving over 100 communities. The level of convenience and access to bus service also varies, as shown in table 3. Airports with direct connections to local bus systems either had connections to buses at the airport terminal(s) or at an intermodal facility or transit center. For example, Denver airport reported that it would be convenient for an average adult with luggage to walk to the local bus stop, which is located at the airport terminal, while passengers at Los Angeles International Airport can take a shuttle to the airport transit center to access buses. However, transportation experts and some airport officials we interviewed stated that ridership on public buses is generally very low for airline passengers but somewhat higher for airport employees. One reason for this situation is the lack of accommodations for luggage on most public buses. Twenty-seven airports reported having a direct connection to a local rail system, such as light rail, commuter rail, or subway, as shown in figure 5. These airports reported several options for passengers to access the rail system. Thirteen airports reported that passengers could either walk or take an automated people mover to access the rail station. Twenty-two airports reported that passengers could take a regular, fixed-route shuttle service to a station for a local rail system. Transportation literature has shown that automated people mover technology has been beneficial in linking public transit at airports, and attributed this impact to the exclusive rights-of-way and driverless operation that allows frequent service on an around-the-clock basis. For example, Chicago O’Hare International Airport's automated people mover is a free, fully-automated 24-hour rail system that operates between the three domestic terminals, the international terminal, and a transit rail station. By comparison, the level of convenience of using shuttles varies. For example, a free shuttle from Baltimore-Washington airport to the local rail station runs approximately every 10 to 15 minutes and takes about 5 minutes. On the other hand, a shuttle running from Washington Dulles International Airport to the local transit rail station costs $8.00 one way, runs every 30 minutes, and takes about 25 minutes. While most major U.S. airports are located in metropolitan areas that have stations for nationwide transportation systems such as Greyhound or Amtrak, only 19 airports reported having direct connections to these stations. Twelve of the 19 airports have direct connections to nationwide bus service. In a few cases, the nationwide bus service is easily accessible to passengers—for example, Hartsfield-Jackson Atlanta International Airport reports that Greyhound is accessible by both walking and automated people mover. However, half of these airports report that passengers can access these services without taking a shuttle, as shown in table 4. Thirteen airports report having a direct connection to nationwide passenger rail service, Amtrak, as shown in figure 6. All 13 airports provide shuttle service to transport passengers to Amtrak stations that serve the metropolitan area. However, based on information gathered during our research, the type of shuttle service can vary. For example, Bob Hope-Burbank airport reports that a free shuttle service transports passengers to the Amtrak station. On the other hand, at Seattle-Tacoma airport, passengers may use a private shuttle that charges a fee to connect to the Amtrak station. Of these 13 airports, only one—Newark’s Liberty International Airport—reported that passengers could also access the Amtrak station by an automated people mover. The accessibility of Amtrak to Newark airport has allowed Continental Airlines to establish a code share agreement with Amtrak, whereby passengers can purchase one ticket for a journey that includes travel by both air and rail. Twenty airports reported that their airport capital improvement plan included proposals to improve intermodal capabilities. At several airports, these proposals are in anticipation of expected growth in enplanements and the need to provide airline passengers and airport employees with alternative transportation modes to access the airports. Most of the airports with plans to improve intermodal services intend to enhance their direct connections to the local transportation system rather than to nationwide systems, as shown in table 5. Only two airports, Baltimore- Washington International and Dallas/Fort Worth International, reported plans to add a direct connection to a nationwide transportation system, both of them to a nationwide bus service. In addition to these plans to improve intermodal connections to a particular mode, 19 airports reported proposals to build an automated people mover to connect airport terminal(s) with ground transportation facilities. For example, Denver International Airport intends to build a local rail station adjacent to the airport’s main terminal and to connect the terminal to the station by an automated people mover. According to transportation and airport officials we spoke with, intermodal facilities and services at airports provide or are expected to provide a range of benefits—such as alternative transportation options for travelers, reduced road congestion and vehicle emissions, and more efficient use of congested air space. These officials, however, have not evaluated these intermodal capabilities and, therefore, are not able to quantify the benefits. Moreover, costs to develop intermodal projects at airports can be significant. In addition, barriers such as the difficulty of obtaining financing can affect the development of these projects. Based on our interviews with U.S. and European transportation officials and our prior work, we identified a number of benefits that can be derived from the development of intermodal capabilities at airports. These capabilities can benefit not only airline passengers and airports, but also airport and airline employees and society at large. We found that many of the benefits cited mirror those that derive from transit projects in general. However, officials had not evaluated specific airport intermodal projects or measured the benefits that may have actually occurred. Due to the post- implementation evaluation requirements that were established for the New Starts program in 2000, those projects that were subsequently selected under the New Starts program will be evaluated over the coming years. Transportation and airport officials we spoke with said that providing passengers and employees alternative transportation options was a major benefit of developing intermodal capabilities at airports. Our prior research has shown that transit investments can provide direct benefits to travelers by improving travel times for existing transit users, improving travel times for automobiles and trucks on alternative roadways, lowering the use of automobiles and the associated environmental costs by attracting riders out of their vehicles, and providing a back-up or future option for nonusers of transit. In some cases, these alternative transportation options may also provide a benefit of reduced travel times and costs in comparison to traveling in a private vehicle (including shuttle or taxi) on congested highways. Potential savings for passengers could include the cost of gas, taxi service, or parking. Several local transportation officials told us that the benefits of intermodal capabilities are maximized when the supporting transit system is reliable and is part of a larger transit network. For example, officials from the Port Authority of New York and New Jersey said that the automated people mover that connects a terminal at Newark airport to a new Amtrak and transit rail station was developed to provide access to many destinations in the New York City area and beyond. In fact, Amtrak officials stated that a large number of Amtrak passengers using the Newark airport station are coming from Philadelphia and Washington, D.C. Airport officials stated that another benefit of airport intermodal capabilities is the potential to reduce congestion on nearby highways, airport access roads, and the terminal curbside. Transportation and airport officials stated that a byproduct of reduced road congestion is a reduction of vehicle emissions and improved air quality. For example, it was estimated that the extension of the Bay Area Rapid Transit to the San Francisco airport would reduce road traffic around the airport by 4,530 daily vehicular trips, representing 6 percent of the daily vehicular trips to the airport. While officials believe intermodal projects improve access to airports and reduce vehicle emissions, they also stated that it is difficult to determine how trip reductions affect overall congestion since congestion is affected by many factors, such as land use, traffic patterns, and general economic conditions, that are difficult to isolate. Transportation industry experts and European transportation officials we interviewed stated that another potential benefit of intermodal capabilities at airports is the more efficient use of air space and existing capacity at congested airports through the replacement of short-haul flights with rail service. The potential reduction of short-haul flights could allow airlines to reallocate airport capacity to long-distance flights, which generally have lower costs per mile. However, our prior work and transportation officials we talked with indicate that for rail transport to capture the market share necessary to affect air travel, the distance between potential nationwide passenger rail destinations must be short enough or trains must travel at high enough speeds to make rail travel times competitive with air travel times. Transportation officials we talked with also stated that the realization of these benefits depends on a reliable and extensive rail network that would provide competitive service to air travel about travel time, frequency of service, and passenger convenience. This situation has occurred in several cases in Europe, where some national governments have established policies to reduce the number of short-haul flights at their major airports and have supported these policies by funding high-speed rail infrastructure. For example, there has been a reduction of air service between Paris, France and Brussels, Belgium—a popular short distance city pair for travelers—due, in part, to the high-speed train service linking Paris Charles de Gaulle airport and downtown Paris with Brussels (see fig. 8). Air France has replaced five Paris-to-Brussels flights with Thalys high- speed rail service. As another example, Lufthansa established a code-share agreement with Deutsche Bahn (the German national train company) between Frankfurt and Stuttgart and between Frankfurt and Cologne. This code-share agreement allows Lufthansa passengers arriving or departing at Frankfurt to transfer onto trains for the first or final portion of their journey to either Stuttgart or Cologne. It also allows passengers to check in for flights or pick up their luggage at the main train stations in Stuttgart and Cologne. Lufthansa officials stated that this service has allowed them to reduce their flights between Frankfurt and Cologne and reallocate resources to other markets. In the United States, efforts have also been made to use rail service to complement air service. For example, in March 2002, Continental Airlines established a code-share agreement with Amtrak in order to expand options and destinations for travelers using Amtrak and Continental. Under this agreement, passengers arriving at Newark airport can complete their journey on Amtrak to destinations such as Philadelphia, Pennsylvania. With this code-sharing agreement, Continental initially eliminated short-haul flights between Newark and Philadelphia and provided connecting rail service into some markets that were not served by Continental, such as Wilmington, Delaware, and Stamford, Connecticut. However, Continental officials stated that in April 2003, they reinstated limited air service between Newark and Philadelphia because of market demand. As another example, Midwest Airline officials said that the new Amtrak station at Milwaukee airport, which opened in January 2005, will allow the airline to better market its services to passengers from northern Illinois. This airline is also discussing a potential code-sharing agreement with Amtrak. Measuring and forecasting the benefits of individual intermodal projects can be challenging in part due to data quality limitations. In our prior work, we identified data quality as a pivotal concern in measuring and forecasting traffic flow, such as the number of passengers using public transportation to get to the airport compared to the number of passengers using private vehicles, as reliable and complete data are not always available. This information is generally collected through surveys of passengers at airports. However, since these surveys can be very expensive to conduct, only airports with significant financial resources conduct these surveys, and then only every few years. Moreover, such surveys tend to result in low response rates, which are often associated with biased estimates due to differences between passengers who agree to participate and those who do not participate in the survey. Transportation officials at our 16 case study locations told us that their intermodal capabilities have not been evaluated, and therefore they are not able to quantify their benefits. This situation should change for future intermodal projects that receive funds through the New Starts program. FTA’s Major Capital Investment rule, that went into effect in April 2001, requires that New Starts grantees conduct “before and after studies” on approved projects. Project sponsors will need to present a complete plan for collection and analysis of information to identify the impacts of the New Starts project and the accuracy of the forecasts. As of June 2005, FTA has awarded nine full funding agreements that will require these before and after studies. Those intermodal projects at airports that use New Starts funding will have to incorporate post-implementation evaluation into the project and face these data quality challenges. Based on our interviews with federal and local transportation officials, we found that intermodal project costs can vary significantly, depending in part on the complexity and scope of the project. We found that these projects may be as simple as placing a bus stop at the terminal or as complex as developing a new rail transit system with an airport station. In general, bus projects cost significantly less than rail projects. For example, we previously reported that the costs of bus-related projects on separate dedicated busways average about $13.5 million per mile in contrast to rail projects, which average about $34.8 million per mile. The higher cost per mile for rail projects compared to bus-related projects arises, in part, from the costs for rail projects associated with constructing stations, structures, signal systems, power systems, and maintenance facilities; relocating utilities; obtaining rights-of-way; and purchasing vehicles. Local transportation officials agreed that the costs of rail projects also vary depending on local circumstances such as whether the project alignments will affect local land-use restrictions or environmentally protected land and the extent to which the project will be affected by airport security measures. Table 6 provides examples of recently developed and planned rail intermodal projects, their approximate costs, and funding sources. See appendix VI for additional information on these projects. A significant barrier to the development of intermodal capabilities is the lack of specific national goals or funding programs to develop intermodal capabilities at airports, as mentioned earlier in this report. A number of other barriers also impede the development of intermodal capabilities at airports, including the difficulty of securing funding, disincentives for airport support, and geographical and physical land constraints at airports. In addition, the use of intermodal connections can be limited by the inability of the ground connections to meet the preferences of airline passengers, many of whom prefer to use private vehicles for trips to airports. Almost all local transportation officials we interviewed agreed that a barrier to developing intermodal capabilities using rail transit is the difficulty of securing funding, which usually includes both federal and local funds. Because this type of intermodal capability requires a large supporting network, such as a light rail system, federal support is often an important part of the funding package. We found that FTA’s New Starts program is a significant source of funding for intermodal capabilities at airports that are part of a rail transit system. Under this program, intermodal projects must compete with other transit projects for funds, and grantees are selected through an evaluation process that can take several years to complete prior to obtaining final funding approval. Local transportation officials agreed that this process can make it difficult to secure this part of the funding package. An FTA official added that New Starts’ rigorous rating process and the increasing demand for its limited funds makes the process time-intensive and competitive in nature. Local transportation officials described other difficulties in securing the use of passenger facility fees, commonly referred to as PFCs. In particular, several local transportation officials mentioned that the requirement that PFC funds be used for projects on airport property, among other criteria, limits their use for intermodal projects. However, even with this restriction, we found that four airport authorities used PFC funds to develop or contribute to intermodal projects at airports, as shown in table 7. Airlines, moreover, support these restrictions on the use of PFC funds. Several airlines told us that the primary objective of PFCs is to fund on- airport development and capacity improvements, and not ground-access projects, which airlines believe should be funded through local and state governments. In fact, airline officials stated that when PFCs are used for intermodal projects, airport funding is depleted and less will be available for other infrastructure projects that directly benefit aviation operations, such as runway renovations. Local transportation officials said it can also be difficult to secure the local funds needed to develop an intermodal airport project. These officials agreed that local funding typically comes from several agencies, such as metropolitan transportation authorities, transit agencies, and airport authorities—all with potentially different project funding priorities. Local transportation officials agreed that these differing priorities can make it difficult to build the unified local support necessary to secure funding, especially when intermodal projects are competing with other transportation or transit projects for limited funds. In some cases, airports may have economic disincentives to commit to the development of intermodal projects. For example, those airports that derive a large portion of revenues from parking may view intermodal projects—and the potential that passengers will access the airport by transit rather than private automobile—as a potential threat to that revenue. According to a 2003 airport association survey, parking revenues make up between 17 and 29 percent of airports’ nonaviation operating revenues. Geographical constraints, including physical and environmental issues, can also add to the difficulty of developing intermodal projects at airports. On the one hand, our prior work has found and local transportation officials stated that densely populated urban areas offer few alternatives for expansion or new project development. On the other hand, it is these same densely populated urban areas where rail connections to airports are more likely to generate benefits that will justify the costs, as these areas may have high levels of congestion and larger numbers of people willing to use public transportation to access airports as a result. Transportation planning officials in California stated that geographic constraints were a barrier to developing route alternatives for the state’s proposed high-speed rail system. While one of their objectives is to connect the system to the airports as directly as possible, they realize that it may not be possible because some California airports are located in areas that are difficult to access without requiring significant disruptions that may include dislocation of established commercial and residential sites. As another example, BART officials said that because federally protected wetlands are located adjacent to the San Francisco airport, officials had to modify the transit route into the airport to ensure there would be minimum impact on the wetlands. Since the proposed light rail line into the Minneapolis/St. Paul airport crossed land owned by various federal agencies, the process to gain the needed right-of-way was a multi-agency effort that required significant coordination, adding somewhat to the project planning time and costs. Unlike the rail network in some European countries, Amtrak's passenger rail network is not extensive enough to provide convenient service to many airports. For example, we noted previously in this report that although 13 airports reported having a direct connection to Amtrak’s passenger rail service, only 1 reported that passengers could access the station by automated people mover. In addition, even when rail lines are accessible to the airport, the frequency of passenger trains may be insufficient to draw airport passenger travel. Both airline and rail officials indicated that for code-share agreements, airlines require a maximum passenger transfer time between airplane and train of less than 1 hour. This requirement translates to one train per hour within the specific market, and Amtrak officials stated that they provide that level of service in very few markets— many of which are located on Amtrak’s corridors serving highly populated metropolitan areas. For example, although Amtrak track lines are adjacent to the airport in Cleveland, Ohio, Amtrak officials stated that Amtrak trains run only twice a day along this line, which is not frequent enough to establish a code-share agreement with an airline. In contrast, in Europe, train companies provide high-speed rail service between the Frankfurt airport and Cologne every half hour, between the Frankfurt airport and Dortmund every hour, and between Paris and Amsterdam Schiphol airport approximately every hour. In our prior work, we stated that transportation corridors that extend across multiple state and local boundaries pose challenges for intermodal transportation decision making due to coordination and cross- jurisdictional issues. Getting the cooperation of and coordination between these different officials can make the planning and implementation of multistate and multiregion projects difficult. During our interviews, we found that many intermodal projects included multiple agencies, communities, and transportation modes—each with its own priorities. For example, during the planning of the Seattle light rail, Sound Transit officials noted that the alignment from downtown Seattle to the Seattle airport ran through a number of surrounding cities. This required three local cities to approve permits for the construction of the project. The development and use of intermodal connections at airports can be limited by the inability of the ground connections to meet the preferences of airline passengers. According to transportation research and local transportation officials, intermodal capabilities are difficult to develop unless a demand for the service exists. Demand for public transportation options to airports is limited, as the vast majority of passengers still use private vehicles to access the airport. For example, one study said that the ceiling on public transportation use to access airports appeared to be about 10 to 15 percent, even at airports that had rail connections. Transportation and airport officials told us that consumers’ preferences can affect the demand for intermodal options at airports, such as the preference for seamless transitions from one mode to another, a simplified process to handle baggage, transit schedules that meet consumer demands, and clear, easy-to-follow information on accessing transportation options—including signage at airports and information at hotels on accessing transit to airports (see fig. 9 for an example of signage). In addition, these officials stated that passengers, particularly those traveling with large amounts of luggage and children, may not consider using transit or rail systems to complete their travel plans due to inconvenience. Using our past work and our analysis of information obtained from government and transportation officials in the United States and Europe, we identified two strategies that could help public decision makers improve intermodal options at airports, particularly direct connections to local and nationwide rail systems. A framework with key elements could assist in the consideration and implementation of either strategy. The first strategy would be to increase the funding flexibility of federal, state, and local transportation agencies under U.S. transportation policy’s focus on local decisionmaking in order to encourage a more systemwide approach to transportation planning and development. This strategy could help overcome the difficulty of securing funding for intermodal projects at airports, which local transportation officials identified most often as a barrier to improving such capabilities. It would most likely lead to a continued focus on the development of local intermodal connections rather than a fully integrated nationwide system. The second strategy would involve a fundamental shift in federal transportation policy’s long-time focus on state and local decisionmaking by increasing the role of the federal government in planning and funding intermodal projects in order to develop more integrated air and rail networks, either nationwide or along particularly congested corridors. This strategy would be closer to the intermodal development strategy followed by the European Union and several European countries, or to the strategy the federal government used to develop the interstate highway system. Such a strategy could increase intermodal options and American mobility through broad policy and funding changes, but the high cost of rail investments and the resulting high costs of this strategy would make it difficult to justify on a nationwide scale. Building on the perspectives gained from our past work in federal investment strategies and the work of transportation experts, we developed a framework to help guide consideration of the two strategies. This framework has three components: Set national goals for the system. These goals, which would establish what federal participation in the system is designed to accomplish, should be specific and measurable. Clearly define the federal role relative to state and local transportation roles. The federal government is one of many stakeholders involved in the development of intermodal capabilities at airports. This component is important to help ensure that the federal role supplements and enhances the participation of other stakeholders. Determine which funding approaches, such as alternatives to investment in new infrastructure, will maximize the impact of any federal investment. This component can help expand the ability to leverage funding resources and promote shared responsibilities. Given the current budgetary environment, and the long-range fiscal challenges confronting the country, substantial increases in funding for transportation projects will require a high level of justification. In addition, either strategy would benefit from a process for evaluating performance periodically to determine if the anticipated benefits are accruing. Evaluations also provide a means to periodically examine established goals, roles, and approaches, and a basis to modify them, as necessary. Leading organizations have stressed the importance of developing performance measures and linking investment decisions and their expected outcomes to overall strategic goals and objectives. While highway and transit projects can be major components of intermodal projects at airports, in our prior work, we found that there are no requirements for evaluations of highway and transit projects receiving federal funds other than those receiving funds through the New Starts program. In the first strategy, Congress could encourage the development of intermodal capabilities at airports while continuing U.S. transportation policy’s focus on local decisionmaking by providing federal, state, and local transportation agencies with additional flexibility within current federal transportation programs that are administered by FTA, FAA, and FHWA. National transportation goals could be established to encourage the development of airport intermodal transportation options. In doing so, Congress can help chart a clear direction, establish priorities among competing projects, and specify the desired results. At the federal level, surface transportation goals are geared toward providing and enhancing the mobility of the American public with a focus primarily on roads, mass transit systems, and railroads. For example, under ISTEA and TEA-21, Congress established goals to develop a national intermodal ground transportation system that will move people and goods in an efficient manner, but the goals did not explicitly include connecting aviation to the ground transportation systems. Futhermore, the national policy concerning intermodal planning of connections between airports and ground transportation systems focuses on coordination and does not set priorities or desired results for these types of intermodal connections. A truly intermodal transportation system would connect ground systems, aviation, and waterways. For example, both the European Union and some individual European Union member nation’s transportation plans highlight the goal of developing better connections between different transportation systems, including air and rail services. Since following this strategy would not involve a major shift in transportation policy, it would most likely not involve a major shift in the federal role in developing intermodal capabilities at airports. The federal role would continue to be focused on funding and oversight of locally determined and developed transportation projects. However, since this strategy would include the goal of establishing a more systemwide approach to transportation planning, the federal government would need to determine the scope of its involvement in encouraging such an approach. Federal transportation funding, which is focused on individual transportation modes, could be shifted to a more systemwide approach across all modes and types of travel. Under the federal transportation planning and funding structure, local transportation agencies tap into federal funds for transportation projects through different federal programs and agencies, based on the relevant mode. Each federal program has specific requirements and criteria, which can limit how local transportation can access and use funds from these programs. In addition, intermodal projects at airports can involve multi-jurisdictions, which can present challenges under the current structure. For example, for passengers or airports to obtain the full benefits of providing alternative transportation options, intermodal capabilities need to be connected to large local transit or national rail systems. Such systems often provide service to multi-jurisdictions and, therefore, their planning and development require cooperation among multiple transportation providers and planners, such as state departments of transportation, local transit agencies, metropolitan planning organizations, and city and county governments. To break down the current funding stovepipes and promote intermodal development, the federal government could consider several alternatives for transportation planning and funding that might better focus on these outcomes and promote better coordination between jurisdictions. These alternatives include: Increasing the flexibility of current programs. The current system of financing surface and aviation transportation projects limits options for addressing intermodal capabilities. During our interviews, officials highlighted that because federal, state, and local funding comes from different sources such as the New Starts program and PFCs, it is difficult to consider efficient and effective ways to enhance intermodal capabilities at airports. Providing more flexibility in funding across modes could help address this barrier. Applying different federal matching criteria for different types of expenditures in order to provide a higher level of federal match for projects that reflect federal priorities. Establishing a performance-oriented funding or reward-based system. Federal funds would favor those entities that address national interests and meet established intermodal goals. Federal support would reward those states or localities that apply federal money to gain efficiencies in their transportation systems, or develop intermodal capabilities at local airports. Expanding support for alternative financing mechanisms. The public sector could also expand its financial support for alternative financing mechanisms to access new sources of capital and stimulate additional investment in intermodal capabilities. These mechanisms include both newly emerging and existing financing techniques such as providing credit assistance to state and local governments for capital projects and using tax policy to provide incentives to the private sector for investing in intermodal capabilities. In some cases, when use and benefits are predicted to be high, private sector revenues may be an option. Aligning incentives for planning agencies to adopt best practices and to achieve expectations. Aligning incentives for existing and new programs or approaches to facilitate the use of better intermodal transportation project planning and funding options could improve the efficiency of federal transportation programs in enhancing intermodal connections between surface and air transportation, especially in multistate transportation corridors, where many planning agencies have to cooperate in establishing priorities. While this strategy of encouraging a more systemwide approach to transportation planning and development could address a number of barriers to developing intermodal services at airports, it would likely support the development of connections to local transit networks instead of to a nationwide rail network. This strategy is based on breaking down barriers with the current transportation planning structure, which is geared toward local involvement. Local transportation officials we interviewed stated that the focus of developing intermodal capabilities at their local airports was to provide greater access for the local community, instead of providing links to nationwide networks. Therefore, since this strategy provides local transportation agencies additional flexibility, we believe that their emphasis will be on developing intermodal capabilities for local access networks. If Congress decides that a more aggressive intermodal development strategy is required, it could increase the federal government’s involvement in developing a nationwide intermodal transportation system, similar to efforts in the 1950s to develop the interstate highway system. Such a strategy would involve a fundamental shift in federal transportation policy’s focus on state and local decisionmaking for transportation projects and would be closer to the intermodal development strategy followed by the European Union (and several European countries) with the goal of promoting rail as a complement to air transportation. For example, the European Union and individual European nations are currently supporting the development of air-rail networks through government funding of high- speed rail infrastructure. In line with this focus, Germany and France have built new dedicated high-speed rail lines that are used only for passenger service and some of which include train stations at their largest airports. While Europe provides examples of how to develop intermodal capabilities at airports, significant differences in population density, geography, and private vehicle costs between the United States and Europe would limit the use of the European model in the United States. (See app. II for more information on the development of air-rail connections in Europe.) Congress could establish national goals for the development of intermodal capacities at U.S. airports that would increase the federal government’s role in developing a nationwide intermodal transportation system that focuses on connecting air and ground transportation. Congress has set a precedent for establishing national policy for large nationwide transportation infrastructure with the development of the interstate highway system. This system was primarily developed to address (1) the public’s demand for efficient long-distance travel, (2) the needs of the military, and (3) national economic development through the connection of metropolitan and industrial areas. While the interstate highway system was focused on a single mode, the national intermodal transportation goals could focus on all modes and the connections between them. Therefore, the goals could include not only the development of facilities and connections on airport property, but also the development of a supporting transportation network to provide air passengers the ability to reach their final destination. Many European governments have emphasized intermodal connections between air and rail within their national transportation policies, with the goal of addressing limited airport capacity and environmental issues. For example, the European Union’s transport policy states that improving the intermodal connections between European airports and the high-speed rail network is a top priority. (See app. II for additional information of trans- European transport network.) The federal government could take a more active role—versus state and local transportation agencies—in the planning of intermodal connections between airports and other transportation modes. In terms of planning, the interstate highway system provides an example of how active involvement by the federal government could lead to the development of a nationwide intermodal system. In that case, the federal government provided project- specific oversight, laid out the routes, oversaw construction, and ensured that the system was adequately maintained. To develop a nationwide intermodal system that focuses on connecting airports to a rail network of sufficient quality to attract significant number of riders, the federal government could potentially take on similar roles. The European high- speed rail network is another example of governments taking an active role in developing larger transportation networks that connect to airports. For example, the French government plays a major role in developing its high- speed rail system—Train à Grande Vitesse. There are four main participants in the nation’s rail network, including the central government, regional governments, Réseau Ferré de France, and the Société Nationale des Chemins de fer Français. While the ownership, management, and operation of the rail system is carried out by the Réseau Ferré de France and Société Nationale des Chemins de fer Français, the central government still defines the extent of the network, gives its approval to major projects, participates in funding, and has oversight authority for the construction and safety of these projects. In addition, while no specific department deals with intermodal capabilities at French airports, the French government set up a working group in 2002 to look at developing more integration between the two transportation modes. For the federal government to take a more active role in developing airport intermodal capabilities, it might also need to take on additional federal funding responsibilities. This would be especially true if the federal policy was to develop a system that promoted connections between airport and high-speed rail networks, similar to the systems that have been developed in Europe. To fully develop an intermodal system that provides airline passengers with nationwide rail options that are comparable to European systems and that could potentially compete with air service, would require expanding and improving the existing U.S. rail network and rail service. Except in limited highly traveled corridors, Amtrak cannot provide the level of service that airlines require, in part, because much of the U.S. rail infrastructure is privately owned by freight companies and passenger trains do not receive priority in scheduling. To accomplish improved air-rail connections, the federal government would have to increase its funding role due to the high cost of enhancing or expanding rail service or developing high-speed rail corridors. Congress has in the past provided significant funding for large transportation projects that were deemed to be in the national interest and were geared toward reaching national goals. For example, between 1954 and 2001, Congress apportioned over $370 billion for the construction and preservation of the interstate highway system. Increased federal involvement in the development of nationwide intermodal capabilities at U.S. airports would be costly and could require the implementation of a dedicated funding source. The full costs of any intermodal capability would be dependent on how integrated and expansive this network would be and whether it included additional high-speed rail or focused on conventional passenger rail service. Our prior work has shown that both choices are costly. In the past, we have reported on Amtrak’s precarious financial situation, for which Congress has periodically provided large-scale infusions of federal funds for capital expenses. Additional federal funds have been spent to develop high-speed train service between Boston and Washington, D.C. We found that through March 2003, a total of about $3.2 billion had been provided—about $2.6 billion by the federal government and an additional $625 million by commuter rail agencies and state governments. Unlike the capital investment in infrastructure for airports, highways, and transit, which receive significant federal money from dedicated funding sources, the national rail system’s infrastructure is funded by annual appropriations and must compete with other federal programs for funds on an annual basis. Therefore, to establish any long-term strategy to fund improvements between the national rail system and airports could require the establishment of a dedicated funding source. For example, in the past, it has been suggested that Amtrak could be funded through a dedicated funding source, such as one of the federal transportation trust funds. Even if a revenue source is established, this new funding would face many of the same revenue challenges that other transportation systems, such as highways, are facing as revenue sources are eroded. Both the European Union and European governments have invested significant funds in the development of high-speed rail networks that provide passengers the option of fast intercity travel. For example, the European Union estimated in 2003 that the total cost of completing the trans-European transport rail network would be around 350 billion euros. In addition, some European governments provide a significant portion of funding for all new rail infrastructure. For example, the Swiss government has established a vehicle tax on all Swiss and foreign freight trucks using Swiss roads to help fund its rail network, among other things. Two-thirds of the revenue collected from this tax is allocated to improving the Swiss rail infrastructure. Germany has also enacted a specific toll on freight vehicles based on a user charge for actual mileage driven. The revenue collected from this toll will be used to finance the Anti-Congestion Scheme for Federal Railway Infrastructure program, among other programs. Given the high costs of this strategy, benefits high enough to justify investment in intermodal facilities would likely be anticipated in a limited number of places, at most. Both private and public benefits could result from this investment. Users of the investment would receive private benefits in the form of transportation services and would be expected to pay some form of fee or user charge. How much users would be willing to pay would depend on the value of the services that they would receive from the intermodal facility, compared with the benefits from alternative modes that they could also use for the same trip and the prices they would have to pay for the alternatives. In locations where there is highway congestion, a rail link to the airport might be valuable to many travelers because it could offer a travel option that might reduce travel time or make the travel time more reliable. Similarly, if airport parking is expensive, an intermodal link might have considerable value to travelers. However, such a link might be of less value where there is little congestion and parking is inexpensive; in such situations, we would not anticipate that many travelers would be willing to pay much to use a new facility. In addition to these private benefits, there may be public benefits that users would not take into account in deciding how often to use the facility and how much they would be willing to pay. The public benefits could include reduced highway and air congestion, pollution, and energy dependence. For example, if air passengers can access a nationwide rail network directly at an airport, some passengers might travel to that airport from other cities by train rather than on highways or short-haul flights, which might reduce highway or airport and airway congestion. However, the demand for such service is likely to be low except in a few highly congested travel corridors where the distances are short enough to make rail travel times competitive with air travel times. Morever, congestion-relief benefits would only be realized at airports where either highways or airports are already at or near capacity, because only at those airports would additional users have a disproportionate, detrimental effect on the flow of automobile or aircraft traffic. At airports that do not have substantial highway or airport congestion, such benefits would not be realized. There might still be some pollution and energy dependency benefits, but since the number of travelers likely to use these facilities at such airports is limited, these benefits will be limited as well. Public benefits could also include “option value,” the value that people place on having the option to use something even though they are not currently using it. By providing an alternative that would be available to travelers as an option if their circumstances change, such as bad weather, investment in intermodal facilities creates value that could also justify public subsidy. The greater the number of potential users, and the greater the likelihood that travelers might switch to the new facility, the greater the option value. The existence of public benefits, or externalities, is often cited as a justification for public subsidies that would induce more people to use a facility than if they had to pay the full cost. When the price can be reduced to users due to subsidies, some additional travelers for whom the private benefits would not be sufficient to justify paying an unsubsidized price would also choose to use the facility. However, only where both the private and the public benefits are large would the appropriate subsidy be sufficient to cover the difference between what users would be willing to pay and the substantial cost of the facility. Given the high investment costs, these locations are likely to be limited to airports where there is substantial ground and air congestion and to a few highly congested travel corridors where the distances are short enough to make rail travel times competitive with air travel times. The limited nature of intermodal connections at major U.S. airports is most likely the result of many factors. One underlying factor is a lack of demand. Due to the inconvenience of transferring from airplane to train or bus, potentially higher travel times, and out-of-pocket costs, many American travelers in many parts of the country are likely to continue to prefer car travel over transit to access the airport and short-haul flights over connections to a nationwide rail system to complete an overall journey. There is likely to be a greater demand for such connections in a few highly traveled corridors where higher private benefits to individual travelers and public benefits such as reduced congestion on roadways would be more likely to result. Moreover, in the context of federal transportation policy’s emphasis on local decision making, local officials in communities with strong local bus and rail transit systems have worked to connect airports to these systems. A federal strategy of encouraging a more systematic approach to transportation planning—including alternative funding mechanisms—could encourage state and local governments to consider the development of additional intermodal connections at airports in the context of other transportation investment decisions. At the same time, it is clear that more quantitative evaluations of the benefits of intermodal capabilities at airports could help to better inform state and local as well as federal decision makers as they attempt to determine which projects to develop with limited resources. The before and after evaluation requirement for projects that receive funding through the New Starts program is a positive step in this direction and could potentially be more widely applied. We provided drafts of this report to DOT and Amtrak for their review and comment. DOT provided technical comments from FAA’s Director of Airport Planning and Programming, which we have incorporated in this report as appropriate. Overall, DOT generally concurred with this report. Amtrak had no comments on this report. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 10 days from the report date. At that time, we will send copies of this report to interested congressional committees, the Secretary of Transportation, the Administrators of FAA and FTA, and the President of Amtrak. We will also make copies available to others upon request. In addition, the report will be available at no charge 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 [email protected]. 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 VII. This report addressed the following questions: (1) What roles do federal, state, and local governments and the private sector play in developing intermodal capabilities at U.S. airports? (2) To what extent have intermodal services and facilities been developed at selected U.S. airports? (3) What benefits, costs, and barriers exist for developing additional intermodal capabilities at U.S. airports? (4) What transportation strategies, including lessons learned from the European experience, may help public decision- makers improve intermodal capabilities at U.S. airports? To address these questions, we used a variety of methods and sources of information. To determine the roles that federal, state, and local governments and the private sector play in developing intermodal capabilities at U.S. airports, we interviewed transportation officials from the following Department of Transportation (DOT) offices: Federal Aviation Administration (FAA), Federal Highway Administration (FHWA), Federal Transit Administration (FTA), and the Office of Intermodalism. We also interviewed officials from the American Bus Association, Association of American Railroads, Association of Metropolitan Planning Organizations, Airports Council International-North American, American Public Transportation Association, International Air Rail Organization, Amtrak, American Airlines, Continental Airlines, Midwest Airlines, and Northwest Airlines. In addition, we interviewed officials from state and local transportation offices, metropolitan planning organizations, transit authorities, and airport authorities representing selected airports, which are identified later in this appendix. To determine the extent to which intermodal services and facilities have been developed at major U.S. airports, we selected and administered a Web-based survey to 72 airports from FAA’s 2003 Air Carrier Activity Information System database. These airports accounted for approximately 90 percent of the enplanements for calendar year 2003, and consist of all 33 large hub, all 35 medium hub, and the 4 small hub airports that are located in the same metropolitan area as a large or medium hub airport. Appendix V provides the complete list of airports surveyed. We asked airport officials about the local and nationwide bus and rail systems that are accessible to their airports by regular, fixed-route shuttle service, an automated people mover or walking. We also asked the airports if their capital improvement plan included proposals to enhance the airport’s connections to local and nationwide transportation systems. Since responses to surveys are often subject to nonsampling errors, we attempted to minimize these errors by taking several precautions during the questionnaire design and pretested the instrument with 8 medium and large hub airports. We made changes to the content and format of the final questionnaire as a result of these pretests. The questionnaire was administered on the Internet from February 22 to March 31, 2005, with two intervening e-mail messages and follow-up telephone contacts. We received responses from all 72 airports, resulting in a 100 percent response rate. To ensure the accuracy of information presented by the airport officials, we relied on Salk International’s Airport Transit Guide and follow-up questions at selected airports. We are not reporting responses for two questions on the survey because we determined that these responses were unreliable. During our pretests of the survey questionnaire, some respondents gave incorrect answers to questions about the existence of stations for either Amtrak or a nationwide bus system within their metropolitan area (questions 5 and 13). Based on follow-up questions, we discovered that some pretest respondents were unaware of some stations located within their metropolitan area, especially in instances where there was no direct access between the airport and these stations. In addition, some respondents were unaware of the exact boundaries of their metropolitan area. Despite these difficulties, we elected to leave these questions in the survey because of their role in screening respondents and setting the context for subsequent questions. The nature of the errors were such that false negative responses would be unlikely to lead to errors in subsequent questions. That is, it is unlikely that an airport that actually had direct connections to a nationwide bus or rail system would state that there was not a station for such a system in their metropolitan area. We conclude that responses to the remaining questions are sufficiently reliable for the purposes of this report. Appendix IV provides the survey results. The survey results (GAO-05-738SP) are also available on the GAO Web site at http://newwww.gao.gov/special.pubs/gao- 05-738SP/index.html. To obtain information on the benefits, costs, and barriers in developing intermodal capabilities at selected U.S. airports, we conducted case study analysis of 16 selected airports. Airports for our case studies were chosen based on airport size, planned or existing types of intermodal service, and geographic location. We adopted a case study methodology because, while the results cannot be projected to the universe of airports, case studies are useful in illustrating the range and complexity of intermodal capabilities the airports implemented. We interviewed local and state transportation officials, metropolitan planning organizations, transit authorities, airport authorities, airlines and other key stakeholders at each of the 16 airports. The cities and airports where we conducted our case studies are shown in table 8. To determine what transportation strategies may help public decision makers improve intermodal capabilities at U.S. airports, we interviewed government, airline, rail, and airport officials from the European Union, France, Germany, Switzerland, and the Netherlands to obtain descriptive information on their airport-rail connections. These nations were selected based on research publications, which identified airports within these countries as having best practices on intermodal airport connections. We also reviewed and used information from our past reports on areas including the interstate highway system, the nationwide rail system, and transportation investment strategies. In order to determine basic differences between the United States and Europe that could affect the relevance of the European experience in the United States, we gathered and analyzed information from intermodal transportation experts and literature. In addition, we obtained and analyzed information and documents from DOT, the European Union, the National Research Council’s Transportation Research Board, the Transit Cooperative Research Program, and others. We conducted our work between July 2004 and July 2005 in accordance with generally accepted government auditing standards. While the European Union has developed a common transportation policy, the actual implementation and development of transportation infrastructure, including intermodal capabilities at European airports, remains the responsibility of individual member nations. Their experiences may provide examples of how intermodal connectivity could be improved in the United States. However, significant differences between the United States and Europe should be considered. In 1992, the European Union established a transportation policy with the guiding principle to open up the transportation market between member countries. This policy included increasing competition within the aviation industry, striking a balance between growth in air transportation and the environment, and building new transportation infrastructure. The European Commission’s Directorate-General for Transport and Energy is the transportation agency for the European Union and is responsible for developing and implementing transportation policy. This office carries out these tasks using legislative proposals—which establish specific requirements or regulations that member countries must implement—and program management including the financing of certain transportation projects. While the European Union has established a European Union- wide policy, individual member nations are responsible for planning and funding not only European Union-designated priority projects, but also their own individual transportation priorities. In July 1996, the European Union established guidelines for developing a trans-European transportation network that comprises roads, railways, airports, seaports, inland ports and traffic management systems that serve the entire European Union. The guidelines included a list of priority projects that can receive funding from the European Union. For those priority projects, the European Union generally funded up to 50 percent of the project study costs and up to 10 percent of project development costs. Member nations are primarily responsible for planning, designing, funding, and building these projects. During our interviews with transportation officials in four European countries, we found that national governments, local governments, and private transportation companies—such as airport and rail companies—all take part in the development of intermodal capabilities at airports. At the European locations we visited, airports, many of which are owned or operated by private airport management companies, have taken the lead in planning and funding major intermodal facilities on airport property. For example, Fraport, a private company that manages Frankfurt’s airport, and Deutsche Bahn, the German rail company, invested over 300 million euros in building a station for long-distance and high-speed trains at the Frankfurt airport. Additionally, some European rail systems are also privately operated. For example, both Germany and France have established private companies to operate their nations’ rail systems. However, the national government still takes the lead in planning and funding the building of the overall rail infrastructure, such as dedicated high-speed rail tracks. Once this infrastructure is built, it is then turned over to these private companies that operate and manage this infrastructure. At the Frankfurt airport, Deutsche Bahn and Fraport funded the construction of the long-distance train station, but all the track infrastructure was funded by the German national government. We found that local governments also are involved in providing intermodal transportation services to airports, with local government-owned transit agencies providing either rail or local bus service to the airport. For example, the Rhein-Main Verkehrsverbund regional transit system provides 230 daily connections and service to about 4,000 passengers per day from the Frankfurt airport. Examining international models can provide examples of how a more active federal role can help in developing a nationwide rail network, including intermodal capabilities at airports. However, significant differences between the United States and other nations would limit the use of these international models. Based on information we gathered from intermodal transportation experts and research we reviewed, we identified three basic differences between the United States and Europe that affect the ability to use the European model in the United States. Population density. Experts and prior research highlight the greater population density of European cities and that downtowns are major destination points for passengers as key differences that affect the use of intermodal systems. While some U.S. cities have population densities comparable to European cities, in general, U.S. cities are more decentralized. In addition, prior research has shown that European cities generally have a greater downtown orientation for passengers as compared to U.S. cities, and so intermodal systems providing direct access to downtown will have a greater ability to draw passengers. Geographic differences. Generally, distances between many major cities in the United States are greater than in Europe. These greater distances can affect intermodal transportation because many experts believe that for intercity rail to be competitive with air travel, the distance between cities needs to be within 2-3 hours total travel time or 100-500 miles, depending on the speed of the train. One expert stated that there are some areas in the United States—California, the Northeast, and the Great Lakes—where it is possible that rail transportation could provide competitive service within these areas. Lower vehicle use costs. In the United States, gasoline prices are much lower than in Europe because of substantially lower taxes. In addition, the rate of car ownership is generally higher. For both reasons, people traveling to airports in the United States are more likely to drive and leave their cars at the airports until they return than in Europe, which could reduce the demand for (and therefore the benefits of) more extensive intermodal capabilities at U.S. airports. Intermodal projects are large capital projects that generally require pooling money from different sources and different transportation modes. The federal government can help finance local transportation projects through federal transportation programs such as the New Starts program and federal credit assistance programs such as the Department of Transportation’s (DOT) Transportation Infrastructure Finance and Innovation Act. State and locally generated money such as state transportation trust funds, dedicated sales taxes, and highway tolls have been used to match federal funds. In addition, airports have used passenger facility charges (PFC) and airport revenue to fund rail access at airports and public-private partnerships have been used to attract private investment. The New Starts program is used to select for federal funding new rail transit projects, including those that connect to airports. New Starts is the Federal Transit Administration’s (FTA) capital investment program for fixed guideway systems and extensions. For selected projects, a maximum of 80 percent federal contribution to total project costs can be funded, but projects that request a maximum federal share of 60 percent of the project’s total cost receive higher priority. For example, parts of the BART extension to the San Francisco International Airport and the Hiawatha Light Rail Line to the Minneapolis/St. Paul International Airport were funded through the New Starts program. Other federal programs provide support for highway and transit systems that may be connected to airports. For example, federal highway fuel taxes are deposited into the Highway Trust Fund and distributed by the Federal Highway Administration (FHWA) and FTA to state transportation departments and local transit operators. While most federal funding sources and programs are linked to highway or transit uses, some funding flexibility between highway and transit is allowed under programs such as the Surface Transportation Program and the Congestion Mitigation and Air Quality Improvement Program, both of which have been used to fund intermodal projects. In addition, the Federal Aviation Administration’s (FAA) Airport Improvement Program (AIP) provides grants to airports for planning and development projects. The program is funded in part by aviation user taxes, which are deposited into the Airport and Airway Trust Fund. Funds are allocated to airports with scheduled commercial service and at least 10,000 enplanements each year. In terms of promoting intermodal capabilities, AIP funds are generally used for access roads to airports that are airport owned, on airport property, and exclusively serve airport traffic. Furthermore, DOT provides credit assistance for highway, transit, passenger rail, and intermodal projects under the Transportation Infrastructure Finance and Innovation Act. Credit assistance includes direct loans, loan guarantees, and lines of credit. Project financing must be repayable in part or in whole from tolls, user fees, or other dedicated revenue sources. Finally, Congress designates specific transportation programs and projects for funding. For example, federal funds to Amtrak support nationwide passenger rail service for operating and capital expenses. Congress also designated funds for the construction of the Amtrak station at the Milwaukee General Mitchell International Airport. State and local funding for intermodal capabilities can provide matching funds for federal programs such as New Starts and can derive from several sources. These sources have included state and local apportionments of the Highway Trust Fund, state and local gas taxes, and motor vehicle taxes and registration fees. In addition, some states have dedicated a percentage of the general sales tax to fund rail transit projects. Some local governments and transit agencies have also dedicated a portion of property tax or payroll tax for rail projects to airports. Also, bridge, tunnel, and highway tolls have in part funded automated people mover systems at John F. Kennedy International Airport in New York and Newark Liberty Airport in New Jersey. In addition, cities and counties can provide capital and operating costs for rail projects. Further, local governments have established special tax districts such as “transportation improvement districts” that can tax businesses in order to capture the value added to a business or property with close access to a rail project. In this way, those who receive the benefits of increased economic activity or increased property value contribute to project costs. For example, a transportation improvement district was established to help fund the proposed rail extension to the Washington Dulles International Airport in Virginia. Like the federal government, states have their own credit assistance programs. The National Highway System Designation Act of 1995 allows up to 10 states to capitalize transportation credit assistance banks to provide loans and credit enhancement to eligible surface transportation projects. For example, under this program, Florida used funds authorized under the Transportation Equity Act for the 21st Century to capitalize its credit assistance bank, which funded in part the development of the Miami Intermodal Center at Miami International Airport. PFCs and airport revenue are the primary sources of local airport contributions to funding projects that provide rail access to airports. For a project to be eligible to use PFCs, it must be airport owned, on airport property, and be exclusively for the use of airport passengers and employees. Airports apply to FAA for approval of both the collection of the fees and the use of the fee revenue for specific projects. FAA will generally approve an airport’s proposal for the collection or use of PFC funds as long as the project is eligible, meets a program objective, and is adequately justified. Airport revenue includes receipts from customer facility charges, parking, terminal concessions, and airline landing fees and rentals. For example, the Miami Intermodal Center will levy a customer facility charge on car rentals to pay for its consolidated rental car facility. The eligibility criteria for the use of airport revenue are similar to PFCs, but projects must only be directly or substantially related to the air transportation of passengers and property rather than for exclusive use. FAA does not approve the use of airport revenue for a particular project, unless an airport or airport user complains that funds are being inappropriately used. State and local governments have used federal funding, PFCs, and airport revenue to back tax-exempt bonds. Also, Grant Anticipation Notes backed by New Starts Full Funding Grant Agreements were used for the BART extension to the San Francisco airport. For on-airport projects, General Airport Revenue Bonds have been issued by airports backed solely by, or in combination with, PFCs and airport revenue. Private investment in intermodal capabilities has occurred through public- private partnerships. For example, Portland International Airport entered into a public-private partnership with the builder of its light rail extension to the airport. In return, the builder has a 85-year lease on the property to develop retail or office space. 0 13. Is there at least one station for a nationwide bus system, such as Greyhound, within the metropolitan area where ( ) Airport is located? Please do not consider local transit buses, charter buses, or shuttle buses to be a nationwide bus system.14. Please consider the nationwide bus station (or stations) most accessible to the airport. Is there regular, fixed-route shuttle service from any of these nationwide bus stations to any of the airport's terminals? 15. Does the airport have a people mover (that is, an automated guideway car or a moving sidewalk) that transports passengers from any of these nationwide bus stations to any of the airport's terminals? 16. Would it be convenient for an average adult with luggage to walk from any of these nationwide bus stations to any of the airport's terminals? Plans to build ground transportation facilities 17. Does ( ) Airport have a Capital Improvement Plan? 18. Does the airport's Capital Improvement Plan include a proposal to build a train station for a local rail system? Please consider local rail systems to include light rail, commuter rail, and subways, but not to include nationwide rail networks, such as Amtrak. 19. Does the airport's Capital Improvement Plan include a proposal to build a train station for a nationwide train system, such as Amtrak? 20. Does the airport's Capital Improvement Plan include a proposal to add stops for local transit buses? Please consider local bus systems to include public transit buses, express buses, and bus rapid transit. Do not consider either nationwide bus systems, such as Greyhound, or on-demand transportation, such as taxi vans, hotel shuttles, or charter buses as local bus systems. 21. Does the airport's Capital Improvement Plan include a proposal to build a station for a nationwide bus system, such as Greyhound? Please do not consider local transit buses, charter buses, or shuttle buses to be a nationwide bus system. 22. Does the airport's Capital Improvement Plan include a proposal to build a people mover (that is, an automated guideway car or a moving sidewalk) to connect any of the airport's terminals with ground transportation facilities, such as bus stations or train stations? 23. Does the airport's Capital Improvement Plan have any other proposals to improve passengers' access to trains and buses? The answers to these questions are unreliable. See appendix I for more details. The 72 airports we surveyed reported different levels of connections to air and rail systems. As shown in table 9, most airports had direct connections to local bus or rail systems, while fewer had connections to nationwide transportation systems. Twenty airports reported plans to develop connections to local transportation systems, while only 2 reported plans to develop connections to a nationwide transportation system. Airport and local transportation officials at each of our case studies reported a number of primary benefits and primary barriers associated with the development of intermodal facilities at the airport. As shown in figure 10, the most commonly cited primary benefit for intermodal facilities at the airport was providing alternative transportation options for passengers, while the most commonly cited primary barrier to developing such facilities was restrictions on the use of FAA funds. A brief description of the intermodal facilities, plans for additional facilities, and local stakeholders at each of the airports is presented in this appendix. Intermodal Facilities – Baltimore-Washington International Airport has the following intermodal connections (see fig. 11). Local bus: Passengers can access local bus service at the airport’s terminal. Local rail: Passengers can access three different local rail transit systems. A station for Baltimore’s local rail transit system is located at the north end of the airport’s terminal. A local commuter rail stops at an Amtrak station that is located within two miles of the terminal and can be accessed by a free shuttle bus from airport terminals. In addition, a station for Washington, D.C.’s local rail transit system can be accessed by an express bus from the airport’s terminal. Nationwide bus or rail: Passengers can access Amtrak at a station located within two miles of the airport and connected to the terminal by a free shuttle. Plans for additional facilities: The airport is evaluating the need for and feasibility of developing a regional intermodal transportation center and an automated people mover system that would connect the airport to the Amtrak rail station, satellite parking lots, and a consolidated rental car facility. Key Local Stakeholders – The Baltimore-Washington airport is owned and operated by the Maryland Aviation Administration, which is part of the Maryland Department of Transportation. At the state level, the department of transportation leads intermodal planning and coordination between state transportation agencies through the airport’s Access Coordination Group. This group is comprised of various state and local government agencies that coordinate project information and resolve any problems or issues. The aviation administration is the lead agency in planning and coordinating intermodal facilities at the airport with federal agencies (such as the Federal Aviation Administration (FAA), state agencies, local governments, private sector organizations, and public stakeholders. Other key organizations include the Baltimore Metropolitan Council, the metropolitan planning organization for the Baltimore region, and Anne Arundel County, which regulates land development on nonstate and federal property. The Maryland Transit Administration provides local bus and rail transit service, and Howard County Transit and Annapolis Transit provide local bus service. The Washington Metropolitan Area Transit Authority provides express bus service to the Greenbelt station of Washington, D.C.’s local rail transit system, Metro. Intermodal Facilities – The Los Angeles International Airport has the following intermodal connections (see fig. 12). Local bus: Passengers can access local bus service at the Intermodal Transit Center, which is connected to airport terminals by a free shuttle. Local rail: Passengers can access the local rail transit system at a station connected to airport terminals by a free shuttle. Nationwide bus or rail: No connections. Plans for additional facilities: The Los Angeles airport master plan includes the development of an intermodal transportation center with a direct connection to the local rail transit system. The plan also includes the construction of automated people movers to connect the intermodal transportation center to airport terminals. Key Local Stakeholders – Los Angeles airport is owned and operated by Los Angeles World Airports—a department of the City of Los Angeles—and governed by the seven-member Board of Airport Commissioners. A number of transit agencies—Los Angeles County Metropolitan Transportation Authority, Culver City Transit, Santa Monica Transit, and Torrance Transit—provide local bus service from the airport to various locations within the Los Angeles area. In addition, the airport also operates a dedicated express bus service, Van Nuys FlyAway, which transports passengers to and from the San Fernando Valley. The airport is taking the lead to develop the intermodal transportation center with a connection to the local rail transit system. Other state and local transportation agencies, such as the Southern California Association of Governments (a metropolitan planning organization) and the California Department of Transportation, have played a limited role in planning ground access to the airport. Intermodal Facilities -- Miami International Airport has the following intermodal connections (see fig. 13). Local bus: Passengers can access local bus service at the airport’s passenger terminal. Local rail: No connections. Nationwide bus or rail: No connections. Plans for additional facilities: Construction has started on the Miami Intermodal Center, located east of the airport's main terminal. The first phase of the center will include the construction of a consolidated rental car facility, a central bus and rail station, and an automated people mover that will connect the center with the airport. The entire first phase is scheduled to be under construction or completed by late 2008. The second phase consists of the construction of additional rail platforms for Amtrak and local rail. Both phases are expected to be completed over a 20-year period. Key Local Stakeholders – Miami airport is owned and operated by the Miami-Dade Aviation Department, a county transportation agency. The Florida Department of Transportation is the lead agency in the development of the intermodal center. As the lead agency, the department of transportation coordinates with other stakeholders—including Miami- Dade Transit, which provides the county’s bus, rail, and other transit services; Miami-Dade Expressway Authority, which oversees the operation and maintenance of five major county expressways; the Miami-Dade Metropolitan Planning Organization, which is the regional transportation planning body; and the Federal Highway Administration—the lead federal agency—which ensures that environmental concerns are addressed and facilitates coordination among other affected federal agencies. Intermodal Facilities – Milwaukee General Mitchell International Airport has the following intermodal connections (see fig. 14). Local bus: Passengers can access local bus service at a bus stop about 1 block from the terminal. Local rail: No connections. Nationwide bus or rail: Passengers can access Amtrak at the Milwaukee airport rail station located on the western perimeter of airport property and connected to terminals by a free shuttle. Plans for additional facilities: A proposed commuter rail line between downtown Milwaukee and Chicago would include a station near the airport that would be connected to the airport by a free shuttle. In addition, there is a proposal to develop a network of five interconnected express bus routes in the Milwaukee area, with one route directly serving the airport. Key Local Stakeholders - The Milwaukee airport is owned and operated by Milwaukee County. The Wisconsin Department of Transportation was the lead agency in developing and securing funding for the construction of the airport’s Amtrak service and rail track improvements. In addition, airport staff participated in the planning and construction of the rail station. Amtrak and the Canadian Pacific Railway, which owns the track next to the airport, were key stakeholders. Amtrak agreed to make the additional stop on its Chicago-Milwaukee route, and Canadian Pacific Railway agreed to allow the construction of the new station subject to the Wisconsin Department of Transportation providing funding for track improvements to maintain freight capacity. Local bus service is provided by Milwaukee County Transit. Midwest Airlines, which is the largest tenant at the airport, advocated the development of the airport’s rail station. Intermodal Facilities –The Minneapolis/St. Paul International Airport has the following intermodal connections (see fig. 15). Local bus: Passengers can access local bus service at the airport’s transit center, which is located adjacent to the airport's main terminal (Lindbergh terminal). Local rail: Passengers can access the local rail transit system at both of the airport’s terminals. One station is located at the airport’s transit center, which is in the main terminal and accessible by automated people mover. The second station, located outside of the airport's other terminal, is connected to that terminal by a covered walkway. Nationwide bus or rail: No connections. Plans for additional facilities: None reported. Key Local Stakeholders – The Minneapolis/St. Paul airport is owned and operated by Metropolitan Airports Commission. The Metropolitan Council (a metropolitan planning organization), Metro Transit (the transit operating division of Metropolitan Council), Metropolitan Airports Commission, and the Minnesota Department of Transportation were the major stakeholders in building the local rail system, including the two stations at the airport. The Metropolitan Council is the owner of the local rail system and received the federal funds used to build the system. Metro Transit is the operator of the local rail system and served as the coordinating agency during construction. The Metropolitan Airports Commission managed construction of the rail tunnel and stations on airport property and provided partial funding. State and local governments, including the Minnesota Department of Transportation and Hennepin County, provided significant funding for this project. Metro Transit and Minnesota Valley Transit also provide local bus service to the airport. Intermodal Facilities –Newark Liberty International Airport has the following intermodal connections (see fig. 16). Local bus: Passengers can access local bus service at ground transportation courtyards located at each of the airport’s three terminals. Local rail: Passengers can access two local rail transit systems at an airport rail station that is connected to each airport terminal by an automated people mover. Nationwide bus or rail: Passengers can also access Amtrak at the airport rail station. Plans for additional facilities: None reported. Key Local Stakeholders – Newark airport is owned by the City of Newark and the Port Authority of New York and New Jersey, which also operates the airport. The port authority was the lead agency in planning, coordinating, and overseeing the construction of the automated people mover and the airport’s rail station. As the lead agency, the port authority also coordinated with federal agencies such as FAA. New Jersey Transit and Amtrak also participated in the development of the airport’s rail station and provide both transit rail service and nationwide rail service from the airport rail station. In addition, the Port Authority Trans-Hudson provides local rail transit service. Continental Airlines, which is the largest tenant at the airport, supported the use of passenger facility charges for this project. Intermodal Facilities – New York John F. Kennedy International Airport has the following intermodal connections (see fig. 17). Local bus: Passengers can access local bus service at a local transit station connected to airport terminals by an automated people mover and at airport terminals. Local rail: Passengers can access two local rail transit systems—a New York commuter rail system and the New York City subway system—at transit stations that are connected to airport terminals by an automated people mover. Nationwide bus or rail: No connections. Plans for additional facilities: There are plans to develop rail transit service from the airport to lower Manhattan, which would include building new rail infrastructure. Key Local Stakeholders – The Port Authority of New York and New Jersey operates Kennedy airport. The port authority was the lead agency in planning, developing and implementing the automated people mover. As the lead agency, the port authority coordinated with key federal agencies, including FAA, and state and local agencies such as the New York Department of Transportation and the Metropolitan Transportation Authority. The New York Metropolitan Transportation Council (the local metropolitan planning organization), airlines, and the local community provided input during the planning and implementation of the automated people mover. In particular, the port authority worked with the Metropolitan Transportation Authority to adopt a similar fare system to assure that passengers could use one fare card to access both the automated people mover and the rail transit system, and to develop the infrastructure to facilitate transfers between the automated people mover and the rail transit system. Intermodal Facilities – Oakland International Airport has the following intermodal connections (see fig. 18). Local bus: Passengers can access local bus service at the airport’s terminals. Local rail: Passengers can access the local rail transit system at a station about 3 miles east of the airport and connected to airport terminals by a shuttle. A fee is charged for this shuttle. Nationwide bus or rail: Passengers can also access an Amtrak station using the shuttle. Plans for additional facilities: There are plans to construct a 3.2 mile elevated automated people mover system that would connect the airport to a local rail station. Key Local Stakeholders – Oakland airport is owned and operated by the Port of Oakland—a city agency. The airport is responsible for all ground transportation systems on airport property and works closely with the local rail transit agency, the Bay Area Rapid Transit (BART), and the Alameda- Contra Costa Transit District to provide public transportation service. Other agencies involved in the development of the planned automated people mover system include Alameda County, the city of Oakland, the Alameda County Congestion Management Agency, the Alameda County Transportation Improvement Authority, and the Metropolitan Transportation Commission. Intermodal Facilities – Portland International Airport has the following intermodal connections (see fig. 19). Local bus: No connections. Local rail: Passengers can access a local rail transit system at a station located at the west end of the airport terminal. Nationwide bus or rail: No connections. Plans for additional facilities: None reported. Key Local Stakeholders – Portland airport is owned and operated by the Port of Portland and is required by state and local regulations to promote the development of alternate modes of transportation. The light rail extension at the airport was funded, in part, by the Bechtel Corporation in exchange for a lease agreement with the airport allowing Bechtel to develop retail, office, and hotel sites on airport property. TriMet, which provides transit service to three Oregon counties, operates and owns the light rail extension, except for the portion of the light rail extension that is on airport property. The portion on airport property is owned by the Port of Portland and operated by TriMet. The city of Portland provided additional funding, and Metro (the region’s metropolitan planning organization) included the light rail extension in the Regional Transportation Plan and provided travel demand forecasting. The Oregon Department of Transportation assisted in coordinating a significant portion of the light rail extension on a right-of-way in the median of an interstate highway. Intermodal Facilities – Ronald Reagan Washington National Airport (National airport) has the following intermodal connections (see fig. 20). Local bus: Passengers can access local bus service at both of the airport’s terminals. Local rail: Passengers can access a local rail transit system at a station adjacent to the airport’s main terminal and connected to that terminal by an elevated crosswalk and the other terminal by a free shuttle. Nationwide bus or rail: No connections. Plans for additional facilities: None reported. Key Local Stakeholders – National airport is owned by the federal government and leased to the Metropolitan Washington Airports Authority, which is responsible for its operation and development. Plans to build a local rail transit station at the airport were initiated in the 1960’s when the local rail system was being designed. The Washington Metropolitan Area Transit Authority operates and maintains the local rail system and provides limited bus service to the airport. Other key stakeholders include the Metropolitan Washington Council of Governments (the metropolitan planning organization), which collects and processes air passenger survey data for the airport. Intermodal Facilities – San Francisco International Airport has the following intermodal connections (see fig. 21). Local bus: Passengers can access local bus service at most airport terminals. Local rail: Passengers can access a local rail transit system at a station located in one terminal and connected to other terminals by an automated people mover. Nationwide bus or rail: No connections. Plans for additional facilities: None reported. Key Local Stakeholders – The city and county of San Francisco own and operate the San Francisco airport. San Mateo County Transit was the key local agency that supported the development of the BART extension south of San Francisco into San Mateo County. BART was the lead agency in planning and coordinating the BART extension, while the airport managed the design and construction of the airport station and guideway located on airport property. The San Francisco airport provided funding to this extension by signing an agreement with BART to pay up to $200 million for the costs associated with the design and construction of the BART train station, guideway, and operating systems on airport property. San Mateo County Transit provides local bus service from the airport to San Mateo and San Francisco counties. Intermodal Facilities – The Norman Y. Mineta San Jose International Airport has the following intermodal connections (see fig. 22). Local bus: No connections. Local rail: Passengers can access two local rail transit systems at stations connected to airport terminals by a free shuttle. Nationwide bus or rail: No connections. Plans for additional facilities: There are plans to build an automated people mover that would connect the local rail station, the airport, and the local commuter rail station. Key Local Stakeholders – The airport is owned and operated by the city of San Jose. The Valley Transportation Authority, a public agency that provides transit service, operates the shuttle that connects the airport to the commuter rail and local rail stations. Additional transit services to the airport are provided by a variety of local agencies, including the city of San Jose and CalTrain. Private operators also provide some transit services to the airport. Intermodal Facilities – Seattle-Tacoma International Airport has the following intermodal connections (see fig. 23). Local bus: Passengers can access local bus service at the south end of the airport’s main terminal. Local rail: No connections. Nationwide bus or rail: Passengers may use a private shuttle operator that charges a fee to connect to the Amtrak station. Plans for additional facilities: There are plans for a local transit rail station to be developed at the airport to provide a connection to a local rail transit system that is under construction. The station will be located on the east side of the airport property, with passengers being able to access the station using a walkway. In addition, officials stated that a pedestrian bridge will be built to connect the airport with a planned local transportation hub, which will provide bus service by a number of local transit agencies. Completion is scheduled by December 2009. Key Local Stakeholders – Seattle-Tacoma airport is owned by the Port of Seattle. Transit services are provided by two local agencies, King County Metro Transit and a tri-county agency, Sound Transit. Sound Transit not only provides regional bus service, but also operates the regional commuter rail service and is constructing the local rail transit system. Also involved in building the local rail transit station at Seattle-Tacoma airport is the city of Sea-Tac, which will permit all construction of the rail line within its city limits. Intermodal Facilities – Washington Dulles International Airport has the following intermodal connections (see fig. 24). Local bus: Passengers can access local bus service at the airport’s main terminal. Local rail: Passengers can access the local rail system at a station that is connected to airport terminals by a shuttle. A fee is charged for this shuttle. Nationwide bus or rail: Passengers can access nationwide bus service at the airport’s main terminal. Plans for additional facilities: There is a plan to extend the local rail system to the airport. The Dulles Corridor Rapid Transit project is a planned 23 mile extension of the local rail system that will provide service to the airport. The rail extension project, if completely funded, will be developed in two phases, with the airport station planned for the second phase. Phase 1 (currently in preliminary engineering) and phase 2 are scheduled for completion in 2011 and 2015, respectively. Key Local Stakeholders – The airport is owned by the federal government but is leased to the Metropolitan Washington Airports Authority, which is responsible for its operation and development. Local bus service is provided by the Washington Metropolitan Area Transit Authority, which also performs corridor-level planning. The Virginia Department of Rail and Public Transportation is the project leader for the local rail extension. The state coordinates with other stakeholders such as the airport, the Washington Metropolitan Council of Governments (the regional transportation planning body), Fairfax and Loudoun counties, and the Federal Transit Administration. Greyhound provides bus service to parts of Virginia with connecting service as far as New York. In addition to the above individuals, Mark Braza, Jennifer Clayborne, Jay Cherlow, Bert Japikse, Jason Kelly, Rosa Leung, Maureen Luna-Long, Grant Mallie, Sara Ann Moessbauer, Maria Romero, Tim Schindler, Jena Sinkfield, John Smale, John Trubey, and Alwynne Wilbur made key contributions to this report. | With the number of airplane passengers using U.S. airports expected to grow to almost 1 billion by the year 2015, ground access to U.S. airports has become an important factor in the development of our nation's transportation networks. Increases in the number of passengers traveling to and from airports will place greater strains on our nation's airport access roads and airport capacity, which can have a number of negative economic and social effects. U.S. transportation policy has generally addressed these negative economic and social effects from the standpoint of individual transportation modes and local government involvement. However, European transportation policy is increasingly focusing on intermodal transportation as a possible means to address congestion without sacrificing economic growth. This report addresses the development of intermodal capabilities at U.S. airports, including (1) the roles of different levels of government and the private sector; (2) the extent such facilities have been developed; (3) benefits, costs, and barriers to such development; and (4) strategies to improve these capabilities. GAO provided a draft of this report to the Department of Transportation (DOT) and Amtrak. DOT generally concurred with the report, and Amtrak had no comments. State and local government agencies have primary responsibility for developing intermodal capabilities at U.S. airports. Generally airports and local transit agencies are heavily involved, especially if these projects are part of a local transit system. The federal government has not established specific goals or funding programs to develop intermodal capabilities at airports. However, it provides funding for projects fitting the criteria of other programs. The private sector may undertake a variety of roles. Most major U.S. airports have direct connections to local transit systems rather than to nationwide rail or bus systems. For example, 64 out of 72 airports have connections to local bus systems, and 27 airports have connections to local rail systems. At the same time, only 19 airports have connections to nationwide rail or bus systems. A number of airports have plans to enhance their connections to local rail and bus systems. U.S. and European transportation officials and experts cited the benefits for intermodal capabilities at airports to include increased transportation options, reduced road congestion, and reduced short-haul flights. The costs of intermodal projects using rail are typically significant. Barriers cited include the difficulty of securing needed funding, disincentives for airport support such as potential reductions in airport parking revenue, geographical and physical land constraints, limitations of the existing nationwide rail network, and inconveniences in comparison to using cars that limit consumer demand. Two differing strategies developed from our prior work would help public decision makers improve intermodal capabilities at airports. The first strategy would increase flexibility within current federal transportation programs to encourage a more systemwide approach to transportation planning and development. The second strategy would involve a fundamental shift in federal transportation policy's focus on local decision making by increasing the role of the federal government in order to develop more integrated air and rail networks and would be closer to the strategy followed in Europe. While the first strategy would most likely lead to a continued focus on the development of intermodal connections to local transit systems, the second strategy could develop more integrated air and rail networks, either nationwide or along particularly congested corridors. The second strategy would be costly, and high benefits, which would be difficult to achieve, would be needed to justify this investment. |
Twelve years ago, in September 1993, the National Performance Review called for an overhaul of DOD’s temporary duty (TDY) travel system. In response, DOD created the DOD Task Force to Reengineer Travel to examine the process. The task force’s January 1995 report pinpointed three principal causes for DOD’s inefficient travel system: (1) travel policies and programs were focused on compliance with rigid rules rather than mission performance, (2) travel practices did not keep pace with travel management improvements implemented by industry, and (3) the travel system was not integrated. On December 13, 1995, the Under Secretary of Defense for Acquisition and Technology and the Under Secretary of Defense (Comptroller)/Chief Financial Officer issued a memorandum, “Reengineering Travel Initiative,” establishing the PMO-DTS to acquire travel services that would be used DOD-wide. Additionally, in a 1997 report to the Congress, the DOD Comptroller pointed out that the existing DOD TDY travel system was never designed to be an integrated system. The report stated that because there was no centralized focus on the department’s travel practices, the travel policies were issued by different offices and the process had become fragmented and “stovepiped.” The report further noted that there was no vehicle in the current structure to overcome these deficiencies, as no one individual within the department had specific responsibility for management control of DOD TDY travel. To address these concerns and after the use of competitive procedures, the department awarded a firm fixed-price, performance-based services contract to BDM International, Inc. (BDM) in May 1998. In September 1998, GAO denied a bid protest challenging the department’s selection of BDM. Under the terms of the contract, the contractor was to start deploying a travel system and to begin providing travel services for approximately 11,000 sites worldwide within 120 days of the effective date of the contract, completing deployment approximately 38 months later. The contract specified that upon DTS achieving initial operational capability (IOC), BDM was to be paid a onetime deployment fee of $20 for each user and a transaction fee of $5.27 for each travel voucher processed. The estimated cost for the contract was approximately $264 million. Prior to commencing the work, BDM was acquired by TRW, Inc. (TRW), which became the contractor of record. The operational assessment of DTS at Whiteman Air Force Base, Missouri, from October through December 2000, disclosed serious failures. For example, the system’s response time was slower than anticipated, the result being that it took longer than expected to process a travel order/voucher. Because of the severity of the problems, in January 2001 a joint memorandum was issued by the Under Secretary of Defense (Comptroller) and the Deputy Under Secretary of Defense (Acquisition, Technology and Logistics) directing a functional and technical assessment of DTS. The memorandum also directed that a determination be made of any future contract actions that would be necessary, based on the assessment results. In July 2001, the Under Secretary of Defense (Comptroller) and the Under Secretary of Defense (Acquisition, Technology and Logistics) approved proceeding with DTS and restructuring the contract with TRW. The TRW contract was restructured through a series of contract modifications, which were finalized on March 29, 2002. The government agreed to provide TRW consideration in the amount of about $44 million for the restructure of the contract. TRW agreed to release and discharge the government from liability and agreed to waive any and all liabilities, obligations, claims, and demands related to or arising from its early performance efforts under the original contract. Northrop Grumman subsequently acquired TRW in December 2002 and, as such, is now the contractor of record. The first deployment of DTS was at Ellsworth Air Force Base, South Dakota, in August 2001. As of September 2005, DTS has been deployed to approximately 5,600 locations. The department currently estimates that DTS will be fully deployed to all 11,000 locations by the end of fiscal year 2006, with an estimated total development and production cost of approximately $474 million. Of this amount, the contract for the design, development, and deployment of DTS, as restructured, is worth approximately $264 million—the same amount as estimated in the original contract that was agreed to with BDM. The remaining costs are DOD internal costs associated with areas such as the operation and maintenance of DTS, the operation of the PMO-DTS, the voucher payment process, and management and oversight of the numerous CTO contractors. DTS automates and integrates the department’s three travel processes: authorization, reservations, and payment to the traveler. Figure 1 depicts the designated DOD travel process using DTS. The three essential players in the processing of a travel authorization and related payment are the traveler, the CTO, and the AO. The traveler generates a travel authorization and enters the appropriate information into DTS, such as travel dates, departure and arrival airports, and hotel and rental car arrangements. When the traveler is finished, DTS sends a prebuilt passenger name record to the CTO. If possible, requested arrangements will automatically book without CTO intervention. In cases where the travel arrangements do not automatically book, the CTO must intervene and take additional steps to book the requested arrangements. Next, the traveler’s AO receives an e-mail notification from DTS stating that there is a travel authorization awaiting review and approval. The AO is a key internal control point in the travel authorization process. AO responsibilities include reviewing the travel authorization for compliance with travel laws, regulations, and policies; determining if the trip is mission essential and funds are available; assigning the proper line of accounting prior to authorization; reviewing all policy exceptions, and approving or rejecting the travel authorization as appropriate. When the AO approves a travel authorization by electronically signing the document in DTS, DTS routes the approved travel authorization to the CTO for ticketing, sends an obligation transaction to the appropriate accounting system and notifies the traveler via e-mail that the travel authorization has been approved. When the trip is complete, the traveler creates a travel voucher for reimbursable travel-related expenses from the travel authorization data stored in DTS, and electronically signs the voucher. DTS electronically routes the travel voucher to the AO for approval. An AO is then responsible for certifying a travel voucher for payment by electronically signing the document. DTS submits the certified travel voucher to DFAS for payment through electronic interfaces, which records the information in the appropriate accounting and disbursing systems. Over the past several years, we have reported pervasive weaknesses in DOD’s travel program. These weaknesses have hindered the department’s operational efficiencies and have left it vulnerable to fraud, waste, and abuse. These weaknesses are highlighted below. On the basis of statistical sampling, we estimated that 72 percent of the over 68,000 premium-class airline tickets DOD purchased for fiscal years 2001 and 2002 were not properly authorized and that 73 percent were not properly justified. During fiscal years 2001 and 2002, DOD spent almost $124 million on airline tickets that included at least one leg of the trip in premium-class—usually business class. Because each premium-class ticket costs the government up to thousands of dollars more than a coach class ticket, unauthorized premium-class travel resulted in millions of dollars of unnecessary costs annually. Because of control breakdowns, DOD paid for airline tickets that were neither used nor processed for refund—amounting to about 58,000 tickets totaling more than $21 million for fiscal years 2001 and 2002. DOD was not aware of this problem before our audit and did not maintain any data on unused tickets. Based on limited data provided by the airlines, it is possible that the unused value of the fully and partially unused tickets that DOD purchased from fiscal year 1997 through fiscal year 2003 with its CBA could be at least $100 million. We found that DOD sometimes paid twice for the same airline ticket— first to Bank of America for the monthly DOD credit card bill, and second to the traveler, who was reimbursed for the same ticket. Based on our mining of limited data, the potential magnitude of the improper payments was 27,000 transactions for over $8 million. For example, DOD paid a Navy GS-15 civilian employee approximately $10,000 for 13 airline tickets he had not purchased. DTS development and implementation have been problematic, especially in the area of requirements and testing key functionality to ensure that the system would perform as intended. Given the lack of adherence to such key practices, it is not surprising that critical flaws have been identified after deployment, resulting in significant schedule slippages. In July 2002, a DOD Inspector General’s report noted that in early 1999, it was evident that the commercial-off-the-shelf software would require extensive modification in order to meet DOD’s needs. Further, the report pointed out that operational problems continued to arise during the third phase of the system testing in the fall of 2000. As originally envisioned, the initial deployment of DTS was to commence 120 days after the effective date of the contract award in September 1998, with complete deployment to approximately 11,000 locations by April 2002. However, that date has been changed to September 2006—a slippage of over 4 years. Figure 2 shows the schedule slippage between the planned and actual implementation of DTS. Our recent analysis of selected requirements disclosed that the testing of DTS is not always adequate prior to updated software being released for use by DOD personnel. System testing is a critical process utilized by organizations to improve an entity’s confidence that the system will satisfy the requirements of the end user and will operate as intended. Additionally, an efficient and effective system testing program is one of the critical elements that needs to be in place in order to have reasonable assurance that an organization has implemented the disciplined processes necessary to reduce software development project risks to acceptable levels. In one key area, our review identified instances in which the testing of DTS was inadequate, which precluded DOD from having reasonable assurance that DTS displayed the proper flights and airfares. For example, DOD officials stated that prior to an August 2005 system update, DTS should have displayed 12 flights, if that many flights were available, within a flight window. DTS program officials and Northrop Grumman personnel acknowledged that this particular system requirement had never been tested because DOD failed to document the requirement until January 2005. Because a system requirement covering this feature had never been defined and communicated to the contractor, there was no reasonable assurance that DTS would display the envisioned number of flights and related airfares within a given flight window. As we have noted in previous reports, requirements that are not defined are unlikely to be tested, with the resulting consequence that they are even less likely to be satisfied. We also noted that even when the requirements were properly defined, the DOD tests for determining whether DTS displayed the proper flights and airfares did not provide reasonable assurance that the (1) proper flights were displayed and (2) airfares for those flights were displayed. Specifically, DTS uses a commercial product to obtain information from the database that contains the applicable flight and airfare information— commonly referred to as a global distribution system (GDS).In testing whether DTS displayed the proper flights and airfares, the information returned from the commercial product was compared with the information displayed in DTS and was found to be in agreement. However, the commercial product did not provide all of the appropriate flights or airfares to DTS that were contained in the GDS. Since the PMO-DTS neither performed an end-to-end test nor made sure that the information returned from this commercial product was in agreement with the information contained in the GDS, it did not have reasonable assurance that DTS was displaying the proper flight and airfare information to the users. According to DOD officials, this system weakness was detected by users complaining that DTS did not display all relevant flights and airfares. Figure 3 illustrates the inadequacy of the DTS testing. PMO-DTS officials acknowledged that these two problems have been ongoing since the initial implementation of DTS. Accordingly, as a result of these two weaknesses, DOD travelers might not have received accurate information on available flights and airfares, which could have resulted in higher travel costs. Further, PMO-DTS officials have stated that the two problems were corrected as part of the August 2005 DTS system update. However, we found that the problems have not been entirely corrected as of the September 2005 release. In reviewing the documentation relating to the September 2005 release, we found that (1) the requirements generally described the functionality that was expected relating to the display of flights and airfares except that the specific flight order was not adequately documented and (2) testing was inadequate to provide reasonable assurance that the DTS system requirements associated with the reservation module were properly tested. Our analysis found that the documentation relating to the testing for the September 2005 release provided reasonable assurance that the proper GSA city pair airfares were displayed for a given flight. However, this documentation did not provide reasonable assurance that the proper flights were displayed. Although we were told by PMO-DTS officials that the testing efforts had checked the number of flights displayed in the GDS to those that were displayed by DTS to ensure that DTS was properly displaying the available flights, adequate documentation was not retained to verify that this comparison had been made. In November 2005 we performed a limited test and found that the system did not properly display the GSA city pair flights between Chicago, Illinois and Dayton, Ohio. Our analysis also identified other problems in the display of flight information. More specifically, for the reservation module our analysis found that the flights actually displayed in DTS did not meet the stated DOD requirements. According to PMO-DTS officials, DTS is required to display up to 25 flights within a 12-hour flight window for domestic flights, with the GSA city pair flights shown first. When more than one flight is available within a category, the flights should then be sorted first by the elapsed flight time and then by the earliest departure time. Our review found that the testing performed for the September 2005 release did not provide reasonable assurance that these requirements were met. Our analysis of two frequently used city pairs DOD tested disclosed that DTS (1) displayed more than the 25 flights, (2) included flights that were outside the flight window, and (3) did not display the flights in the proper order. The following examples illustrate these problems. The testing documentation showed that 29 flights were displayed for the Chicago, Illinois, to Dayton, Ohio, flight and that 11 of these flights were outside the flight window. For example, the stated departure time was 9:00 a.m. which means that flights from 3:00 a.m. and 3:00 p.m. should be considered for inclusion. Furthermore, 60 percent of the first 10 flights were outside of this window and leaving at such times as 3:45 p.m. (fourth item on the display) and 8:55 p.m. (eighth item on the display). Although the stated requirement was to show the flights with GSA city pairs first, sorted by elapsed flight and earliest departure times, the testing documentation showed for an October 18, 2005, departure time, that the first flight displayed in DTS left Washington, D.C., at 6:45 a.m. and arrived at Columbus, Ohio at 9:30 a.m. with an elapsed flight time of 1 hour and 55 minutes when the user entered a 9:00 a.m. departure time. However, the documentation also showed that 6:55 a.m. (eleventh item on the display) and 1:35 p.m. (thirteenth item on the display) departing flights were also available with elapsed times of about 1 hour and 25 minutes. Based on the stated requirement, these two flights should have been shown first and second on the display since they had shorter elapsed flight times and were also GSA city pair flights. Furthermore, the flights with the shortest elapsed flight times were direct flights while the first flight involved stopping at another airport before arriving at Columbus, Ohio. We believe that one factor contributing to the failure to detect the errors in displaying the flights in the proper order was that the stated requirements for the order had not been properly documented. Specifically, the requirements that were included in the testing documentation stated that the flights were to be displayed in the following order: GSA city pair flights with capacity limits, GSA city pair flights, and all other unrestricted flights. These requirements did not contain additional information to state that elapsed flight time and earliest departure time should also be considered in the display. As we noted in our September 2005 testimony, requirements that are not defined are unlikely to be tested. PMO-DTS officials stated that subsequent to the September 2005 release, they had identified the flight order display problem and that it had been corrected in a subsequent release. Our limited test in November 2005 showed that the flights were now displayed in the proper order for the two city pairs for which we had identified problems in the September 2005 testing. PMO-DTS officials stated that they would investigate the reasons (1) that more than 25 flights were displayed, (2) why flights that were outside the 12-hour flight window were displayed, and (3) why all GSA city pair fights were not included in the display. DTS has corrected one of the previously reported travel problems, but others remain. We have previously reported that a breakdown in internal controls and a weak control environment have led to potential fraud, waste, and abuse of hundreds of millions of dollars being improperly spent on DOD travel.Specifically, DTS has resolved the problem related to duplicate payment for airline tickets purchased through CBAs. However, problems remain related to improper premium-class travel, unused tickets that are not refunded, and accuracy of travelers’ claims. The three remaining problems cannot be resolved solely within DTS and will take departmentwide action to address. Based upon our observations, we found that DTS was designed to ensure that a ticket purchased through CBAs cannot be claimed on the individual’s travel voucher as a reimbursement for airfare to the traveler. We have previously reported that the department sometimes paid for the same airline ticket twice when the CBAs were used. As part of our statistical sample discussed later, we found 14 travel vouchers for which an airline ticket purchased with a CBA was included on the voucher; however, the traveler did not receive reimbursement for the claim. While DOD has taken actions to improve existing guidance and controls related to premium-class travel, including system changes in DTS, we identified instances in which unauthorized premium-class travel continues. In November 2003, the Under Secretary of Defense for Personnel and Readiness formed a task force to address our prior recommendations that focused on three major areas: (1) policy and controls of travel authorization, (2) ticket issuance and reporting, and (3) internal control and oversight. Subsequently, several policy changes were made to improve the control and accountability over premium-class travel. For example, the approval level for first-class travel was elevated to a three-star general and for business-class travel to a two-star general or civilian equivalent. Other changes included strengthening the description of circumstances when premium-class travel may be used to more clearly show that it is an exceptional circumstance and not a common practice. In all cases, AOs must have their own premium-class travel approved at the next higher level. These changes also set a broad policy that CTOs are not to issue premium-class tickets without proper authorization. In September 2004, the PMO-DTS made system changes to DTS that blocked eight fare codes that were considered to be premium-class fare codes from being displayed or selected by the traveler through DTS. According to the PMO-DTS, the airline industry does not have standardized fare code indicators to identify first-class, business-class, and economy-class. Subsequently, DOD found that economy class fare codes were being blocked using the eight codes and, in May 2005, reduced the list to three codes. According to PMO-DTS officials, these three codes are consistently used among the various airlines to designate premium-class travel. Despite these various changes in policy and to DTS, we continue to identify instances in which premium-class travel is occurring without the proper authorization. Our analysis disclosed at least 68 cases that involve improper premium-class travel. Table 1 presents a summary of our analysis. DOD regulations require that authorization for premium-class accommodations be made in advance of travel unless extenuating circumstances or emergency situations make advance authorization impossible. Further, consistent with the Federal Travel Regulation, DOD restricts premium-class travel to one of the following eight circumstances: (1) regularly scheduled flights between origin and destination provide only premium-class accommodations, and this is certified on the travel voucher; (2) coach class is not available in time to accomplish the purpose of the official travel, which is so urgent it cannot be postponed; (3) premium-class travel is necessary to accommodate the traveler’s disability or other physical impairment, and the condition is substantiated in writing by competent medical authority; (4) premium-class travel is needed for security purposes or because exceptional circumstances make its use essential to the successful performance of the mission; (5) coach-class accommodations on authorized/approved foreign carriers do not provide adequate sanitation or meet health standards; (6) premium-class accommodations would result in overall savings to the government because of subsistence costs, overtime, or lost productive time that would be incurred while awaiting coach-class accommodations; (7) transportation is paid in full by a nonfederal source; and (8) travel is to or from a destination outside the continental United States, and the scheduled flight time is in excess of 14 hours. However, a rest stop is prohibited when travel is authorized for premium-class accommodations. Based upon the documentation provided by DOD, we found that none of the 68 cases meet the above criteria or were approved at the appropriate level. Further, as shown in table 1, we were unable to ascertain if premium-class travel occurred for 321 travel legs. For 245 travel legs, no documentation was received, and for 76 travel legs, the documentation provided was inconclusive. On numerous occasions, we requested that the DOD components provide us with documentation, such as ticket stubs or travel itineraries, to substantiate whether the travel legs were premium- or economy-class travel. If the documentation indicated premium-class travel, we requested that the proper authorization and justification be provided. At the end of September 2005, the DOD components had not provided the requested documentation for 245 travel legs. Therefore, we could not ascertain and—more importantly—on the basis of the documentation provided, DOD is not in position to determine, if the airfare was for premium-class or economy-class travel. Specific examples of the 68 instances of improperly approved premium- class travel are highlighted below: A Navy senior Chief Petty Officer (E-8) flew from Norfolk via Detroit to Seattle, Seattle to Los Angeles, drove from Los Angeles to San Diego, and flew first class from San Diego via Detroit to Norfolk. The traveler charged $1,578 on the government travel card for travel from Norfolk to Seattle and San Diego to Norfolk, whereas GSA city pair fare was only $359. Similarly, the traveler paid $298 to fly from Seattle to Los Angeles compared to the GSA city pair fare of $149. The CTO remarked on the travel authorization that it would not issue a first-class ticket without properly approved documentation and the lowest government fare was $414. The traveler submitted the travel voucher and the approving official (civilian GS-9) approved the premium-class travel costs without documentation of proper authorization from a premium-class approving official. According to a Navy official, the traveler purchased his own ticket at the airport. However, this has no bearing on the fact that reimbursement was made without the proper authorization. A Department of the Army civilian employee (GS-12) flew from Columbia, South Carolina, via Atlanta, Georgia, to Gulf Port, Mississippi, to attend a conference. One leg of the return trip included a first-class flight. From our review and analysis of Bank of America data and the travel voucher, DOD paid $1,107 for the airfare. The cost of a GSA city pair round trip airfare was $770. According to information provided by the Army, the traveler informed the Army that he was meeting another traveler at the destination; they were going to share a rental car; and there were no seats available on the flight the other traveler had booked. Therefore, the individual selected a flight arriving as close as possible to the time of the traveler he was meeting. The justification provided by the traveler is not in accordance with DOD’s criteria. As a result, the premium-class fare was not properly approved. Fifty-eight of the 68 travel legs identified as premium-class travel were for international travel, mostly intra-European flights. For 31 of the 58 travel legs, the CTOs claimed that these flights were the lowest unrestricted fares available, and therefore it is not necessary to obtain permission for premium-class travel. However, effective August 16, 2004, paragraph U3125-B5.b of the Joint Federal Travel Regulations (JFTR) and paragraph C2204-B.5.b of the Joint Travel Regulations (JTR) require the approval of premium-class travel under these circumstances. More specifically, the JFTR and JTR state that “When regularly scheduled flights between the authorized origin and destination (including connection) points provide only premium-class accommodations, the member must certify these circumstances on the travel order attachment.” In the absence of specific authorization/approval from the designated authority, the member is financially responsible for all additional costs resulting from premium-class airline accommodations use. The 58 travel legs were identified as business class and therefore should have been approved in accordance with DOD’s policy. However, the CTOs failed to notify the traveler that these travel legs were coded business class, and therefore, approval by higher authority was required. Unless the CTOs adhere to the applicable policy, improperly approved premium-class travel will continue. It is incumbent upon DOD to ensure that the CTOs are knowledgeable about the department travel policies and that those policies are followed. DTS still does not have the capability to determine whether a traveler does not use all or a portion of an airline ticket and obtain a refund as required. To address this problem, DOD directed that all new CTO contract solicitations require CTOs to prepare unused airline ticket reports which identify tickets that were not used within a specified period, usually 30 days past the trip date, so that they can be canceled and processed for refund. Additionally, the various DOD components were directed to modify existing CTO contracts to require the CTOs to process refunds for unused airline tickets. However, according to DOD officials, this requirement has not yet been implemented in all existing CTO contracts. At the five locations we visited, each CTO was preparing the unused airline ticket report; however, the frequency varied. The CTOs at the Army and Air Force locations prepared the required report on a daily and monthly basis, respectively. According to Army and Air Force officials, the reports are prepared for each location currently using DTS. For the third quarter of fiscal year 2005, the Army had unused airline tickets of approximately $14 million, and the Air Force had about $2 million of unused airline tickets submitted for refund. The Navy requires its CTO to produce the unused ticket report on a weekly basis. Our review of the Navy’s unused airline ticket report for the week ended July 17, 2005, indicated that the Navy was in the process of obtaining refunds of about $800,000. The Marine Corps prepared unused airline ticket reports on a monthly basis. For the third quarter of fiscal year 2005, the Marine Corps had approximately $1.4 million in unused airline tickets refunded. Army, Navy, and Marine Corps representatives stated that the reports prepared by their CTOs also included dollar amounts that are the result of travelers notifying the CTOs that all or a portion of their ticket was not used. They could not ascertain the amount that related directly to the work of the CTOs. According to Air Force personnel, the unused airline ticket report only includes tickets that were found by the CTO and then canceled and refunded. DFAS has previously reported problems with the accuracy of DTS travel payments. For the first quarter of fiscal year 2004, DFAS reported a 14 percent inaccuracy rate in the DTS travel payments of airfare, lodging and meals, and incidental expenses. Our analysis of 170 travel vouchers disclosed that for the two attributes that are directly related to the operation of the DTS system—computation of lodging reimbursement and meals and incidental expenses (per diem)—the DTS calculations were correct in all instances on the basis of the information provided by the traveler. However, we continue to identify numerous instances in which employee errors led to inaccurate reimbursements. In some cases, errors occurred because incorrect data were entered into DTS by the traveler. In other cases, the reviews by the AO were inadequate. In regard to the AO reviews, on the basis of our sample, we estimated that 18 percent of the travel vouchers were paid even though there was not reasonable assurance that the amount of the reimbursement was accurate. Further, we estimated that 29 percent of the travel vouchers lacked adequate receipts for the amounts claimed. Furthermore, for the 49 travel vouchers lacking receipts, we saw no evidence that the AOs were provided with the appropriate receipts by the traveler. The JFTR and JTR state that receipts are required for all lodging expenses regardless of amount and for all individual official travel expenses of $75 or more. The receipt must show when specific services were rendered, and the traveler must attach the required receipts to the travel voucher. In one case, the traveler was reimbursed for expenses claimed in excess of $500, even though none of the required receipts were available for review and approval by the AOs. Additionally, we identified eight vouchers in which the claims for reimbursement of rental car expenses were not in accordance with DOD policy. The JFTR and JTR state that when rental car usage is authorized for official business by the AOs, reimbursement is authorized for rental car expenses, such as the rental costs, taxes and local assessments on rental car users, gasoline, parking, road/tunnel tolls, and any per-day administrative fee required by the rental car agreements. When a compact rental car (the “standard” for TDY travel) does not meet requirements, the AOs may authorize vehicles appropriate for the mission. In all eight cases, we found that the traveler did not provide justification for the non-compact rental cars and the AOs did not require the justification to be documented in accordance with DOD policy. The AO’s review and approval of the traveler’s voucher is intended to ensure that only authorized, properly supported travel charges are reimbursed and that the amounts are accurate and properly calculated. Our analysis clearly indicates that DOD reimbursed travelers for amounts claimed despite the lack of the required documentation. According to DOD regulations, “the AO (s’) signature on the expense report certifies that the travel was taken, that the charges are reasonable . . . and that the payment of the authorized expenses is approved.” While the AO’s signature indicates that the payment is approved, it falls short of ensuring that amounts claimed are reasonable in the cases in which receipts for airfare and lodging are not provided. Further, inadequate reviews by the AO’s resulted in some travelers being reimbursed more than entitled and other travelers having to pay for legitimate travel expenses out of their own pockets. DOD’s goal of making DTS the standard travel system within the department depends upon the development, testing, and implementation of system interfaces with the myriad of related DOD systems, as well as private-sector systems, such as the system used by the credit card company that provides DOD military and civilian employees with travel cards. While DOD has developed 31 system interfaces, the PMO-DTS is aware of at least 18 additional DOD business systems for which interfaces must be developed. To date, DOD has reported that the development and testing of the system interfaces has cost over $30 million. Developing the interfaces is time consuming and costly. Additionally, the underutilization of DTS at the sites where it has been deployed is also hindering the department’s efforts to have a standard travel system. Furthermore, the underutilization affects the estimated savings that are to be derived from the use of DTS departmentwide. One of DOD’s long-standing problems has been the lack of integrated systems. To address this issue and minimize the manual entry of data, interfaces between existing systems must be developed to provide the exchange of data that is critical for day-to-day operations. For example, DTS needs to know before permitting the authorization of travel that sufficient funds are available to pay for the travel—information that comes from system(s) other than DTS—and once the travel has been authorized, another system needs to know this information so that it can record an obligation and provide management and other systems with information on the funds that remain available. Interfaces are also needed with private- sector systems, such as the system used by the credit card company that provides DOD personnel with travel cards. Figure 4 identifies the 36 DOD business systems for which the interfaces with DTS have already been developed and implemented. Figure 5 illustrates the additional 18 DOD business systems for which interfaces with DTS must be developed in the future. While DOD was able to develop and implement interfaces with the 36 systems, the development of each remaining interface will present the PMO-DTS with challenges. For example, the detailed requirements for each of the remaining interfaces have not yet been defined. Such requirements would define (1) what information will be exchanged and (2) how the data exchange will be conducted. This is understandable in some cases, such as for the Army General Fund Financial Enterprise Resource Planning (ERP) system, which is a relatively new endeavor within the department, so it will be some time before DOD is in position to start development of the interface. Additionally, the development of the DTS interfaces depends on other system managers achieving their time frames for implementation. For example, the Navy ERP system is one of the DOD systems with which DTS is to interface and exchange data. Any difficulties with the Navy’s ERP implementation schedule could adversely affect DTS’s interface testing and, thereby, result in a schedule slippage for the interface’s implementation. The above two factors also affect DTS’s ability to develop reliable cost estimates for the future interfaces. Besides the DOD systems, DTS must also develop effective interfaces with several private-sector systems. For example, DTS must interface with the department’s credit card provider and the four GDSs used by the various CTOs that support DOD’s travel activities. The information from the credit card provider is used for such items as (1) supporting and automating the CBA reconciliation process for credit card charges and (2) providing the traveler with the credit card charges to assist in the preparation of the travel voucher and the payment process. The interfaces with the four GDSs are necessary since DTS must support the GDS that has been selected by a CTO servicing a given DOD location. For example, CTO A has selected SABRE as its GDS and services base A, while CTO B has selected Apollo as its GDS and services base B. In order for DTS to properly display the reservation information to personnel at base A, it must have a connection to SABRE, while in order to perform the same function at base B, it must have a connection to Apollo. Further complicating DTS’s operation is the fact that not all airlines use a GDS. Fees are charged by the GDS for displaying and booking reservations and to the CTO for making travel arrangements. Providing the travel services directly to the traveler could eliminate these costs and is one reason that some travel service providers have decided not to use a GDS. According to DTS officials, the ability to directly connect travel service suppliers and customers is being explored. For example, they are currently negotiating with an airline to bring its flight and airfare information into DTS, rather than going through a GDS, by using an existing internet technology commonly referred to as Web services. Another challenge in establishing DTS as a standard travel system within DOD is the continued use of the existing legacy travel systems, which are controlled and operated by the various DOD components. Currently, at least 31 legacy travel systems are continuing to be operated within the department. As we have previously reported, because each DOD component receives its own funding for the operation, maintenance, and modernization of its own systems, there is no incentive for DOD components to eliminate duplicative travel systems. We recognize that some of the existing travel systems, such as the Integrated Automated Travel System version 6.0, cannot be completely eliminated because they perform functions, such as permanent change of station travel claims that DTS cannot. However, in other cases, the department is spending funds on duplicative systems that perform the same functions as DTS. The funding of multiple systems that perform the same functions is one of the reasons why the department has at least 4,150 business systems. Since these legacy systems are not controlled and operated by the PMO-DTS, it does not have the authority to discontinue their operation. Over the past several years, we have been critical of the department’s inability to effectively control its business systems investments. To address this issue, the statutory requirements of the Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005 are aimed at improving the department’s business systems management practices. The act directs DOD to put in place a definite management structure responsible for the control and accountability over business systems investments, by establishing a hierarchy of investment review boards from across the department, and directs that the boards use a standard set of investment review and decision-making criteria to ensure compliance and consistency with the department’s business enterprise architecture. The continuation of the status quo should not be tolerated. It is the investment review boards’ responsibility to ensure the funds are not being spent on the legacy systems at those locations where DTS has been fully deployed. Allowing such expenditures to occur will only perpetuate the current parochialism and cultural resistance to change that is prevalent throughout the department. We have previously reported that cultural resistance and stovepiped operations have all contributed significantly to the failure of previous attempts to implement broad-based management reforms at DOD. The department has acknowledged that it confronts decades-old problems deeply grounded in the bureaucratic history and operating practices of a complex, multifaceted organization and that many of these practices were developed piecemeal and evolved to accommodate different organizations, each with its own policies and procedures. Because of the continued operation of the legacy systems at locations where DTS has been fully deployed, DOD components pay DFAS higher processing fees for processing manual travel vouchers as opposed to processing the travel vouchers electronically through DTS. According to an April 13, 2005, memorandum from the Assistant Secretary of the Army (Financial Management and Comptroller), DFAS was charging the Army $34 for each travel voucher processed manually and $2.22 for each travel voucher processed electronically—a difference of $31.78. The memorandum further noted that for the period October 1, 2004, to February 28, 2005, at locations where DTS had been deployed, the Army paid DFAS approximately $6 million to process 177,000 travel vouchers manually—$34 per travel voucher, versus about $186,000 to process 84,000 travel vouchers electronically—$2.22 per voucher. Overall, for this 5- month period, the Army reported that it spent about $5.6 million more to process these travel vouchers manually as opposed to electronically using DTS. The military services have recognized the importance of utilizing DTS to the fullest extent possible. The Army issued a memorandum in September 2004 directing each Army installation to fully disseminate DTS to all travelers within 90 to 180 days after IOC at each installation. The memorandum included a list of sites to which DTS should be fully disseminated and the types of vouchers that must be processed through DTS. Furthermore, the memorandum noted that travel vouchers that could be processed in DTS should not be sent to DFAS for processing. In a similar manner, in February 2005, the Marine Corps directed that upon declaration of DTS’s IOC at each location, commands will have DTS fully fielded within 90 days and will stop using other travel processes that DTS has the capability to process. The Air Force issued a memorandum in November 2004 that stressed the importance of using DTS when implemented at an installation. The Navy issued a similar directive in June 2005. Despite these messages, DTS remains underutilized by the military services. Some of the military services, and in particular, the Army, have taken steps to monitor DTS’s usage, but others, such as the Marine Corps, do not capture the data necessary to assess the extent to which DTS is being underutilized. The lack of pertinent data hinders management’s ability to monitor its progress toward the DOD vision of DTS as the standard travel system. Until DOD develops and implements an effective strategy for overcoming resistance, parochialism, and stovepiped operations, transformation efforts, as envisioned by the 1995 task force report, will not be successful and the department will be faced with the continued proliferation of numerous business systems that are nonintegrated, duplicative, and waste limited resources. In its 1995 report, the DOD Task Force to Reengineer Travel noted that the existing process was complex and imposed exorbitant administrative costs on DOD to ostensibly ensure that travel funds are not wasted. The task force concluded that the DOD travel system focused on (1) compliance with rigid rules rather than on performance of the mission, (2) outmoded travel practices, and (3) a nonintegrated travel system and that the department needed to address these problems. While DTS has reduced some of the administrative burden, other opportunities exist to further achieve the vision of a travel system that reduces the administrative burden and cost while supporting DOD’s mission. While some of the opportunities could be implemented by DOD policy changes, others will require coordination with other organizations such as IRS. Examples of the possible changes in DOD’s travel management practices include the following: automating approval of changes to authorized travel expenses; utilizing commercial databases to identify unused airline tickets and simplifying display of flights; utilizing airfares other than the GSA city pair fares, where cost effective; using automated methods to reduce hard copy receipt requirements. The current business process used by DTS designates the traveler’s supervisor as the AO responsible for authorizing travel and then approving the travel voucher and making sure the charges are appropriate after the travel is complete. Furthermore, should the actual expenses claimed on the travel voucher differ from the authorized estimate of expenses, the AO is required to approve these deviations as well. For example, if the estimated costs associated with the travel authorization are $500 and the actual expenses are $495, then the AO must specifically approve the $5 difference. If the difference is caused by two different items, then each item must be approved. Similarly, if the actual expenses are $505, then the AO must specifically approve this $5 increase. This policy appears to perpetuate one of the problems noted in the 1995 DOD report—compliance with rigid rules rather than focusing on the performance of the mission. One practice that could be used to reduce the administrative burden on the traveler and the AO is to automatically make the adjustments to the travel claim when the adjustments do not introduce any risk or the cost of the internal control outweighs the risk. For example, processing a travel claim that is less than the amount authorized does not pose any more risk than processing a travel claim that equals the authorized amount since the key is whether the claim is valid rather than whether the amount equals the funding initially authorized and obligated in the financial management system. The concept of using tolerances and making accounting entries is discussed in the Exposure Draft: Core Financial System Requirements that was published by the Office of Federal Financial Management. These requirements were also contained in the previous document issued by the Joint Financial Management Improvement Program in November 2001. We have previously reported that DOD has not recovered millions of dollars in unused airline tickets. As discussed previously, one action that DOD is taking to address the problem is requiring the CTOs to prepare reports on the unused airline tickets. While this action is a positive step forward, it requires (1) the CTOs to have an effective system of performing this function and (2) DOD to have an effective program for monitoring compliance. A third party service, commonly referred to as the Airlines Reporting Corporation (ARC), may provide DOD with the necessary information to collect unused airline tickets in an automated manner. DTS officials have stated that they have had discussions with ARC, but were uncertain of the cost of obtaining and utilizing the data provided by ARC. If the information from ARC was utilized, DOD would not have to rely on the reports prepared by the CTOs and would be able to avoid the costs associated with preparing the unused airline ticket reports. According to DOD officials, this requirement has not yet been implemented in all the existing CTO contracts, and therefore, the total costs of preparing the unused airline ticket reports is not known. Besides using ARC for the unused airline tickets, DOD could use the information from ARC to provide assurances that the airfares claimed by travelers are correct. A case in point is an example we found in our review of premium-class travel. Since the ticket was obtained through a transaction outside of DTS, it was not included in the results previously discussed. We found that an Air Force senior executive purchased an airline ticket from Albuquerque, New Mexico to Europe with stopovers in France, Great Britain, Denmark, and Germany. He originally purchased a round-trip airline ticket using his government travel card for $3,159. The traveler then exchanged the ticket at an airport and received a $1,303 credit on the government travel card. We examined Bank of America data and confirmed that a refund of $1,303 was posted to the account. While in Munich, Germany, the traveler exchanged the ticket again and was charged an additional $515. The total airfare cost for this part of the trip was $2,371; however, the traveler submitted a voucher claiming the original estimated cost of $3,159 and included a handwritten receipt. The approving official approved the travel voucher, and the traveler was reimbursed $3,159, an overpayment of $788. Additionally, the traveler purchased an airfare ticket in Copenhagen to fly to Hamburg, and we found that the traveler submitted a receipt and requested a reimbursement of $628, even though Bank of America showed that ticket cost only $523—a potential overpayment of $105. As a result of these various transactions the traveler was potentially improperly reimbursed at least $893. Since ARC maintains ticketing data, such as passenger name, ticket number, flight information, and fees paid for over 3 years, access to ARC would allow DOD to obtain the entire history of refunds and exchanges associated with a given ticket number. This information would permit DOD to not only identify unused airline tickets, but also unreported refunds such as those in the previous example. Since ARC is the organization that assigns tickets numbers, DOD could easily query the trips of interest. Under this concept, DOD could take the ticket numbers and query ARC to validate that the (1) ticket had been used and (2) ultimate price paid for the ticket after any refunds. Any tickets associated with trips that had been completed but not yet used would be identified in this process, which would allow DOD to begin taking the necessary actions to ensure it received the reimbursement for the portion of the unused airline ticket. This information would also be useful in identifying refunds provided to travelers that were not shown on the travel vouchers. The current DTS business rules require the system to display multiple airfares for the same flight. DTS displays airfares in the following order, if seats are available on a given flight: GSA city pair fares with capacity limits, GSA city pair fares, and other unrestricted fares—if GSA city pair fares are not available on that flight. Following the above criteria, for a flight from Washington, D.C. (Ronald Reagan National Airport), to Dallas/Fort Worth, the GSA city pair fare with capacity limits, which is $188, would be shown along side the GSA city pair fare of $341, assuming that seats were available for both fares. We believe that the process could be simplified if only the lowest available airfare was displayed—in this case, $188. Using the above flight, DTS should only display the GSA city pair fare with capacity limits for the given flight, if seats are available, since it was the lowest-cost unrestricted airfare, rather than showing both fares. Furthermore, if a lower unrestricted fare was available, that fare, rather than the GSA city pair fare, should be shown. This approach would be in accordance with the GSA city pair program since it allows for other unrestricted fares to be accepted when the selected airfare is (1) lower than the GSA city pair fare and (2) available to the general public. Implementation of this change would require DTS to change its business process. Currently, if travelers have to change their flights and the fares are not the same, they have to go through the approval process because it necessitates change in the amount of funds obligated to pay for the flights. In reality, approving an airfare change from a GSA city pair fare with capacity limits to a GSA city pair fare should be “automatic” since a GSA city pair flight and airfare were being used and this airfare could have been selected by the traveler when the travel authorization was originated. Additionally, the automatic approval of such an increase would help alleviate concerns the travelers may have about amending travel authorization while in a travel status. DOD’s business rules and the design of DTS provide that only unrestricted airfares should be displayed. However, adopting a “one size fits all” policy does not provide an incentive to the traveler to make the best decision for the government, which was one of the stated changes documented in the 1995 DOD report. Other airfares, generally referred to as restricted airfares, may be less expensive than a given GSA city pair fare and other unrestricted airfares. However, as the name implies, these fares come with restrictions. For example, within the GSA city pair fare program, changes can be made in the flight numerous times without any additional cost to the government. Generally, with restricted airfares there is a fee for changing flights. The Federal Travel Regulation and DOD’s JFTR and JTR allow travelers to take restricted airfares, including on those airlines not under the GSA city pair contract, if the restricted airfare costs less to the government. However, DOD’s regulations do not address reimbursement above the applicable unrestricted airfare if that charge was incurred for the convenience of the government. For example, assume that the GSA city pair rate between city A and city B was $300 and a traveler selected a restricted airfare for $250. If the traveler incurred a $35 change fee for personal reasons, then the traveler would be allowed to claim for reimbursement the $35 fee since the total price of the ticket ($285) was less than the GSA city pair fare. On the other hand, if the traveler incurred a $70 fee and the change was for the convenience of the government, it is not clear under DOD’s regulations that the traveler would receive reimbursement for the entire $320. Furthermore, even if the traveler felt certain that no changes would be required, DTS does not display restricted air fares. Additionally, at the present time, DOD does not have quantifiable information available that can be used to ascertain if the use of restricted airfares would be advantageous to the department. Adopting a standard policy of using one type of airfare—unrestricted or restricted—is not the most appropriate approach for DOD to follow. A better approach would be to establish guidance on when unrestricted and restricted airfares should be used and then monitor how that policy is implemented. For example, travelers could be instructed to select restricted airfares when (1) the certainty of the trip occurring is highly probable, (2) the cost differential between unrestricted and restricted airfare would cover the costs of at least one change fee, and (3) the restricted airfare meets mission requirements. Once these business rules were defined, DTS could be modified to incorporate them into its displays of available flights, which would assist the traveler in identifying restricted airfares that may be of interest and in compliance with DOD guidance. Although development of the guidance is an important first step, management also needs to determine (1) whether the policy was being followed and (2) what changes are needed to make it more effective. For example, a periodic review of the change fees associated with restricted airfares could be made to determine such items as (1) whether, after consideration of these fees, savings were accruing to the department and (2) if the change fees were significant, the reasons for those change fees. Since DTS could be modified to capture the change fees as a separate expense item, such quantifiable data would assist in this analysis. While receipts provide valuable information that is necessary to validate claims, as noted in our sample results, the omission of receipts was a significant problem in our review of the travel vouchers. In some cases, DOD may be able to change its policy and reduce the number of receipts required and the associated administrative burden without adversely affecting its ability to ensure a claim is proper. However, in some cases, IRS regulations mandate that DOD obtain receipts. For example, IRS has prescribed certain guidelines relating to the requirement for receipts associated with travel expenses. In this regard, receipts are not required for expenses less than $75 (except for lodging) and transportation expenses where receipts are not readily available. Automated methods could be used to reduce the number of receipts that the traveler is currently required to provide without compromising internal controls. Currently, a DOD traveler is required to provide a copy of the receipt associated with the airline ticket, except when the ticket is purchased via the CBA. However, adequate information may be available from automated sources that would provide at least the same degree of assurance as the receipts. Specifically, when the airline ticket is acquired using a government credit card, the appropriate information is available from the credit card company in an automated form that can be used to validate the claim on the voucher. Besides the airline tickets, information on the government charge card could also be used to validate the claim for reimbursement for travel fees paid to the CTO and fuel charges. Furthermore, if DOD gained access to the information contained in ARC as discussed previously, then this information could be used to further support the costs associated with the travel claim. Other automated methods that may be able to produce reasonable assurance of the claim may require consultation with IRS. For example, IRS requires that lodging expenses be supported by receipts showing (1) the name and location of the hotel; (2) the dates the employee stayed there; and (3) separate amounts for charges such as lodging, meals, and telephone calls. In the case of federal travel, such information is critical to determining whether the individual is receiving duplicate reimbursement. For example, if the employee was reimbursed $70 for lodging expenses, which included a $5 meal, then that employee could be compensated for the meal twice—once under the per diem allowance paid and then again under the lodging expenses. The information currently displayed by the government charge card vendor does not provide this level of detail. However, other automated techniques may provide reasonable assurance that the objective of not paying expenses twice is achieved. Conceptually, using data-mining techniques, an entity could achieve reasonable assurance that the claims for lodging were reasonable and did not include duplicate charges. The following is one conceptual approach that could be used. DTS knows (1) the dates the employee claimed lodging expenses, (2) the amount of lodging expenses claimed each day, and (3) the location where those expenses should have been incurred. Also, assuming that the lodging was booked through DTS, it knows the rate that is expected to be paid. The government charge card system knows the (1) transaction date of the payment made to the lodging provider, (2) total amount paid, (3) name of lodging provider, and (4) location of lodging provider (city, state, and zip code). Comparison of data from DTS and the government charge card would indicate whether the claim for lodging costs was greater than or equal to the amount claimed on the travel voucher, which would provide reasonable assurance that the costs had been incurred. Although the comparison of the DTS information to the charge card information would provide reasonable assurance that the charges claimed were actually incurred, it would not provide reasonable assurance that the costs claimed did not include duplicate charges. Reasonable assurance that the amounts actually claimed represented the actual charges for those items can be obtained by using the data already captured (or available) through two methods. First, since DTS knows the travel claims for a large number of individuals, it will have a high probability of knowing (1) the lodging expenses incurred by others at that facility and (2) the applicable tax rate for lodging associated with a given zip code. For example, if 10 travelers stay within a given zip code and the tax rate is 5 percent, then it is reasonable to expect that another claim in that zip code with a 5 percent tax rate is reasonable. Second, it may be possible to compare the rate claimed by multiple individuals at a given facility even though those individuals may not have been associated with the trip or stayed at the facility on the same day. For example, if 5 travelers stayed at hotel A during a 6-month period and all of them claimed the same for lodging and taxes, then it would be reasonable to assume that this figure was the actual amount paid. Using these techniques, anomalies could be detected. The term “reasonable assurance” is important because no matter how well designed and operated, an internal control system cannot provide absolute assurance that agency objectives will be met. Furthermore, an important concept in internal control considerations is the relationship between costs and benefits. Because techniques and technology may allow DOD to achieve the reasonable assurances needed by IRS that, in effect, require DOD to obtain lodging and similar receipts, DOD could explore with IRS acceptable approaches for reducing the number of receipts required for the paper-based receipt process. Reducing the need for paper receipts would also reduce the administrative burden on the travelers and the AOs and the costs incurred by DOD for capturing and storing these receipts. Overhauling DOD’s financial management and business operations—one of the largest and most complex organizations in the world—represents a daunting challenge. DTS, intended to be the department’s end-to-end travel management system, illustrates some of the obstacles that must be overcome by DOD’s array of transformation efforts. With over 3.3 million military and civilian personnel as potential travel system users, the sheer size and complexity of the undertaking overshadows any such project in the private sector. Nonetheless, standardized business systems across the department will be the key to achieving billions of dollars of annual savings through successful DOD transformation. As we have previously reported, because each DOD component receives its own funding for the operation, maintenance, and modernization of its own systems, nonintegrated, parochial business systems have proliferated—4,150 business systems throughout the department by a recent count. The elimination of stovepiped legacy travel systems and cheaper electronic processing, which could be achieved with the successful implementation of DTS, is critical to realizing the anticipated savings. Further, opportunities exist to streamline the department’s overall travel management practices thereby reducing the administrative burden and cost without affecting internal controls and, in some cases, improving internal controls over the department’s travel management practices. To improve the department’s management and oversight of DTS and streamline its administrative process for travel, we recommend that the Secretary of Defense take the following 10 actions: direct the PMO-DTS to effectively implement the disciplined processes necessary to provide reasonable assurance that (1) requirements are properly documented and (2) requirements are adequately tested; direct the PMO-DTS to properly test new or modified system interfaces so that the intended functionality is properly operating prior to a software update being provided to DTS users; direct the PMO-DTS to require that all CTOs adhere to the department’s policy on the use of premium-class travel, even in those instances where it is listed as the only available airfare; direct the Secretaries of the Army, Navy, and Air Force, as well as the heads of all DOD agencies, to reemphasize that travelers are to justify exceptions from department policy and the importance of the authorizing officials not approving any travel authorization in which exceptions are not properly justified; direct the Secretaries of the Army, Navy, and Air Force, as well as the heads of all DOD agencies, to routinely monitor, such as on a quarterly basis, information on the number and cost of processing travel vouchers outside of DTS and initiate action to eliminate funding for legacy systems, where applicable; direct the PMO-DTS to develop and implement the means to automate the approval of changes to authorized travel expenses where possible; direct the PMO-DTS to consider the viability of using commercial databases to identify unused airline tickets, for which reimbursement should be obtained and help improve the assurance that the actual travel taken was consistent with the information shown on the travel voucher; direct the PMO-DTS to consider simplifying the display of airfares in direct the PMO-DTS to determine the feasibility of utilizing restricted airfares, where cost effective; and direct the PMO-DTS to work with IRS to develop an approach that will permit the use of automated methods to reduce the need for hard copy receipts to satisfy requirements to substantiate travel expenses. We received written comments on a draft of this report from the Director, DFAS, which are reprinted in appendix II. DOD concurred with all our recommendations and identified actions it plans to take to improve the department’s management and oversight of DTS and streamline its administrative travel process. For example, DOD stated that it will continuously monitor and adjust its processes to ensure requirements are properly documented and tested. Additionally, DOD noted that the PMO- DTS will incorporate system and travel review changes to ensure CTOs are following departmental policy by periodically reviewing premium-class travel authorizations. DOD’s comments also noted that the department will consider the use of commercial databases to identify unused airline tickets for which reimbursement should be obtained. DOD noted that this effort could be expanded governmentwide through ongoing collaborative efforts with GSA. We are sending copies of this report to the Secretary of Defense; Under Secretary of Defense (Comptroller); the Under Secretary of Defense (Acquisition, Technology and Logistics); and the Director, Office of Management and Budget. Copies of this report will be made available to others upon request. In addition, the report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions on matters discussed in this report, please contact McCoy Williams at (202) 512-6906 or [email protected] or Keith A. Rhodes at (202) 512-6412 or [email protected]. 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 III. To determine if the Department of Defense (DOD) effectively tested key Defense Travel System (DTS) functionality associated with flights and airfares, we reviewed two key DTS flight-related requirements and the related testing to determine if the desired functionality was effectively implemented. To determine if DTS will correct the problems previously identified with DOD travel, we analyzed past GAO reports and testimonies, selected Defense Finance and Accounting Service (DFAS) reports, and DOD congressional testimonies. In this regard, we focused on how DTS addresses issues related to premium-class travel, unused tickets, and centrally billed accounts (CBA) and the accuracy of claims for travel reimbursement. More specifically, to determine if DTS will correct the weaknesses related to premium-class travel, we identified and tested all individually billed account (IBA) and CBA premium-class travel transactions processed by DTS for the first quarter of fiscal year 2005 (October through December 2004) for proper approval and justification and obtained an understanding of the process to purchase properly approved and justified premium-class travel through DTS, and of the controls in DTS to prevent a traveler from purchasing premium-class travel without proper approval. To assess the use of premium-class travel for IBA, we obtained from Bank of America a database of fiscal year 2005 first quarter (October through December 2004) air travel transactions charged to IBA accounts. The database contained transaction specific information, such as the price of the ticket, ticket number, name of passenger, date and destination of travel, and service code (first, business, or coach class seating accommodations). We also obtained from the Project Management Office—Defense Travel System (PMO-DTS) a database containing all vouchers processed by DTS for the same time period. We extracted all unique Social Security Numbers (SSN) from the PMO-DTS database and compared the information with the data from Bank of America. This comparison resulted in the identification of the IBA transactions that could be potential premium-class airline tickets. We eliminated all airfare charges that were less than $200, which created a listing of 380 potential premium-class travel IBA charges. In those instances in which there was insufficient information in DTS to ascertain if a premium-class airline ticket had been purchased, we requested additional information from the military services, such as travel itinerary or ticket stub providing information on the class of service (economy, business, first) purchased. We reviewed the travel authorization and all supporting documentation to determine the class of service provided and determined if there was proper approval and justification for premium-class travel. To ascertain if the CBAs were being used for the purchase of premium- class travel, we followed the same methodology used in reviewing IBAs. Our comparison resulted in the identification of 244 potential CBA premium-class travel transactions. The CBA listing only contained the travelers’ names and not their respective SSNs, therefore we requested additional information from the military services. In performing our analysis of the IBA and CBA, besides the $200 criteria mentioned above, we also eliminated all airfare transactions that were not processed through DTS or that we determined were economy-class airfare transactions. This process resulted in the identification of potentially 419 transactions in which a premium-class ticket could have been issued. To address the issue of unused airline tickets, we discussed with the PMO- DTS specific actions that were being taken and visited five locations to ascertain if the commercial travel offices were preparing the unused airline ticket reports. In regard to the duplicate payment for airline tickets purchased through the CBA, we reviewed DTS controls to ascertain if they were designed to ensure that tickets purchased through the CBA cannot be claimed on an individual’s travel voucher as a reimbursement to the traveler. To test for the accuracy of travel voucher reimbursements, we utilized the DTS database previously mentioned covering the first quarter of fiscal year 2005. From this database, we extracted all temporary duty travel vouchers where the travel occurred from October 1, 2004 to December 31, 2004. We assumed a 10 percent rate of control violations, and we desired a precision of +/- 5 percentage points at the 95 percent confidence level. These parameters, along with an assumed 80 percent response rate, led to a sample size of 173 travel vouchers. Because we followed a probability procedure based on random selections, our sample is only one of a large number of samples that we might have drawn. Since each sample could have provided different estimates, we express the precision of our particular sample’s results as a 95 percent confidence interval (e.g., plus or minus 5 percentage points). This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn. As a result, we are 95 percent confident that each of the confidence intervals in this report will include the true values in the study population. To identify some of the challenges confronting DOD in making DTS the department’s standard travel system, we discussed with PMO-DTS officials their implementation strategy and reviewed past GAO reports and testimonies related to the department’s efforts to improve the accuracy and reliability of the information in its business systems. Additionally, we analyzed data on the number of systems interfaces that have been developed and implemented to date and those that need to be developed in the future. We also discussed with the PMO-DTS some of the specific actions that could be taken to further streamline the department’s travel management practices. In this regard, we reviewed past GAO reports that discuss specific actions agencies can take to streamline their respective travel management practices. We assessed the reliability of the DOD data used for our audit by (1) performing electronic testing of required data elements, (2) reviewing existing information about the data and the system that produced them, and (3) interviewing agency officials knowledgeable about the data. We determined that the data were sufficiently reliable for the purpose of this audit. We performed our audit work from October 2004 through October 2005 in accordance with U.S. generally accepted government auditing standards. We requested comments on a draft of this report from the Secretary of Defense or his designee. We received written comments from the Director, DFAS, which are reprinted in appendix II. In addition to the above contacts, the following individuals made key contributions to this report: Darby Smith, Assistant Director; J. Christopher Martin, Senior Level Technologist; F. Abe Dymond, Assistant General Counsel; Beatrice Alff; Francine DelVecchio; Thomas Hackney; Gloria Hernandez-Saunders; Wilfred Holloway; Jason Kelly; Sheila Miller; Robert Sharpe; Patrick Tobo; and Adam Vodraska. Army National Guard: Inefficient, Error-Prone Process Results in Travel Reimbursement Problems for Mobilized Soldiers. GAO-05-400T. Washington, D.C.: March 16, 2005. Army National Guard: Inefficient, Error-Prone Process Results in Travel Reimbursement Problems for Mobilized Soldiers. GAO-05-79. Washington, D.C.: January 31, 2005. DOD Travel Cards: Control Weaknesses Led to Millions of Dollars of Improper Payments. GAO-04-576. Washington, D.C.: June 9, 2004. DOD Travel Cards: Control Weaknesses Led to Millions in Fraud, Waste, and Improper Payments. GAO-04-825T. Washington, D.C.: June 9, 2004. DOD Travel Cards: Control Weaknesses Led to Millions of Dollars Wasted on Unused Airline Tickets. GAO-04-398. Washington, D.C.: March 31, 2004. Travel Cards: Internal Control Weaknesses at DOD Led to Improper Use of First and Business Class Travel. GAO-04-229T. Washington, D.C.: November 6, 2003. Travel Cards: Internal Control Weaknesses at DOD Led to Improper Use of First and Business Class Travel. GAO-04-88. Washington, D.C.: October 24, 2003. | The Department of Defense (DOD) has been working to develop and implement a standard end-to-end travel system for the last 10 years. Over the past several years numerous GAO reports and testimonies have highlighted problems with DOD's travel practices that resulted in wasteful spending of millions of dollars. In response, the department has noted that the Defense Travel System (DTS), in part, will help correct these problems. Because of the widespread congressional interest in DTS, GAO initiated the audit under the statutory authority of the Comptroller General of the United States. The objectives of the audit were to (1) determine if DOD effectively tested key DTS functionality, (2) ascertain if DTS will correct the weaknesses previously identified, (3) identify the challenges that remain, and (4) identify opportunities to streamline DOD's travel process. DTS development and implementation have been problematic, especially in the area of testing key functionality to ensure that the system will perform as intended. Consequently, critical flaws have been identified that resulted in significant schedule slippages between the planned and actual system deployment. GAO's recent analysis of selected requirements related to DTS's reservation module disclosed that system testing was ineffective in ensuring that the promised capability has been delivered as intended. For example, GAO found that DOD did not have reasonable assurance that DTS properly displayed flight and airfare information. This problem was not detected prior to deployment, since DOD failed to properly test system interfaces. While DTS has corrected some of the previously reported travel problems, others remain. Specifically, DTS has resolved the problem related to duplicate payment for airline tickets purchased with the centrally billed accounts. However, problems remain related to improper premium-class travel, unused tickets that are not refunded, and accuracy of travelers' claims. These remaining problems cannot be resolved solely within DTS and will take departmentwide action to address. GAO also identified two key challenges facing DTS in becoming DOD's standard travel system: (1) developing needed interfaces and (2) underutilization of DTS at sites where it has been deployed. While DTS has developed 36 interfaces with various DOD business systems, it will have to develop interfaces with at least 18 additional systems--not a trivial task. Additionally, the continued use of the existing legacy travel systems results in underutilization of DTS and affects the savings that DTS was planned to achieve. Furthermore, GAO has identified concepts that the department can adopt to streamline its travel management practices. |
In response to a congressional request in 2005, the National Academies gathered a group of business, government, and academic leaders to identify steps the leaders thought would ensure that the United States is a leader in science and engineering and can compete, prosper, and be secure in the twenty-first century. The resulting 2007 report, entitled Rising above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future, recommended a number of specific actions to address these goals.increasing federal investment in long-term basic and cross-disciplinary scientific research, creating an agency within DOE to support transformational energy research that might be high risk but could also provide dramatic benefits for the nation, increasing the number and skills of science and mathematics teachers in primary and secondary schools, and investing in higher education with the goal of increasing the number of undergraduate and graduate students with degrees in science, engineering, and mathematics fields. The COMPETES Acts addressed some of the actions in these areas. For example, COMPETES 2007 authorized creation of the Advanced Research Projects Agency-Energy in DOE to overcome long-term and high-risk technological barriers in developing energy technologies, and it authorized programs in Education and NSF to train teachers in STEM fields. Among other things, the report advocated Investments in scientific research have led to significant advances such as the development of the Internet, satellites, aircraft, and the mapping of the human genome, while investments in STEM education have provided multiple forms of support for developing a highly qualified STEM workforce. However, evaluations of such investments face inherent challenges, such as those related to the long-term nature of many scientific research projects, an inability to predict certain outcomes, and difficulty tying specific investments to direct outcomes. As we reported in 2012, evaluations of STEM education programs may be hindered by inconsistent collection of output data, such as the number of institutions or students directly served by programs.effectiveness of investments in scientific research and STEM education in improving U.S. competitiveness—the overall goal of the COMPETES Acts—are complicated by a number of factors. For example, it is difficult to measure competitiveness. The Council on Competitiveness, a group of business, academic, and labor leaders focused on ensuring U.S. prosperity, reported that traditional measures of competitiveness, such as trade balances, levels of foreign direct investment, employment, or wages Further, efforts to evaluate the may not fully capture a nation’s competitiveness because of the complexities brought about by multinational corporations competing in constantly shifting global networks. Further, complications arise from ambiguities surrounding the term competitiveness, which has multiple definitions. Efforts are under way to address some of these challenges. For example, STAR Metrics—Science and Technology for America’s Reinvestment: Measuring the Effect of Research on Innovation, Competitiveness, and Science—is a partnership between science agencies and research institutions to consistently document the outcomes of federally funded science investments. In addition, the National Science and Technology Committee on STEM Education within the Office of Science and Technology Policy collects and maintains information on how investments in STEM education are distributed across agencies, programs, and target groups. The committee compiled a comprehensive inventory of STEM education programs across the federal government in 2011 and released a 5-year federal STEM education plan in May 2013 to establish a strategy for focusing federal STEM education investments so they have the most significant impact possible on national priorities. As we reported in 2010 when we reviewed COMPETES 2007, agencies collect data and use different approaches to evaluate their progress NSF, DOE, Commerce, and Education use toward long-term outcomes.several tools—which may either broadly assess agency-wide activities or focus on program-level activities—to evaluate their scientific research and STEM education activities. Such tools include the following: advisory committees, such as NSF’s committees that exist for each directorate—for example, the Education and Human Resources Advisory Committee provides advice, guidance, and recommendations concerning NSF’s science and engineering education programs; performance reviews, such as Commerce’s Annual Performance and Accountability Reports, which provide data on performance measures for NIST including the number of publications produced, or the Advanced Research Projects Agency–Energy’s (ARPA-E) quarterly technical milestone reviews of funded projects, which help reviewers decide if project funding should be continued; Committees of Visitors, such as those used by NSF, Science and NIST, which are groups of external experts that assess the overall quality of program operations and, in some cases, program outcomes; and formal program evaluations, which are systematic, empirical studies used by agencies to assess how well a particular program or component of a program is working. Of the $62.2 billion authorized under the COMPETES Acts in fiscal years 2008 through 2012, $52.4 billion was appropriated, including $51.9 billion for the entire budgets of NSF, Science, and NIST. Funding for these three entities accounts for more than 99 percent of the funding appropriated under the COMPETES Acts during this period. (See fig. 1.) Appropriations for NSF, Science, and NIST generally increased in fiscal years 2008 through 2012 but did not reach authorized levels. For example, NSF’s appropriations increased from about $5.9 billion in fiscal year 2007—the last year before its appropriation was authorized under the COMPETES Acts—to about $7 billion in fiscal year 2012, when it was authorized to receive $7.8 billion. Appropriations for Science, which were authorized under the COMPETES Acts starting in fiscal year 2010, increased from $4.8 billion in fiscal year 2009 to about $4.9 billion in fiscal year 2012, when Science was authorized to receive $5.6 billion. Likewise, funding for NIST increased but not to authorized levels: in fiscal year 2007, before its appropriation was authorized under the COMPETES Acts, it received about $680 million, compared with $750 million in fiscal year 2012, when NIST was authorized to receive about $970 million. In addition, the American Recovery and Reinvestment Act of 2009 (Recovery Act) appropriated about $5.2 billion to these entities in fiscal year 2009. The majority of the Recovery Act appropriations—over $3 billion—went to NSF. Figure 2 shows the amounts authorized under the COMPETES Acts for NSF, Science, and NIST, as compared with the amounts appropriated, including Recovery Act appropriations. The COMPETES Acts also specifically authorized funding for 40 individual programs, including some programs within and some outside of NSF, Science, and NIST. (See app. II.) For example, in addition to authorizing $22.1 billion for the entire budget of NSF in fiscal years 2008 through 2010, COMPETES 2007 specifically authorized $345 million of that total for NSF’s Robert Noyce Teacher Scholarship Program in fiscal years 2008 through 2010. The programs not within NSF, Science, or NIST fell elsewhere within the Departments of Commerce and Energy, or in Education. Among the 40 programs for which the COMPETES Acts specifically authorized funding, the 12 programs that existed before the acts all received appropriations and continue to operate. Six of the 28 newly authorized programs also received appropriations. Of these 6 programs, 1—ARPA-E—is continuing operations, 3 did not receive appropriations in fiscal year 2012, and 2 are in the process of being implemented as of May 2013. More specifically, according to officials NSF’s Science Master’s Program, NIST’s Technology Innovation Program, and Education’s Teachers for a Competitive Tomorrow did not receive appropriations in fiscal year 2012. Officials told us the Science Master’s Program and the Technology Innovation Program are in the process of shutting down, and Teachers for a Competitive Tomorrow has not awarded new grants since fiscal year 2010. Further, Commerce’s Loan Guarantees for Science Park Infrastructure and Federal Loan Guarantees for Innovative Technologies in Manufacturing are in the process of being implemented, according to Commerce officials; these programs first received appropriations in fiscal year 2012. Twenty-two of the 28 newly authorized programs did not receive appropriations, including 9 programs that were newly authorized in COMPETES 2007 but repealed in COMPETES 2010. In total, 16 of the 40 programs for which the COMPETES Acts specifically authorized funding have been implemented, including the 12 previously existing programs, ARPA-E, and the 3 newly authorized programs that did not receive appropriations in fiscal year 2012. As noted previously, two other newly authorized programs that received appropriations are in the process of being implemented. As shown in figure 3, the implemented programs generally focus on five areas: (1) research and development programs focus on activities aimed at enhancing scientific research and development,(2) manufacturing performance programs focus on supporting innovation among U.S. manufacturers and other organizations,(3) STEM teacher training programs focus on education and professional development for prospective or existing STEM teachers, (4) STEM undergraduate programs focus on encouraging or improving undergraduate STEM education, and (5) STEM graduate programs focus on supporting graduate students training for careers in research or education in STEM disciplines. With few exceptions, agency officials told us they did not include funding requests in their budget submissions for the programs that did not receive funding. Agencies did include funding requests in their budget submissions for 4 of the 22 newly authorized programs that did not receive funding. Specifically, Education requested appropriations for the Math Now program in fiscal years 2008 and 2009 and for the Foreign Language Partnership and Advanced Placement and International Baccalaureate programs in fiscal year 2009, while Commerce requested appropriations in fiscal year 2012 for the Regional Innovation Program. For the other 18 programs, officials most often told us they did not request appropriations because their agencies already had similar programs under way or could work within current programs to carry out similar activities. For example, Science officials told us the office did not request appropriations for the Discovery Science and Engineering Innovation Institutes because the program’s implementation would have duplicated existing activities. Commerce officials told us that the department’s Economic Development Administration implemented certain aspects of the Regional Innovation Program (RIP) through the existing Economic Adjustment Assistance program when RIP did not receive appropriations. However, the officials also noted that by implementing aspects of RIP in this manner they have reduced funding available to other worthwhile aspects of the Economic Adjustment Assistance program. In other cases, officials told us they did not request appropriations because the programs did not fit into the agency mission or because the agencies prioritized other programs in light of limited resources or other factors. Recent evaluations that we identified have generally suggested positive results for the fully implemented programs for which the COMPETES Acts specifically authorized funding; some of the evaluations have also recommended ways to improve the programs. Recent evaluations have been conducted for 15 of 16 fully implemented programs. According to NSF officials, no evaluation of the Science Master’s Program was published during 2008-2012, which is the time frame of evaluations included in our review. These evaluations have provided information on how well programs—or aspects of programs—were working in each of the five areas on which the programs focus. Many studies have also made recommendations for program improvement. Following are examples of selected evaluations and key findings for programs in the five focus areas: Research and development. Studies for these programs found that they were generally producing positive results and noted areas for continued improvement. For example, one study used econometric modeling to examine the effects of the Experimental Program to Stimulate Competitive Research, which aims to improve the research and development capacity of participating states. The results suggested participating states have been effective in growing federal financial support for science and engineering at a faster rate compared with nonparticipating states. However, the authors noted that while the effect they found was statistically significant, it was a small effect. They concluded that more enhanced and innovative efforts are needed to sustainably build states’ research and development capacity. In another example, our 2012 review of ARPA- E found that it successfully funded projects that would not have been funded solely by private investors, in keeping with its goals. Manufacturing Extension Partnership, Delivering Measurable Results to Manufacturing Clients: Fiscal Year 2009 Results (Washington, D.C.: March, 2011). These findings were based on MEP surveys of program clients; fewer than 50 percent of respondents reported that MEP had an impact on sales, investment levels, jobs created, or jobs retained. A majority of client respondents did report cost savings in areas such as labor, materials, inventory, and energy. Jennifer Carney et al., Evaluation of the National Science Foundation’s Integrative Graduate Education and Research Traineeship Program (IGERT): Follow-Up Study of IGERT Graduates (Arlington, VA: February 2011). experience positively contributed to their ability to finish their PhDs. A majority of respondents (94 percent) also reported that the IGERT experience helped them obtain their current work positions. An exploratory analysis comparing IGERT graduates with non-IGERT graduates from similar academic departments found no significant difference between the graduates in securing employment, but they did find that IGERT graduates reported a greater interest in interdisciplinary education or research training. We provided a draft of this report to Commerce, DOE, Education, and NSF for comment. Commerce’s Economic Development Administration did not have any comments on the draft. Commerce’s NIST provided written comments, which are reproduced in appendix III, along with our response. On behalf of NIST, the Secretary of Commerce stated that the draft, as scoped, does not fully capture the significant positive impact that the COMPETES Acts have had on NIST. As noted in our response in appendix III, the scope of our review is based on a mandate in COMPETES 2010 that calls for GAO to evaluate the extent to which programs authorized under the law have been funded, implemented, and are contributing to achieving the goals of the act. Our report addresses the total appropriations to NIST in fiscal years 2008 through 2012 in objective 1. To satisfy the needs of our congressional clients, we focused our review on programs for which the COMPETES Acts specifically authorized funding. DOE provided technical comments, which we incorporated as appropriate. Education did not have any comments on the draft. NSF provided technical comments, which we incorporated, as appropriate. We are sending copies of this report to the Secretaries of Commerce, Education, and Energy; the Director of NSF; the appropriate congressional committees; and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. 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 IV. To inform our objectives, we reviewed our October 2010 report on agency obligations under the America Creating Opportunities to Meaningfully Promote Excellence in Technology, Education, and Science Act of 2007 (COMPETES 2007) and the steps agencies were taking to evaluate implemented programs under COMPETES 2007. We also reviewed relevant laws, including COMPETES 2007 and the COMPETES Reauthorization Act of 2010 (COMPETES 2010), and we interviewed agency officials from the National Science Foundation (NSF); the Department of Energy (DOE), including the Office of Science (Science) and the Advanced Research Projects Agency–Energy (ARPA-E); the Department of Commerce (Commerce), including the National Institute of Standards and Technology (NIST) and the Economic Development Administration; and the Department of Education (Education). To determine the extent to which funding was appropriated under the authorization of the COMPETES Acts, we reviewed the laws and identified the entities and programs for which the acts specifically authorized funding. To determine the extent to which funding was actually provided to such entities and programs, we reviewed annual appropriations data in Congressional Research Service reports and agency budget justification documents, and confirmed these data with agency officials. Agency officials were not able to provide complete appropriations data at the program level. Complete final appropriations data for fiscal year 2013 were also not available. We interviewed agency officials to learn about the status of programs that received funding. We also asked agency officials which programs were included in annual budget requests and why other programs were not included in those requests. To examine what the results of evaluations suggest about how the programs for which the COMPETES Acts specifically authorized funding are working, we identified and reviewed a selection of recent studies that evaluated these programs. To identify these evaluations, we conducted a literature review and interviewed agency officials. Specifically, we conducted a literature search in databases such as ProQuest, SciSearch, and Academic One to search for recent reports or publications that evaluated programs authorized by the COMPETES Acts. We conducted an initial review of the summaries of the reports or publications returned in our literature search and provided by agencies, and we excluded those that did not appear to evaluate how well programs were working and were not published in 2008-2012. We included studies published from 2008 through 2012; in some cases, these studies included data on program activities that occurred before 2008. We reviewed the methodology of the identified studies and reported on the results of those we determined to be methodologically sound and reliable for the purposes of our report. We included the results of 21 studies covering 13 programs in our review. We reported findings on a select number of programs and evaluations based on the following criteria: (1) we included programs that received federal funding in fiscal year 2012 and are continuing operations as of May 2013 and (2) for each focus area, we chose programs with the most recent evaluations and included up to two of the most recent studies for those programs. Some agencies provided us with performance reviews and other reports containing performance measurements that we did not include in our review of evaluations. When drafting our report, we provided agency officials with information on the studies to be included. We determined focus areas for implemented programs based on agency information about the purposes and goals of those programs. We also interviewed officials from departments, agencies, and program offices with authorized funding under the COMPETES Acts, including representatives from NSF’s Education and Human Resources Directorate, Engineering Directorate, and Office of Integrative Activities; Energy’s Science and ARPA-E; Commerce’s NIST and Economic Development Administration; and Education’s Office of Postsecondary Education. We conducted this performance audit from October 2012 to July 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 obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Figure 4 below shows the 40 programs for which the America Creating Opportunities to Meaningfully Promote Excellence in Technology, Education, and Science (COMPETES) Act of 2007 or the COMPETES Reauthorization Act of 2010 specifically authorized funding. 1. The scope of our review is based on a mandate in the America COMPETES Reauthorization Act of 2010 (COMPETES 2010) that calls for GAO to evaluate the extent to which programs authorized under the law have been funded, implemented, and are contributing to achieving the goals of the act. Our report addresses the total appropriations to NIST in fiscal years 2008 through 2012 in our first objective. To satisfy the needs of our congressional clients, we focused our review on programs for which COMPETES 2010 and the America Creating Opportunities to Meaningfully Promote Excellence in Technology, Education, and Science Act of 2007 (COMPETES 2007) specifically authorized funding. 2. Our draft report notes that the Baldrige Performance Excellence Program is currently operating using private funds, according to agency officials. We clarified in our footnote that the program remains authorized to receive funding. We did not include information about funding for fiscal year 2013 because that is beyond the scope of our review. 3. The scope of our review includes program evaluations published from 2008 through 2012. The draft report includes the findings from the Manufacturing Extension Partnership’s (MEP) fiscal year 2009 client impact survey, which was the most recent survey published in our time frame. The results of the MEP 2011 client impact survey, which was published in March 2013, were outside the scope of our review. 4. To identify the evaluations we included in our analysis, as described in appendix I, we conducted a literature search and asked the agencies to provide evaluations of the programs that were published from 2008 through 2012. We conducted an initial review of the summaries of the reports or publications identified and excluded those that did not appear to evaluate how well programs were working. Based on the summary of the publication cited in NIST’s letter, we concluded it was not in our scope, and it was not included in the selection of studies we reported on. When drafting our report, we provided agency officials with information on the studies to be included, and Commerce officials did not bring this publication to our attention at that time. However, upon receiving NIST’s comments, we reviewed our criteria for identifying studies, and we continue to believe that our approach to identifying and selecting studies was appropriate. 5. We believe figure 4 clearly communicates the authorization of funding for the Technology Innovation Program (TIP) under COMPETES 2007. Figure 4 also shows that TIP did not receive appropriations in fiscal year 2012, and that the program is not currently operating. Further, in the body of our report, we say that according to agency officials TIP is in the process of shutting down. We do not provide information about fiscal year 2014 because that is outside the scope of our review. In addition to the individual named above, Karla Springer (Assistant Director), Nicole Dery, Cindy Gilbert, Michael Kendix, Cynthia Norris, Marietta Mayfield Revesz, and Barbara Timmerman made key contributions to this report. | Scientific and technological innovation and a workforce educated in STEM fields are critical to long-term U.S. economic competitiveness. Leaders in government, business, and education have expressed concern about the nation's ability to compete with other technologically advanced countries in these fields. In this context, Congress passed COMPETES 2007 and reauthorized the act with COMPETES 2010, each with the overall goal of investing in research and development to improve U.S. competitiveness. Among other things, the acts specifically authorized funding for certain programs. COMPETES 2010 mandated GAO to evaluate the status of authorized programs. GAO examined (1) the extent to which funding was appropriated under the authorization of COMPETES 2007 and COMPETES 2010 and (2) what recent evaluations suggest about how programs for which the acts specifically authorized funding are working. To answer these questions, GAO reviewed relevant federal laws, interviewed agency officials, and reviewed program evaluations for quality and content. This report contains no recommendations. In fiscal years 2008-2012, $52.4 billion was appropriated out of the $62.2 billion authorized under the America Creating Opportunities to Meaningfully Promote Excellence in Technology, Education, and Science Act of 2007 (COMPETES 2007) and the America COMPETES Reauthorization Act of 2010 (COMPETES 2010). Almost all of these funds went to the entire budgets of three existing research entities--the National Science Foundation (NSF), the National Institute of Standards and Technology (NIST), and the Department of Energy's (DOE) Office of Science (Science)--including all of the programs and activities the entities carry out. Appropriations for NSF, NIST, and Science generally increased under the acts but did not reach levels authorized by the acts. In addition to authorizing the budgets of these entities, COMPETES 2007 and COMPETES 2010 specifically authorized funding for 40 individual programs, including some programs within and some outside of these entities. Among those 40 programs, the 12 programs that existed before COMPETES 2007 received appropriations and continue to operate. Six of 28 newly authorized programs were also funded. Of these 6 programs, 1--DOE's Advanced Research Projects Agency-Energy, set up to develop new energy technologies--is continuing operations, 3 were not funded in fiscal year 2012, and 2 were not fully implemented as of May 2013. For the 22 programs that were not funded, agency officials generally said that they did not request funding in their budget submissions; most often this was because agencies had similar programs under way or could pursue similar objectives within current programs. For example, Science said it did not request funding for the Discovery Science and Engineering Innovation Institutes because it would have duplicated other Science programs. For the fully implemented programs for which the COMPETES Acts specifically authorized funding, recent evaluations generally reported positive results, and some evaluations provided suggestions for improvements. Recent evaluations have been conducted for almost all of the programs that were implemented, or for aspects of those programs. For example, studies of the Robert Noyce Teacher Scholarship Program found that the program has increased the number of qualified science, technology, engineering, and mathematics (STEM) teachers, but also suggested that retention of teachers in high-need schools could be improved. |
As the largest civilian contracting agency in the federal government, DOE relies primarily on contractors to carry out its diverse missions and operate its laboratories and other facilities. About 90 percent of DOE’s budget is spent on contracts and large capital asset projects. DOE’s fiscal year 2015 discretionary budget request totaled almost $28 billion, with NNSA accounting for a substantial share—more than 40 percent. With three projects under way as of August 2012 that are expected to cost upwards of $17 billion, and with a history of significant cost growth and schedule delays, we designated NNSA’s contract and project management for contracts and projects with values of at least $750 million as high risk due to vulnerabilities to fraud, waste, abuse, and mismanagement. NNSA, a separately organized agency within DOE, is responsible for the management and security of the nation’s nuclear weapons programs. NNSA articulates its strategy for managing the nuclear weapons infrastructure in its annually updated Stockpile Stewardship and Management Plan. The plan includes information on NNSA’s eight government-owned, contractor-operated sites that comprise its nuclear security enterprise—formerly known as the nuclear security complex. These include three national nuclear weapons design laboratories— Lawrence Livermore National Laboratory in California, Los Alamos National Laboratory in New Mexico, and Sandia National Laboratories in New Mexico and California; four nuclear weapons production plants—the Pantex Plant in Texas, the Y-12 National Security Complex in Tennessee, the Kansas City Plant in Missouri, and tritium operations at DOE’s Savannah River Site in South Carolina; and the Nevada National Security Site, formerly known as the Nevada Test Site. These sites carry out, among other things, the Stockpile Stewardship Program, which helps ensure a U.S. nuclear deterrent without full-scale nuclear testing. Activities under this program include dismantlement and disposition of nuclear weapons, as well as long-range planning to modernize NNSA’s nuclear security enterprise. The National Defense Authorization Act for Fiscal Year 2012 required NNSA to submit a report to congressional defense committees (1) assessing the role of the nuclear security complex in supporting key activities and (2) identifying any opportunities for efficiencies and cost savings in the complex. More specifically, section 3123 of the act required the report to include the following: an assessment of the role of the nuclear security complex sites in supporting a safe, secure, and reliable nuclear deterrent; reductions in the nuclear stockpile; and the nuclear nonproliferation efforts of the nation; an identification of opportunities for efficiencies within the nuclear security complex and an assessment of how those efficiencies could contribute to cost savings and strengthening safety and security; an assessment of duplicative functions within the nuclear security complex and a description of which duplicative functions remain necessary and why; an analysis of the potential for shared use or development of high explosives research and development capacity, supercomputing platforms, and infrastructure maintained for the Work for Others program, if the Administrator determines it appropriate; and a description of the long-term strategic plan for the nuclear security complex. The act required that NNSA’s report to congressional defense committees include an assessment of the role of the nuclear security complex sites in supporting a safe, secure, and reliable nuclear deterrent; reductions in the nuclear stockpile; and the nuclear nonproliferation efforts of the nation. NNSA’s report, however, does not include such an assessment. Instead, the NNSA report describes activities of the nuclear security enterprise such as (1) certifying annually that the nuclear weapons stockpile is safe, secure, and reliable; (2) extending the life of existing weapons; (3) dismantling some nuclear weapons to reduce their quantity; and (4) developing and deploying technologies, approaches, and monitoring tools to ensure compliance with international agreements. In addition, NNSA’s report states that the 2014 Stockpile Stewardship and Management Plan, issued in June 2013, provides supplemental information on the role of the nuclear security enterprise. NNSA officials told us that that they did not think the act required them to submit an updated assessment of the nuclear security enterprise and stated that carrying out such an assessment would have taken more time to complete than the 14 months provided under the act. NNSA officials also said that a 2008 report that assessed the role of the nuclear security enterprise sites is still valid. NNSA officials said that a new analysis of the role of the nuclear security enterprise sites may be warranted in the future if circumstances change sufficiently. Officials acknowledged that, since 2008, characteristics of some large capital asset projects have changed in the face of increasing costs, fiscal constraints, and technical difficulties, including plans to construct a Chemistry and Metallurgy Research Replacement Nuclear Facility at Los Alamos National Laboratory, and plans to construct a Pit Disassembly and Conversion Facility at Savannah River. Notwithstanding such changes across the nuclear security enterprise, NNSA officials said that the fundamental role that each site plays in supporting the nuclear security enterprise is consistent with the assessment included in the 2008 report. We did not evaluate NNSA’s 2008 report, but given the report is more than 5 years old, it raises questions about the assessment still being relevant. Moreover, we note that NNSA’s report to Congress did not cite the 2008 report as support and, as discussed previously, NNSA did not provide an assessment of the role of the nuclear security complex sites in supporting key NNSA activities, as required by the act. In March 2014, NNSA decided to evaluate alternative plutonium disposition technologies that it believes can achieve a safe and secure solution more quickly and cost effectively. Office of Management and Budget, Fiscal Year 2015 Budget of the United States (Washington, D.C.: Mar. 4, 2014). Plan, issued in June 2013, constitutes its 25-year strategic plan for the nuclear security enterprise. NNSA’s report to Congress identifies opportunities for efficiencies and assesses duplicative functions. It does not, however, (1) assess how identified efficiencies could contribute to cost savings and strengthen safety and security, as required by the National Defense Authorization Act for Fiscal Year 2012, (2) or analyze the potential for shared use of facilities, which was a task the act stated should be included if the Administrator determines it to be appropriate. NNSA’s report identifies seven efficiency opportunities. The opportunities included in the report are a summary of efficiency opportunities included in the 2014 Stockpile Stewardship and Management Plan, issued in June 2013, as well as some infrastructure and research and development initiatives. Specifically, NNSA’s report discusses efficiency opportunities that may result from (1) establishing the Office of Acquisition and Project Management in 2011; (2) establishing the Office of Infrastructure and Operations in fiscal year 2013; (3) consolidating the management and operating contracts for Y-12 National Security Complex and the Pantex Plant; (4) efficiencies in the nuclear weapons research and development portfolio, such as refurbishing facilities to reduce downtime between experiments; (5) improving the planning process for High Energy Density activities; (6) reducing the size of the Kansas City Plant; and (7) achieving projected benefits from the new Uranium Processing Facility. NNSA’s report also includes an assessment of duplicative functions— which determined that most duplication has been eliminated over the past 25 years, and the duplicative activities that remain are essential to operations. For example, the report states that the nuclear security enterprise does maintain duplicative weapons design, certification, and surveillance functions but that it is an intended redundancy. Los Alamos National Laboratory and Lawrence Livermore National Laboratory both act as design agents for scientific matters pertaining to the weapon physics package. But, according to the report, the intellectual diversity that results from competing physics design laboratories is important to fulfill the requirement of stockpile stewardship. As discussed above, NNSA’s report identifies seven efficiency opportunities. The act, however, required NNSA to submit a report to congressional defense committees that included not only an identification of efficiency opportunities, but also an assessment of how those efficiencies could contribute to cost savings and strengthen safety and security. NNSA’s report does not provide an assessment of how the efficiencies identified could contribute to cost savings and strengthen safety and security, as required by the act. For example, NNSA’s report cites the establishment of two new offices—the Office of Acquisition and Project Management in 2011 and the Office of Infrastructure and Operations in 2013—as efficiency opportunities, but it does not provide an assessment of how these offices have contributed or will contribute to cost savings. Similarly, the report cites efficiencies achieved in recent years related to experiments and simulations conducted in support of nuclear weapons research and development, but it does not include information about how these efficiencies might lead to cost savings. These and other efficiencies described in NNSA’s report also do not include an assessment of how the efficiencies will strengthen safety and security. In addition, three of the efficiency initiatives included in NNSA’s report involve projects or strategies that, in prior reviews, we have found face challenges, which, if not addressed, may impact NNSA’s ability both to achieve cost savings and strengthen safety and security. Consolidating the Y-12 and Pantex management and operations contracts to integrate finance systems and streamline management support services. We previously concluded that it is unclear how cost savings from this consolidation could be achieved and whether it would produce as much in savings as NNSA has anticipated. NNSA’s report does not address these previously raised concerns. Constructing a new Uranium Processing Facility at the Y-12 National Security Complex: NNSA stated that the new facility would include engineered controls that will provide improved safety, security, and reliability of enriched uranium operations, among other things. But, NNSA’s report contains no other information regarding how the new facility will improve safety and security and, as NNSA itself has acknowledged, challenges inherent in this project are being addressed, and the features of the facility have undergone significant changes. We have previously reported, in 2012, project costs had increased almost 6 times NNSA’s initial estimates. Accordingly, as a result of the increased cost estimate for this project, how or whether it can lead to cost savings remains unclear. Moving Kansas City operations to a smaller, nearby leased facility. This move began in 2013 and is scheduled for completion in August 2014. In October 2009, however, we found the potential cost efficiencies gained from this leasing arrangement may have been overstated because the methodology used to estimate savings eliminated potentially less costly alternatives. NNSA’s report does not address these previously raised concerns or address how efficiencies gained from this move will lead to improved safety and security. GAO, VA Health Care: Methodology for Estimating and Process for Tracking Savings Need Improvement, GAO-12-305 (Washington, D.C.: Feb. 27, 2012); Defense Management: Opportunities Exist to Improve Information Used in Monitoring Status of Efficiency Initiatives, GAO-13-105R (Washington, D.C.: Dec. 4, 2012); and Veterans Affairs: Limited Support for Reported Health Care Management Savings, GAO-06-359R (Washington, D.C.: Feb. 1, 2006). estimates, and a detailed process for tracking actual savings resulting from improvements. Consistent with our prior recommendations, we derived several key principles for preparing cost savings estimates from federal budgeting and cost estimating guidance. These principles include preparing an appropriate level of detailed documentation so that a reasonably informed person can easily recreate, update, or understand the cost savings estimate; identifying key assumptions used in preparing the estimate; assessing the reliability of data used to develop the estimate; and verifying or validating the accuracy of the calculations performed. NNSA’s recent experience with previously identified cost savings targets underscores the importance of assessing whether cost savings can in fact be achieved. As discussed previously, the Office of Management and Budget directed NNSA to include cost savings to be achieved through management efficiencies and workforce prioritization savings in its 2014 future budget estimates so that the overall estimate could be reduced. NNSA incorporated these cost savings into its budget estimates before assessing how it could achieve the savings, thereby limiting the credibility of savings for budgetary purposes. In November 2013, NNSA determined that savings anticipated from workforce prioritization would not be feasible. NNSA officials told us, in March 2014, that they are assessing whether and how it might still achieve the management efficiency savings incorporated in its budget estimates, but that they have not yet determined when the assessment will be completed. NNSA’s report does not provide an analysis of the potential for shared use of facilities. The National Defense Authorization Act for 2012 required NNSA, if the Administrator determined it appropriate, to provide an analysis of the potential for shared use or development of high explosives research and development capacity, supercomputing platforms, and infrastructure maintained for the Work for Others program. NNSA’s report does not discuss the Administrator’s determination regarding whether such an analysis is appropriate. Nonetheless, NNSA includes in its report a section entitled potential for shared use of selected facilities. The information contained in the report, however, focuses on existing, not potential, shared use opportunities. Specifically, NNSA’s report includes two examples of sites that operate Work for Others programs and three examples where they use facilities not owned by the nuclear security enterprise to execute its missions. The report states that NNSA leverages the costs saving and benefits of time-sharing and collaboration at these facilities, but it provides no additional information on the potential for new opportunities to supplement those efforts the agency has already put into practice. Like other federal agencies, NNSA is being asked to find ways to operate more efficiently and reduce costs. Modernizing the nuclear security enterprise to ensure a safe, secure, and reliable nuclear deterrent will involve billions of dollars and take many years to accomplish. NNSA has identified several opportunities to achieve efficiencies across the nuclear security enterprise, but it is not clear whether cost savings will result because NNSA did not assess how these opportunities would create savings, how much could be saved, and in what time frame. Some of the opportunities NNSA proposes are associated with projects or activities for which NNSA has had difficulties accurately estimating costs and schedules or which are currently in flux. Without a sound methodology for assessing efficiency opportunities—a methodology that includes the basis of any assumptions included in the savings estimates, an assessment of the reliability of data used to develop the estimate, and verification or validation of the accuracy of savings calculations performed, as well as a process for tracking actual savings—NNSA cannot provide reasonable assurance that the efficiency opportunities it has identified will result in savings. Without such information, Congress does not have critical information to make the budgetary and policy choices that best balance long-term spending and nuclear security goals. To ensure Congress receives reliable information regarding budgetary savings, we recommend that the Administrator of NNSA, when reporting on efficiency and savings opportunities in the future, develop a methodology that includes details on how savings from each operational improvement will be achieved; the basis of any assumptions included in the savings estimates; an assessment of the reliability of data used to develop the estimate; verification or validation of the accuracy of savings calculations performed; and a process for tracking actual savings resulting from operational improvements. We provided a draft of this report to NNSA for its review and comment. NNSA provided written comments, which are presented in appendix I. NNSA also provided technical comments on our draft report, which we incorporated as appropriate. In its written comments, NNSA disagreed with our findings and our recommendation. Specifically, in its comments, NNSA stated that it was concerned that our report reflects an interpretation of the National Defense Authorization Act for Fiscal Year 2012 that differs from NNSA’s, resulting in potentially misleading conclusions. NNSA further stated that the report incorrectly concludes that the NNSA report to Congress did not provide an assessment of the roles of Nuclear Security Enterprise sites in performing certain missions as required and that the basis for our conclusion that the assessment was not provided is unclear. We disagree. The act required NNSA to provide a report to congressional defense committees “assessing the role of the nuclear security complex sites in supporting a safe, secure, and reliable nuclear deterrent; reductions in the nuclear stockpile; and the nuclear nonproliferation efforts of the United States.” As we noted in our report, NNSA described the activities of the nuclear security enterprise in its report to Congress, but it did not provide an assessment. A description is not an assessment. In its comments, NNSA stated that the 2008 Complex Transformation Supplemental Programmatic Environmental Impact Statement that underlies its report to Congress, is still operative, and there have been no substantive transformations of the Nuclear Security Enterprise since. As we note in our report, however, NNSA did not cite this assessment in its report to congressional defense committees. Moreover, the 2008 Complex Transformation Supplemental Programmatic Environmental Impact Statement is more than 5 years old, which raises questions about its continued relevance. Notably, key elements of that document, such as the construction of the Chemistry and Metallurgy Research Replacement Nuclear Facility and the Uranium Processing Facility, have not been constructed and NNSA is reconsidering its approach on how to address these critical needs. NNSA also states in its comments that we appear to have interpreted the act as requiring NNSA to causally and quantitatively link its cost efficiency initiatives to specific cost savings when the congressional language does not make any reference to linking the two. We disagree because the act does link efficiencies and cost savings. Specifically, the act states that the NNSA report must identify “opportunities for efficiencies within the nuclear security complex and an assessment of how those efficiencies could contribute to cost savings and strengthening safety and security.” As we stated in our report, NNSA’s report to congressional defense committees identifies opportunities for efficiencies. It does not, however, assess how identified efficiencies could contribute to cost savings and strengthen safety and security, as required by the act. For example, in its report NNSA cites efficiencies achieved in recent years related to experiments and simulations conducted in support of nuclear weapons research and development but does not include information about how these efficiencies might lead to cost savings. Finally, NNSA did not concur with GAO’s recommendation that future reporting on efficiencies and cost savings should include a methodology for estimating the savings derived from potential efficiencies and track savings resulting from new efficiency efforts. NNSA stated that it would not have reliable information to accurately develop cost estimates directly linked to the efficiencies and that the congressional language does not make any reference to linking the two. NNSA states that it believes doing so would be speculative and result in unreliable information. We disagree. We have previously reported in evaluations of other agencies’ cost savings efforts that a sound methodology for estimating savings helps ensure that proposed savings can be achieved. Though such an effort may present analytical and other challenges, it is nonetheless important to do so. As we noted in our report, a methodology that includes the basis of any assumptions included in the savings estimates, assessing the data reliability of the estimate, validating savings calculations, and tracking actual savings achieved will help NNSA provide Congress the information it needs to make important budgetary and policy choices that best balance long-term spending and nuclear security goals. Thus, we continue to believe that NNSA should take action to fully address this recommendation. We are sending copies of this report to the appropriate congressional committees, the Secretary of Energy, the Administrator of NNSA, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected] . Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Other GAO staff who made key contributions to this report are Diane LoFaro, Assistant Director; Delwen Jones; Jeanette Soares; and Ginny Vanderlinde. Modernizing the Nuclear Security Enterprise: NNSA’s Budget Estimates Do Not Fully Align with Plans. GAO-14-45. Washington, D.C.: December 11, 2013. Modernizing the National Security Enterprise: Observations on NNSA’s Options for Meeting Its Plutonium Research Needs. GAO-13-533. Washington, D.C., September 11, 2013. Nuclear Weapons: Factors Leading to Cost Increases with the Uranium Processing Facility. GAO-13-686R. Washington, D.C.: July 12, 2013. Defense Management: Opportunities Exist to Improve Information Used in Monitoring Status of Efficiency Initiatives. GAO-13-105R. Washington, D.C.: December 4, 2012. VA Health Care: Methodology for Estimating and Process for Tracking Savings Need Improvement. GAO-12-305. Washington, D.C.: February 27, 2012. Modernizing the Nuclear Security Enterprise: The National Nuclear Security Administration’s Proposed Acquisition Strategy Needs Further Clarification and Assessment. GAO-11-848. Washington, D.C.: September 20, 2011. Nuclear Weapons: National Nuclear Security Administration’s Plans for Its Uranium Processing Facility Should Better Reflect Funding Estimates and Technology Readiness. GAO-11-103. Washington, D.C.: November 19, 2010. Nuclear Weapons: National Nuclear Security Administration Needs to Better Manage Risks Associated with Modernization of Its Kansas City Plant. GAO-10-115. Washington, D.C.: October 23, 2009. Veterans Affairs: Limited Support for Reported Health Care Management Efficiency Savings. GAO-06-359R. Washington, D.C.: February 1, 2006. | Nuclear weapons are an essential part of the nation's defense strategy, and NNSA is charged with performing key activities in support of this strategy. Like other agencies, however, NNSA is being asked to find ways to operate more efficiently and reduce costs. The National Defense Authorization Act for Fiscal Year 2012 mandated that NNSA submit a report to congressional defense committees that, among other things, includes an assessment of the role of the nuclear security complex sites, as well as opportunities for efficiencies at these sites and how these efficiencies may contribute to cost savings and help strengthen safety and security. The act required that NNSA's report include certain topics and mandated that GAO assess the report submitted by NNSA. This report evaluates the extent to which the NNSA report (1) assessed the role of nuclear security complex sites in supporting key NNSA activities and (2) identified opportunities for efficiencies and cost savings within the nuclear security complex. GAO analyzed NNSA's statutory reporting requirements, the agency's report to congressional committees and supporting documentation, and interviewed NNSA officials. The National Nuclear Security Administration's (NNSA) report to congressional defense committees describes, but does not assess, the role of the nuclear security complex sites. The act required that NNSA's report include an assessment of the role of the nuclear security complex sites in supporting a safe, secure, and reliable nuclear deterrent; reductions in the nuclear stockpile; and the nuclear nonproliferation efforts of the nation—which GAO refers to in this report as key NNSA activities. NNSA's report does not include such an assessment. Instead, the report describes activities such as certifying annually that the nuclear weapons stockpile is safe, secure, and reliable. NNSA officials told GAO that a prior 2008 report that assessed the role of the nuclear security complex is still valid and said that they did not think the act required them to update it. GAO notes, however, that NNSA's report to Congress does not cite the 2008 report as support for its assessment and provides no other information that would constitute an assessment. NNSA officials said that a new analysis of the role of the nuclear security complex sites may be warranted in the future if circumstances change. Officials acknowledged that characteristics of some major projects—such as the Chemistry and Metallurgical Research Replacement Nuclear Facility in New Mexico—have changed recently due to technical and fiscal challenges, but that such changes do not alter the fundamental role each site plays. NNSA's report to congressional defense committees identified seven opportunities for efficiency, but it did not, as required by the act, provide an assessment of how these efficiencies could contribute to cost savings or strengthening safety and security. For example, NNSA's report cites the establishment of two new offices—the Office of Acquisition and Project Management in 2011 and the Office of Infrastructure and Operations in 2013—as efficiency opportunities but does not provide an assessment of how these offices have contributed or will contribute to cost savings or improved safety and security. In addition, some efficiency opportunities noted in NNSA's report—such as the capabilities provided by the new Uranium Processing Facility at the Y-12 National Security Complex—involve projects or strategies that GAO has previously reported face challenges, which, if not addressed, may impact NNSA's ability both to achieve cost savings and strengthen safety and security. Key principles for preparing savings estimates include a methodology that identifies the basis of any assumptions included in the savings estimates and a process for tracking actual savings. Such a methodology could help ensure that savings from proposed efficiencies can be achieved. Because NNSA did not assess how these efficiencies would lead to savings, however, it is not clear whether any cost savings will result. GAO recommends that, when reporting on efficiencies and cost savings in the future, NNSA establish a methodology for estimating the savings derived from potential efficiencies and track savings resulting from efforts. NNSA disagreed, stating that the act did not require, as GAO recommends, that efficiencies be linked to cost savings. GAO believes its recommendation remains valid. |
The Corps’ Civil Works Program is organized into three tiers: headquarters, in Washington, D.C.; eight regional divisions that were generally established according to watershed boundaries; and 38 districts nationwide (see fig. 1). Corps headquarters primarily develops policies and guidance to fulfill agency responsibilities and plans the direction of the organization. The Assistant Secretary of the Army for Civil Works, appointed by the President, sets the strategic direction for the agency and has principal responsibility for the overall supervision of functions relating to the Civil Works Program, including supervising the Chief of Engineers’ execution of the program. The Chief of Engineers, a military officer, is responsible for the execution of the Corps’ civil works and military missions. The Corps’ divisions have the primary role of coordinating the districts’ civil works projects and are commanded by military officers. The role of the districts, also commanded by military officers, is to plan and implement the studies and projects that Corps divisions and headquarters approve. The Corps typically becomes involved in water resources projects when a local community perceives a need or experiences a problem that is beyond its ability to solve and contacts the Corps for assistance. Figure 2 illustrates the major steps in the typical process when the Corps leads a feasibility study or construction project. If it does not have current statutory authority to study the problem, the Corps needs congressional authorization before proceeding. Studies are authorized through legislation, typically a Water Resources Development Act (WRDA), or in some circumstances, a resolution by an authorizing committee. In addition to congressional authorization, the Corps needs an appropriation to conduct the study. Prior to WRRDA 2014, after receiving authorization and an appropriation, the Corps conducted studies in two phases: reconnaissance and feasibility. Corps district offices conducted reconnaissance studies at full federal expense to determine if the problem warranted federal participation in a feasibility study and how the problem could be addressed. During the reconnaissance phase, the Corps also assessed the level of interest and support from nonfederal entities such as state, tribal, county, or local governments or agencies that might become sponsors. If the Corps determined that further study was warranted, the district office sought agreement from the local sponsor to share costs for a feasibility study. WRRDA 2014 eliminated the reconnaissance phase to accelerate the study process and allow the Corps to proceed directly to the feasibility study. The purpose of the feasibility study is to further investigate the problem and make recommendations on whether a project is worth pursuing and how the problem should be addressed. Generally, the cost of the feasibility study is split equally between the Corps and the nonfederal sponsor. The district office conducts the study and documents the results in a feasibility study report that includes a total project cost estimate based on the recommended plan. The Chief of Engineers reviews the feasibility report and upon deciding to recommend the project for construction, signs the final decision document—called the Chief’s Report—and transmits it through the Assistant Secretary of the Army for Civil Works and the Office of Management and Budget for review. The Office of Management and Budget recommends to the President whether to support or change the Corps’ budget request, and the President’s budget request is transmitted to Congress. Congress may then authorize the project’s construction in a WRDA or other legislation. The purpose of the preconstruction engineering and design phase is to complete any additional planning studies and all of the detailed technical studies and designs needed to begin construction. During this time, the Corps pursues congressional authorization for the project and construction funding through the annual budget process. Under its budget formulation process, the Corps prioritizes projects that it determines have the highest expected returns for the national economy and the environment, as well as those that reduce risk to human life. When the Corps receives appropriations, which generally provide funding directly for individual projects in increments over the course of several years, the district enters into a cost-sharing agreement with a nonfederal sponsor. The standard federal and nonfederal cost share percentages for construction projects can vary by the purpose of the project, as shown in table 1. Typically, the Corps manages the construction process, contracting out the majority of construction work to private engineering and construction contractors. Throughout the construction phase, the Corps oversees the contractors’ work, performing routine inspections to ensure it meets the Corps’ design and engineering specifications. During construction, the Corps may request and Congress may enact scope or cost changes. When construction is complete, the Corps may operate and maintain the constructed project (e.g., navigation projects), or it may turn over operation and maintenance to the nonfederal sponsor (e.g., most flood damage reduction projects). Alternatively, when a nonfederal sponsor undertakes a feasibility study or construction project, the sponsor typically manages and funds the total cost of the feasibility study or construction project and may later seek reimbursement or credit for the federal share of the work it conducts. Reimbursement refers to the Corps’ repayment to a nonfederal sponsor for the federal share of a construction project that the nonfederal sponsor incurs in undertaking such work. Credit is a noncash offset toward the local share of a feasibility study or construction project and is an alternate means for the Corps to compensate a nonfederal sponsor for the federal share of the costs it incurs when it undertakes such work. In the case of feasibility studies, a nonfederal sponsor may independently undertake the study and submit a study report to the Secretary of the Army. The Assistant Secretary of the Army for Civil Works then forwards to Congress an assessment of whether the study report and process complied with applicable federal laws and regulations and any recommendation the Assistant Secretary has about the project. If Congress later authorizes the project for construction, the nonfederal sponsor may be eligible to receive credit for the federal share of the feasibility study toward the nonfederal share of the construction project costs. When a nonfederal sponsor undertakes construction of an authorized federal water resources project, or separable element thereof, it first enters into a partnership agreement with the Corps. The agreements specify how the Corps and nonfederal sponsor will collaborate, generally stating their respective roles and responsibilities and the terms and conditions under which both parties will execute their responsibilities. The agreements also establish the requirements the nonfederal sponsor must meet to be eligible for credit or reimbursement for the federal share of the construction costs. In general, to be eligible for credit or reimbursement, nonfederal sponsors are required to design and construct the project in accordance with applicable federal and state laws, regulations, standards, and policies. In addition, the nonfederal sponsor is responsible for all public and government agency coordination and for obtaining all necessary federal and state permits. However, the nonfederal sponsor can contract with the Corps to undertake these efforts at the nonfederal sponsor’s expense if such work does not delay the completion of other Corps projects. Corps headquarters and district officials said that to be eligible for credit or reimbursement for the federal share of the construction of a project, nonfederal sponsors must meet the same requirements that the Corps would adhere to if it led the construction project, such as meeting the Corps’ engineering and design standards. The Corps maintains an oversight role, performing inspections of the project as constructed and validating costs that the sponsor submits for reimbursement or credit. However, the Corps cannot guarantee reimbursement for the federal share of the costs because such reimbursement is subject to the enactment of appropriations, as is generally specified in the agreement between the Corps and nonfederal sponsor. The authorities that allow nonfederal sponsors to undertake feasibility studies and construction projects have been included in various federal statutes since 1968. These authorities allow sponsors to take responsibility for and fund a study or project in its entirety and, upon completion of the project in accordance with Corps standards, request reimbursement for the federal portion of project costs under the relevant cost-sharing formula. We identified five federal statutory authorities that existed prior to changes enacted in WRRDA 2014 allowing nonfederal sponsors to undertake a feasibility study or construction of harbors or navigational improvements, shoreline protection projects, flood control projects, or generally authorized federal water resources projects (see table 2). The Corps confirmed that these are the relevant statutes that allow nonfederal sponsors to undertake federal water resources projects. In addition to these five broader statutory authorities, Congress may authorize projects led by nonfederal sponsors in separate, project-specific legislation. For example, Congress authorized a flood damage reduction project in the 1993 Defense Appropriations Act. In June 2014, Congress enacted WRRDA 2014, which amended or replaced most of the authorities outlined in table 2 and consolidated them under two new provisions. Specifically, section 1014 of WRRDA 2014 amends sections 203 and 204 of WRDA 1986 to provide authority for nonfederal sponsors to undertake the study and construction of the full range of water resources projects. Similar to prior authorities, WRRDA 2014 authorizes nonfederal sponsors to study, design, and construct water resources projects using their own funding, in accordance with Corps engineering and design standards. The act also authorizes nonfederal sponsors to receive credit or reimbursement for nonfederal funds expended on the federal share of the project upon determination by the Corps that the completed project adhered to federal law, regulations, and applicable standards and conditions, such as the Corps’ engineering standards. A senior Corps headquarters official said that a significant difference between WRRDA 2014 and previous water resources development authorization acts is that WRRDA 2014 authorizes nonfederal sponsors to undertake construction projects that have not yet been authorized by Congress and to seek reimbursement for those projects if they are subsequently authorized. Prior legislation provided that Corps approval could occur and construction begin only after a project was authorized by Congress. Corps headquarters could not provide the exact number of, or specific information about, projects undertaken by nonfederal sponsors because it has delegated the responsibility for overseeing such projects to the districts. In addition, the information that Corps headquarters collected from the districts on the number of such projects and reimbursements to nonfederal sponsors did not match the information that districts provided to us. Corps headquarters officials told us that they could not provide an exact number of, or specific information about projects undertaken by nonfederal sponsors, such as the number of each type of project (feasibility study or construction), completion status, and project costs, because districts are responsible for overseeing these projects. Corps headquarters officials also said that the Corps does not have a comprehensive source of information about these projects at the headquarters level, but they estimated that nonfederal sponsors have undertaken “less than a handful” of feasibility studies or construction projects. Consequently, to identify the extent to which nonfederal sponsors have undertaken federal water resources projects, we requested information directly from all 38 district offices responsible for civil works. Corps district offices maintain a variety of information on such projects, which they provided in response to our request. The information they provided offers examples of the range of federal water resources projects undertaken by nonfederal sponsors. For example, Corps districts reported that from 1986 through 2014, 28 nonfederal sponsors undertook 32 water resources projects: 11 feasibility studies and 21 construction projects. Sixteen of the 38 Corps districts responsible for civil works projects oversaw these projects, which varied in geographic location and project type. According to the data Corps districts provided in response to our request, a majority (21) of the 32 water resources projects undertaken by nonfederal sponsors were located in California and the states along the Gulf of Mexico: Florida, Louisiana, Mississippi, and Texas. Other water resources projects were scattered across the United States. For instance, Georgia, Illinois, Kansas, Nebraska, Nevada, Oklahoma, Oregon, and Virginia each had one project led by a nonfederal sponsor, and Alaska had two projects. In addition to geographic variation, nonfederal sponsors undertook projects for different project purposes and at different phases of the project, based on responses from Corps district offices. In total, nonfederal sponsors undertook 11 feasibility studies: 8 for navigation and 3 for flood damage reduction. They also undertook 21 construction projects: 4 for navigation, 16 for flood damage reduction, and 1 for ecosystem restoration. As of September 2014, the feasibility studies and construction projects nonfederal sponsors had undertaken were at various stages of completion, according to information provided by Corps district offices. Specifically, nonfederal sponsors had completed more construction projects than feasibility studies—14 of 21 construction projects and 3 of 11 feasibility studies. The Corps district offices reported that the total estimated costs of feasibility studies and construction projects for each project undertaken by nonfederal sponsors ranged from approximately $500,000 to just over $600 million and, overall, totaled approximately $4 billion. (See app. II for detailed information provided by the Corps districts.) As part of their response to our request, Corps districts provided information about reimbursements to nonfederal sponsors for the federal share of projects they undertook. In addition, Corps headquarters officials provided us with information they collected from the districts about reimbursements to nonfederal sponsors who undertook projects. The headquarters officials told us that approximately twice a year Corps headquarters collects information from the districts on planned and actual reimbursements to nonfederal sponsors to help ensure that the agency does not exceed annual statutory reimbursement limits. However, these officials said they do not have a process for reviewing the information they receive from districts to ensure its accuracy and reliability. We compared the reimbursement data that headquarters collected from the districts with the reimbursement data the districts provided to us and found the following areas of inconsistency: Information on the total number of reimbursed projects was inconsistent. According to information provided by Corps districts in response to our data request, the Corps reimbursed nonfederal sponsors for all or part of the federal share of 13 construction projects nonfederal sponsors undertook from 1986 through 2014. However, according to Corps headquarters data, the Corps reimbursed nonfederal sponsors for the federal share of 20 projects. When we compared the list of 13 projects we compiled from information provided by the districts with the list of 20 projects provided by Corps headquarters, we found only 5 projects led by nonfederal sponsors for which the Corps issued reimbursements that were common to both lists. Information on the total amount of reimbursements was inconsistent. Corps headquarters data on the total reimbursement amount were also inconsistent with the total reimbursement amount provided to us by the districts. According to information provided by Corps districts in response to our data request, the Corps reimbursed nonfederal sponsors approximately $266 million toward the federal share of construction projects undertaken by nonfederal sponsors from 1986 through 2014. However, according to Corps headquarters data, the Corps reimbursed nonfederal sponsors a total of just under $207 million for projects undertaken during the same period. Reimbursed amounts for specific projects did not always match. Of the five projects led by nonfederal sponsors that were common to both lists, the reimbursement amounts did not match for two of them. In one case, the district office reported a reimbursement of $5 million, and Corps headquarters reported a reimbursement of $15.6 million. For the second case, the district office reported a reimbursement of $142.8 million, and Corps headquarters reported a reimbursement of $25.7 million. To understand these differences, we asked Corps headquarters to reconcile the list of projects and reimbursement amounts provided to us by the districts with the data they collected from the districts. Corps headquarters officials confirmed that the 13 projects the districts provided to us received reimbursement. Corps headquarters officials also identified an additional 13 projects led by nonfederal sponsors that received reimbursements but were not provided to us by the districts—increasing the total amount of reimbursements to nonfederal sponsors to just under $400 million. Corps headquarters officials could not fully explain why differences existed between the number of projects and reimbursement amounts provided to us by the districts and the information they collected from the districts for the same time period. Initially, Corps headquarters officials said the differences may have resulted because the districts provided information to us at a different time than when they provided information to headquarters. However, because our data requests to both the districts and headquarters were for the same data (projects undertaken by nonfederal sponsors under certain authorities) covering the same time frame (1986 through 2014), the projects and reimbursement amounts should have matched. Subsequently, Corps headquarters officials said that a possible explanation for the differences in the data the districts provided to us and the data Corps headquarters collected from the districts pertained to when headquarters began collecting the information. Specifically, Corps headquarters officials said that they began collecting annual reimbursement data from district offices in 2006, when Congress enacted annual reimbursement limits. Corps headquarters officials said that, as a result, reimbursement information for projects led by nonfederal sponsors that had agreements signed before 2006 may be less reliable than the reimbursement information for projects with agreements signed after 2006. In addition, headquarters officials said that districts did not report projects authorized under a particular provision (section 206 of WRDA 1992) as we requested but included them when reporting reimbursement data to Corps headquarters. Corps headquarters officials stated they were not aware of Corps policies or procedures that provide guidance to the districts on the type of information to collect and maintain on projects led by nonfederal sponsors, in general, including what information to record; how, when, and where to record it; and how long to maintain it. Federal standards for internal control call for internal controls and all transactions and other significant events to be clearly documented in management directives, administrative policies, or operating manuals and for accurate and timely recording of transactions and events. Without developing documented guidance for districts to have procedures for accurate recordkeeping for transactions and other relevant information related to projects led by nonfederal sponsors, the Corps does not have reasonable assurance that districts will consistently record information on such projects and that the information districts provide to headquarters on such projects will be accurate and reliable. Corps district officials and nonfederal sponsors we interviewed identified several lessons learned from feasibility studies and construction projects undertaken by nonfederal sponsors. These officials provided their views on what worked well on projects led by nonfederal sponsors and the advantages and disadvantages of nonfederal sponsors undertaking such projects, as well as challenges and opportunities for improvement related to these projects. (See table 4 in app. I for the interview questions we asked Corps districts and nonfederal sponsors to obtain this information.) In discussing what worked well on projects led by nonfederal sponsors, Corps district officials and nonfederal sponsors we interviewed identified various factors. Corps district officials most frequently cited partnering with experienced nonfederal sponsors, while nonfederal sponsors most frequently cited regularly communicating with the Corps. Specifically, Corps officials from 6 of the 16 districts we interviewed said that nonfederal sponsors’ prior experience partnering with the Corps on projects contributed to their success in conducting feasibility studies or construction projects in a timely manner. For example, Corps officials in one district said they have long been working with a particular nonfederal sponsor who was very familiar with the Corps’ processes, which contributed to the nonfederal sponsor’s ability to build a large, extensive flood damage reduction project in just 3 years. Corps officials from another district said that the key contact for a nonfederal sponsor that is conducting three separate flood control projects has a good understanding and knowledge of the Corps’ processes and, as a result, is often called upon to assist other nonfederal sponsors. Similarly, three nonfederal sponsors said that learning the Corps’ processes and procedures has helped their organizations grow and strengthen their relationship with the Corps and potentially benefit future collaboration. While Corps district officials identified partnering with experienced nonfederal sponsors as a leading factor, nonfederal sponsors we interviewed most commonly (8 of 20) cited regular communication with the Corps as a factor that led to successful partnerships. According to these nonfederal sponsors, regular communication with the Corps— ranging from several times a week to quarterly—led to successful project implementation, including helping to ensure everyone was “rowing the boat in the same direction,” meeting Corps standards, and adhering to project timelines. Another nonfederal sponsor said that in addition to holding quarterly meetings with the Corps, Corps district officials also attend the sponsor’s board meetings, which has been helpful to the partnership because it “keeps everyone on the same page.” These nonfederal sponsor views were also shared by officials from eight Corps districts we interviewed, who noted that early and frequent communication contributed to successful projects. Both Corps district officials and nonfederal sponsors we interviewed most commonly identified similar advantages of nonfederal sponsors undertaking feasibility studies or construction projects: that consistent nonfederal sponsor funding led to expedited project implementation and increased sponsor flexibility to address local priorities. Specifically, officials from most of the Corps districts with projects led by nonfederal sponsors (13 of 16) noted that consistently available funding from nonfederal sponsors was a key advantage of nonfederal sponsors undertaking federal water resources projects. One Corps district official characterized the authority for nonfederal sponsors to implement projects as “a very powerful tool to get projects done because the federal budget continues to be tight.” According to another district official, a nonfederal sponsor’s funding helped mitigate a delay completing a project for which the Corps expected an appropriation in fiscal year 2003 but did not receive until fiscal year 2007. In another district, the nonfederal sponsor’s funding for and implementation of a construction project enabled the sponsor and the Corps to complete a flood damage reduction project to construct a reservoir in accordance with a court-ordered deadline. Similarly, most nonfederal sponsors we interviewed (14 of 20) indicated that, in general, providing consistent funding has led to less costly or faster project implementation than when the Corps leads feasibility studies or construction projects. For example, a nonfederal sponsor estimated that sponsors can implement design and construction phases that are 25 to 30 percent less costly than Corps-led design and construction phases. Another nonfederal sponsor said that it completed the remaining 6 miles of an 8-mile channel improvement project in the time it took the Corps to complete the first 2 miles, at a cost of approximately $25 million less than it would have cost if the Corps had continued to build the project. In addition to cost savings, another nonfederal sponsor said that it chose to lead a harbor deepening feasibility study and construction project for its port because it thought it could complete the work faster than if the Corps led the project. One nonfederal sponsor explained that expediting project completion is important because, in the case of flood control projects, a completed project can help save lives and reduce property damage. For navigation projects, expedited project completion may result in economic benefits, such as increased commerce and tourism from deeper-draft ships having the ability to enter ports that have been deepened, according to one nonfederal sponsor. In 2013, we reported that, among other factors, less than optimal federal funding contributes to cost increases on Corps- led projects, which result from the need to break work into smaller segments and modify contracts to extend completion schedules. Consistent with those findings and the views of nonfederal sponsors, officials from 15 of the 16 Corps districts we interviewed discussed the advantages of nonfederal sponsors’ ability to act sooner and expedite project timelines, such as that the nonfederal sponsors’ more consistent funding streams may help mitigate project delays and associated cost escalations and enable communities to realize the benefits of projects sooner. Corps district officials and nonfederal sponsors identified nonfederal sponsors not receiving reimbursement for the federal share of water resources projects as a primary disadvantage of undertaking such projects. Specifically, Corps officials in 6 of the 16 districts we interviewed noted that construction projects may be authorized in legislation but may not receive appropriated funds, which may result in nonfederal sponsors not getting reimbursed for projects they undertook. Ten of the 20 nonfederal sponsors we interviewed cited the risk of not being reimbursed, especially given constrained federal budgets and the Corps’ funding priorities, as a primary disadvantage of and potential deterrent to undertaking projects. Nonfederal sponsors said they understood that reimbursement from the Corps is subject to appropriated funds. However, one nonfederal sponsor said that others have been deterred from undertaking projects because of reimbursement concerns. That sponsor also said that it could be difficult in the longer term to maintain a collaborative partnership with the Corps if the likelihood of reimbursement remains low. Relatedly, one nonfederal sponsor said that in addition to providing full financial support for the project it undertook, it also spent time and resources—estimated at nearly $600,000—to obtain its reimbursement from the Corps. In three other cases, nonfederal sponsors said the Corps did not conduct its final accounting and reimbursement in a timely manner, placing additional burdens on nonfederal sponsors. For example, in two cases, the Corps is conducting in 2016 the financial closeout for projects that the nonfederal sponsors completed in 2006. One of these nonfederal sponsors had to incur additional public debt to maintain the Corps’ escrow requirements while the Corps completed its final accounting process. In another case, a nonfederal sponsor said it took the Corps 6 years to reimburse them and 11 years to close out the project after the nonfederal sponsor completed it. Corps headquarters officials agreed that taking 10 years to perform the financial closeout for these projects was a long time. However, the officials said that outstanding reimbursement claims, contract modifications, and delays in validating documentation to support nonfederal sponsor credits were some of the reasons for the protracted time frame. Corps officials and nonfederal sponsors we interviewed identified several challenges, as well as opportunities for improvement related to guidance and information sharing. Specifically, both cited challenges with the agency’s guidance for nonfederal sponsors undertaking feasibility studies or construction projects related to the clarity of roles and responsibilities, as well as the project implementation process and necessary documentation. Corps officials from three districts we interviewed said that it was challenging not to have guidance clearly defining each party’s roles and responsibilities. Specifically, a district official said that in one case the district worked with an experienced nonfederal sponsor that paid the Corps $100,000 for oversight to help ensure that its project would be eligible for reimbursement. However, the nonfederal sponsor also hired its own contractors to manage quality control and assurance. The Corps district official and nonfederal sponsor said this created some tension between the Corps and nonfederal sponsor regarding what constituted a reasonable level of oversight for reimbursable projects. The Corps district official indicated that guidance clarifying roles and responsibilities and level of oversight may help avoid duplication of efforts and cost. Another district official stated that guidance on roles and responsibilities, as well as the range of work products expected—such as cost estimates—may help ensure a common understanding of expectations from the onset of a study. The official said that the district worked independently with the nonfederal sponsor to provide supplemental direction—specifying the type of reviews required and work products expected—to more clearly communicate the expectations involved in each step in the Corps’ review process. In another district, the official said that the nonfederal sponsor became frustrated with delays in the Corps’ review process and a lack of clarity regarding who within the Corps was responsible for communicating decisions to the nonfederal sponsor. According to officials from that district, the result was that the nonfederal sponsor bypassed them and communicated directly with the Assistant Secretary of the Army for Civil Works for action and information on its project. In addition, both Corps district officials and nonfederal sponsors we interviewed experienced challenges with the Corps’ project implementation process. Corps district officials from 7 of the 16 districts we interviewed said that it can be challenging to work with nonfederal sponsors undertaking water resources projects who have limited experience partnering with the Corps since they tend to underestimate what it takes to implement projects. One Corps district official said it can be “very painful” and take a lot of effort to help less experienced sponsors understand the complexities of undertaking water resources projects because the detailed information they need is not available in guidance documents. In addition, officials from another district said that it is challenging to convey to nonfederal sponsors the Corps’ standards and criteria for reimbursement eligibility. Nonfederal sponsors also shared similar views on challenges related to the Corps’ project implementation process. Eight of the 20 nonfederal sponsors we interviewed said the Corps does not have clear guidance on the project implementation process, which in some cases hindered the nonfederal sponsors’ ability to efficiently implement projects. As one nonfederal sponsor stated, “the Corps has no clear-cut guidance for nonfederal sponsors on how to navigate the process.” The sponsor also said that often projects were hampered by the Corps’ identification of requirements after the fact, or as a result of policy changes that occurred during the process, which affected both project time frames and cost. In addition, nonfederal sponsors said that the multiple, lengthy reviews within the Corps—at the district, division, and headquarters levels— contributed to confusion and delays and added costs during project implementation. For example, one nonfederal sponsor said it took nearly a year and a half, after submitting a letter indicating its interest in undertaking a project, to sign an agreement with the Corps enabling the sponsor to initiate the project. Two other sponsors noted that the process of making changes to a project’s design was cumbersome because of the number and levels of review required before reaching the Chief of Engineers in Corps headquarters. Officials from more than half of the Corps districts we interviewed (10 of 16) said they do not rely on the agency’s guidance when collaborating with nonfederal sponsors conducting feasibility studies and construction projects. Instead, these officials indicated that they provide verbal direction to nonfederal sponsors as needed throughout the feasibility study or construction project for various reasons, including that the guidance is outdated, does not clearly establish the roles and responsibilities related to projects led by nonfederal sponsors, and does not provide the level of specificity that nonfederal sponsors need. For example, when we examined the guidance, we found that the Corps’ primary guidance—the Planning Guidance Notebook—has not been updated to reflect policy and process changes that the Corps has made since its publication in 2000, such as information related to the Corps’ planning process for feasibility studies. In addition, the guidance does not delineate the specific roles and responsibilities of the Corps or nonfederal sponsors for projects led by nonfederal sponsors. In February 2016, the Corps issued implementation guidance for feasibility studies led by nonfederal sponsors under WRRDA 2014. In this guidance, the Corps clarified that it is generally not authorized to provide assistance to nonfederal sponsors undertaking feasibility studies, except in certain circumstances in which the Corps is permitted to provide limited technical assistance under the Intergovernmental Cooperation Act. In addition, the Corps has developed draft guidance for construction projects led by nonfederal sponsors, which a Corps headquarters official said is being reviewed and is estimated to be issued in 2016. Nonfederal sponsors have played an important role in undertaking federal water resources projects when the Corps has been unable to do so because of funding constraints and competing priorities. However, the number of federal water resources projects undertaken by nonfederal sponsors and the amounts reimbursed to them cannot be reliably determined because the Corps does not have guidance for districts— which are responsible for overseeing such projects—on how to collect, record, and maintain accurate information about these projects. Without documented guidance for districts that result in consistent procedures for accurate recordkeeping for transactions and other relevant information related to projects led by nonfederal sponsors, the Corps does not have reasonable assurance that districts will consistently record information on such projects and that the information provided to headquarters on such projects will be accurate and reliable. To ensure that the U.S. Army Corps of Engineers has accurate information about federal water resources feasibility studies and construction projects led by nonfederal sponsors, we recommend that the Secretary of Defense direct the Secretary of the Army to direct the Chief of Engineers and Commanding General of the U.S. Army Corps of Engineers to establish documented guidance for accurate recording of transactions and other relevant information related to these projects. We provided a draft of this report for review and comment to the Department of Defense. In its written comments, reprinted in appendix III, the department concurred with our recommendation and stated that the Corps will establish documented guidance for accurate recording of transactions and other relevant information related to federal water resources studies and projects led by nonfederal sponsors within 18 months and distribute to the districts. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. 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 IV. This report examines (1) the authorities that enable nonfederal sponsors to undertake a feasibility study or construct an authorized water resources project, (2) the extent to which nonfederal sponsors have undertaken federal water resources projects and the information the Corps has about them, and (3) Corps officials’ and nonfederal sponsors’ views on the lessons learned from these projects. To identify authorities that enable nonfederal sponsors to undertake feasibility studies or construction projects, we reviewed water resources development legislation enacted from 1968 to June 2014 and identified five statutory provisions. In addition, we identified project-specific legislation that authorized nonfederal sponsors to undertake specific water resources projects. We shared our list with Corps headquarters officials to ensure that we had identified all relevant statutes. To determine the extent to which nonfederal sponsors have conducted federal water resources projects and the information the Corps has on them, we developed an online data collection instrument. We discussed the types of information available and terminology with Corps headquarters, division, and district officials. We used water resources development legislation from 1986 as the starting point for our data request because this legislation fundamentally changed the way the Corps planned and financed federal water resources projects. We pretested the data collection instrument with one district and made adjustments to the instrument on the basis of this pretest. We administered the data collection instrument to all 38 Corps districts responsible for civil works projects. Using this instrument, we asked each district to identify feasibility studies or construction projects from the enactment of the Water Resources Development Act of 1986 that nonfederal sponsors undertook in their districts under one or more of the statutory provisions we identified, or under a project-specific authorization. The data collection period was approximately May to September 2014. We achieved a 100-percent response rate. Using the data obtained with the instrument, we totaled the number of projects led by nonfederal sponsors that were reported by districts. We also produced descriptive information about these projects, including a summary of project locations, project purposes, project phases, completion status, and total estimated project costs using the answers to the following questions from the online data collection instrument shown in table 3. We clarified and confirmed data we obtained through the data collection instrument through follow-up interviews with Corps district officials. We also compared information we collected from the Corps districts on reimbursements to nonfederal sponsors with information provided by Corps headquarters on reimbursements to nonfederal sponsors. Through this process, we identified a number of discrepancies between the reimbursement information on projects led by nonfederal sponsors reported to us by Corps districts and the information provided by Corps headquarters. We interviewed Corps headquarters officials to understand the potential reasons for the discrepancies and asked them to reconcile the differences. They added 13 projects to the list we collected directly from the districts and modified some of the reimbursement amounts, but they did not provide satisfactory explanations for all of the changes. Therefore, the reimbursement data are reliable for reporting an estimated aggregate reimbursement amount to give a sense of magnitude, but they may not be accurate at the individual project level, as discussed in the report. We also reviewed relevant agency guidance documents, such as Corps-issued engineer regulations and policy documents that provide implementation guidance, as well as partnership agreements between the Corps and nonfederal sponsors, federal standards for internal control, and leading practices for collaboration. To obtain views on lessons learned from projects led by nonfederal sponsors, we conducted semistructured telephone interviews with Corps officials from 16 districts that reported overseeing at least one feasibility study or construction project undertaken by a nonfederal sponsor. We conducted similar semistructured telephone interviews with several of the nonfederal sponsors that undertook feasibility studies or construction projects to get their perspectives on the lessons learned from these projects. Specifically, we interviewed 20 of the 28 sponsors undertaking 32 projects. The remaining nonfederal sponsors either did not respond to our request for an interview or did not have a representative with direct knowledge of the project with whom we could speak. We analyzed the information from the interviews we conducted with district officials and nonfederal sponsors qualitatively, including conducting a content analysis on selected questions related to the advantages and disadvantages of projects led by nonfederal sponsors and lessons learned from these projects. Table 4 shows the questions we asked the Corps district officials and nonfederal sponsors to obtain their views on lessons learned. We conducted this performance audit from January 2014 to December 2016 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. In response to our data collection request, Corps districts provided a variety of information on federal water resources projects undertaken by nonfederal sponsors—specifically, feasibility studies and construction projects. Table 5 lists the project names, responsible districts, and project locations of federal water resources projects undertaken by nonfederal sponsors, 1986 through 2014, as reported by Corps district offices. Corps districts reported that from 1986 through 2014, 28 nonfederal sponsors undertook 32 water resources projects: 11 feasibility studies and 21 construction projects. Sixteen of the 38 Corps districts responsible for civil works projects oversaw these projects, which varied in geographic location and project type. According to the data Corps districts provided in response to our request, a majority (21) of the 32 water resources projects undertaken by nonfederal sponsors were located in California and the states along the Gulf of Mexico: Florida, Louisiana, Mississippi, and Texas. Other water resources projects were scattered across the United States. For example, Georgia, Illinois, Kansas, Nebraska, Nevada, Oklahoma, Oregon, and Virginia each had one project led by a nonfederal sponsor, and Alaska had two projects (see fig. 3). In addition to geographic variation, nonfederal sponsors undertook projects for different project purposes and for different phases of the project, based on responses from Corps district offices. In total, nonfederal sponsors undertook 11 feasibility studies: 8 for navigation and 3 for flood damage reduction. They also undertook 21 construction projects: 4 for navigation, 16 for flood damage reduction, and 1 for ecosystem restoration. As of September 2014, the feasibility studies and construction projects nonfederal sponsors had undertaken were at various stages of completion, according to information provided by Corps district offices. Specifically, nonfederal sponsors had completed more construction projects than feasibility studies—14 of 21 construction projects and 3 of 11 feasibility studies. The Corps district offices reported that the total estimated costs of feasibility studies and construction projects for each project undertaken by nonfederal sponsors ranged from approximately $500,000 to just over $600 million, and overall, totaled approximately $4 billion. (See table 3 in app. I for the data collection instrument questions we asked Corps districts to obtain this information.) In addition to the contact named above, Vondalee R. Hunt (Assistant Director), Richard Burkard, Joanna Chan, John Delicath, Juli Digate, Mitchell Karpman, Stuart Kaufman, Jamie Meuwissen, John Mingus, Carl Ramirez, Anne Rhodes-Kline, and John Scott made key contributions to this report. | Through its Civil Works program, the Corps designs, constructs, and maintains federal water resources projects, such as levees for flood risk management. Under certain authorities, nonfederal sponsors, such as states and local governments, may undertake studies or construct projects and may be eligible for reimbursement or credit for the federal share of costs. GAO was asked to examine federal water resources projects undertaken by nonfederal sponsors. This report examines (1) the authorities enabling nonfederal sponsors to undertake studies or projects, (2) the extent to which such sponsors have undertaken federal projects and the information the Corps has about them, and (3) the Corps' and sponsors' views on lessons learned from projects. GAO reviewed federal laws and agency guidance; collected information about studies and projects led by nonfederal sponsors from 1986 through 2014 from all 38 Corps districts responsible for civil works; and interviewed Corps officials in 16 districts that have overseen at least one such study or project, as well as 20 nonfederal sponsors that have undertaken projects. Authorities that allow nonfederal sponsors to undertake federal water resources projects, including feasibility studies and construction projects, have been included in various federal statutes since 1968. Until June 2014, when Congress enacted the Water Resources Reform and Development Act, five federal statutory authorities allowed nonfederal sponsors to undertake studies or construction of federal water resources projects such as flood control projects. The 2014 act amended and consolidated prior statutory provisions authorizing water resources projects. The number of federal water resources projects nonfederal sponsors have undertaken and the amounts they have been reimbursed for the federal share of these projects cannot be reliably determined. The U.S. Army Corps of Engineers (Corps) does not track this information at the headquarters level and has delegated the responsibility for tracking and overseeing such projects to the districts. While Corps headquarters collects information from the districts on reimbursements, the information that headquarters provided GAO did not match the information that the districts provided to GAO. For example, the number of reimbursed projects and the amount of reimbursements made to nonfederal sponsors were inconsistent in the two data sets. Corps headquarters officials could not fully explain why differences existed and could not identify any Corps policies or procedures that provide guidance to the districts on the type of information to collect and maintain on projects led by nonfederal sponsors. Federal standards for internal control call for all transactions and other significant events to be clearly documented, and for accurate and timely recording of transactions and events. Without documented guidance for districts regarding recordkeeping for projects led by nonfederal sponsors, the Corps does not have reasonable assurance that districts will consistently record information on such projects and that the information districts provide to headquarters on these projects will be accurate and reliable. Corps district officials and nonfederal sponsors GAO interviewed identified several lessons learned from projects undertaken by nonfederal sponsors. For example, officials and nonfederal sponsors frequently cited enhanced partnerships and communication as areas that worked well on projects led by nonfederal sponsors. In contrast, both Corps district officials and nonfederal sponsors cited various challenges in existing Corps guidance. For example, officials noted that Corps guidance does not clearly establish roles and responsibilities for these projects, and nonfederal sponsors said the Corps does not have clear guidance on the project implementation process. The Corps issued implementation guidance for feasibility studies led by nonfederal sponsors in February 2016 in which it clarified that it is generally not authorized to provide assistance to nonfederal sponsors undertaking feasibility studies, except in certain circumstances in which the Corps is permitted to provide limited technical assistance to nonfederal sponsors. The Corps has also developed draft guidance for construction projects led by nonfederal sponsors, which it estimates it will issue later in 2016. GAO recommends that the Corps develop guidance for accurate recording of transactions and other relevant information about projects undertaken by nonfederal sponsors. The agency agreed with GAO's recommendation. |
Under the Housing Act of 1937, as amended, the Congress created the federal public housing program to assist communities in providing decent, safe, and sanitary dwellings for low-income families. However, it was not until 1975 that HUD established a permanent system known as the Performance Funding System (PFS) for subsidizing public housing. For years, the public housing program was self-sufficient because it was open only to residents whose incomes were high enough for them to be able to pay rents that would cover operating costs. The program began to move toward serving poorer households with the Housing Act of 1949, which required incomes of eligible households to be 20 percent below the income necessary to rent decent private housing. Also, during the 1950s and 1960s, the average income of public housing tenants began to fall as the more upwardly mobile households found affordable housing elsewhere. By 1969, public housing had shifted to serving the poorest households, those who had difficulty paying rents that were high enough to cover the full costs of public housing operations. As a result, the Congress passed the Brooke Amendments, beginning in 1969, which limited the rent that tenants could be charged to 25 percent of their incomes and authorized a program of federal subsidies to pay for the operating costs that public housing agencies could no longer meet with rental income alone. By the mid-1970s, rising subsidy costs, along with concern in the Office of Management and Budget and the Congress that the system did not provide an incentive for good management, led to the 1974 Housing Act mandating that the Secretary of HUD establish a mechanism for subsidizing the cost of providing public housing. As a result, HUD developed PFS in 1975; since then, PFS has come under almost constant review in efforts by HUD and others to find a more effective mechanism for allocating congressional appropriations to housing agencies. Provisions in pending housing reform legislation would require HUD to create a block grant to cover operating expenses and to develop a new formula for allocating that grant. After implementing PFS in 1975, HUD began allotting operating subsidies to housing agencies on the basis of their costs in the base year 1975. Since then, HUD has adjusted the base year costs annually for inflation and other factors to update the allowable costs of operating public housing. The subsidy that HUD provides is the difference between a housing agency’s income and these allowable costs. Although HUD did not base housing agencies’ allowable expenses on what it should cost to provide a standard set of housing services, twice over the program’s life the Department has used quantitative cost models, based on two different sets of cost data, to better define subsidy levels: once at the outset to establish an upper limit for allowable costs and again in 1992 to adjust some agencies’ costs that, according to the second cost model, were less than 85 percent of their predicted levels. HUD and its contractors did not believe that the results of the statistical analysis provided a standard of what agency expenses should be or need to be to efficiently provide a commonly understood standard of service in public housing. HUD implemented its system for subsidizing public housing agencies in 1975, basing it on the HUD-approved operating expense level incurred by housing agencies that year. HUD also developed a cost model, called the “prototype equation,” that was based on the costs of a group of well-managed agencies. The equation was used to predict housing agencies’ operating costs and to thereby establish a limited range of costs within which HUD expected housing agencies to operate. HUD and the Urban Institute, which developed the model for HUD, reported that the model did not produce an estimate of what housing agencies should or need to spend for housing services. Instead, based on a set of five cost-related factors, the model produced for every agency a predicted, or prototype, expense level that could then be compared with the actual expenditures that formed the subsidy’s basis. HUD believed that this comparison showed which agencies had spending that significantly exceeded the comparable expenses derived from a group of well-managed agencies, after controlling for their differences in the five factors. Without a method to establish what operating expenses are necessary to provide some standard level of services—nor a method to define what that standard level of services would consist of—HUD chose to use each agency’s actual operating expenses in 1975 as its standard baseline amount, not including utility and audit expenses. Since then, the subsidy a housing agency receives each year is its prior year’s allowable expenses—adjusted for (1) additions or deletions to its housing stock, (2) inflation, and (3) an additional 0.5 percent to allow for higher costs associated with an aging housing stock—less the amount of rental and other income the housing agency receives. Thus, the PFS subsidy is the shortfall between an agency’s allowable expenses and its income. In years when the congressional appropriation has not been sufficient to cover the shortfall, HUD has proportionally reduced each agency’s subsidy to conform to the amount appropriated. To develop the prototype equation, a 1975 study by the Urban Institute identified certain operating characteristics of housing agencies that were related to the agencies’ operating expenditures. On the basis of operating performance and responses to questionnaires, the study identified a group of local agencies considered to be well managed at the time. The Urban Institute used these agencies’ costs to identify five characteristics of a local agency’s housing operations that were directly related to operating expenditures per housing unit, per month, called per unit-month costs, and determined the relative impact of the characteristics on the overall cost of operations. On the basis of the Urban Institute’s study, HUD established an upper limit for expenses and beginning in 1975 limited the growth in allowable expenses for housing agencies that had expenses that significantly exceeded the level predicted for them by the prototype equation. In 1992, HUD implemented the results of a second study in a subsidy review process mandated by the 1987 Housing and Community Development Act. This study’s approach was similar to the Urban Institute’s approach. It also identified five cost factors that were related to local agencies’ operating costs, but it used different factors and drew on the past expense levels of a much larger sample of housing agencies. The act required this study, in part, to correct inequities in the base year expense level, to accurately reflect changes in operating circumstances, and to reflect the higher cost of operating in an economically distressed unit of local government. If an agency’s allowable expense level was less than 85 percent of the amount calculated by the new PFS formula developed in the 1992 study, the allowable expense level would be increased to the 85-percent level. At that time, this adjustment was expected to effect 868 housing agencies, most of which were small. HUD believed that its PFS formula was not sufficiently accurate to change agencies’ allowable costs that differed by less than 15 percent from the value predicted by the formula. A lower percentage would have been more costly because it would have permitted more housing agencies to increase their allowable costs. Because the agencies that qualified for the increase in allowable expenses were comparatively small, this review added only 1.4 percent to the total federal subsidy for that year. Although HUD’s 1992 study related operating costs to certain characteristics of a housing agency, HUD did not use the new formula to establish specific allowable expense levels for all housing agencies. Instead, for most agencies, the allowable expense level continued to be based on past actual costs. HUD officials believed that the 1992 cost model improved on the prototype equation in several respects, but they still had concerns about whether the model reflected all the important circumstances and conditions affecting housing agencies’ costs. For example, none of the cost factors accounted for the condition and quality of the housing stock. In addition, neither the Urban Institute’s nor HUD’s analysis controlled for differences in the effect that varying maintenance practices would have had on expenditures and on the varying physical condition of agencies’ housing stock. Consequently, the studies’ statistical analyses simply reflect historical spending patterns rather than differences in the cost conditions at different locations. Moreover, the spending patterns analyzed in 1992 might not have accurately reflected the true costs of operating public housing because spending had been limited since 1975 by housing agencies’ available revenue—the sum of the PFS subsidy and rental and other income. The operating subsidies that HUD provides through PFS are not sufficient to adequately supplement some housing agencies’ operations budgets. Although these agencies’ base year costs were limited by the prototype formula where necessary, adjusted for inflation and other effects, and converted into their current allowable expense levels, the expense levels still reflect housing conditions, management policies, and, most importantly, the spending patterns that existed almost a quarter of a century ago. PFS has not adapted to the housing agencies’ changing needs, residents, or operating circumstances. Therefore, the housing agencies that either had inadequate resources in 1975 because they were serving extremely poor residents or had changes in their operating circumstances over the years that had a substantial impact on their costs may not be receiving adequate subsidies today to operate effectively. For example, each of the four large housing agencies we visited had experienced changes in its circumstances since PFS was implemented in 1975. The significant actions taken by the housing agencies’ managers to address these changes demonstrate that the operating subsidies they receive from HUD may not be sufficient to meet their agencies’ needs. These agencies have deferred maintenance expenses, reduced staffing in critical areas, and supplemented their operating budgets with funding from other federal grants. The four agencies took these and other actions, despite being reasonably well managed according to HUD’s management assessment program. Finally, we found that 17 percent of the housing agencies had had declining operating reserves during their fiscal years ending in 1992 through 1996. In particular, 4 of the 21 extra large housing agencies (those operating 6,600 or more housing units) had declining reserve levels in 3 of the last 4 years. One of the uses that housing agencies make of operating reserves is to pay for operating expenses. For example, officials at the Miami-Dade Housing Agency stated that they use reserves to pay for maintenance when their operating income—primarily comprising rent receipts and the PFS subsidy—is insufficient. When HUD adopted PFS, housing agencies’ expenditure levels varied significantly according to the rental income they could collect from their tenants and other factors such as the quality of their housing stock and neighborhood characteristics. Annual expenditures were driven by the level of maintenance needed to keep the housing stock in good condition, neighborhood and tenant characteristics that affected both security expenses and the residents’ need for social services, local agencies’ policies regarding the volume and types of social services they made available to residents, and agencies’ criteria for selecting and evicting tenants. A 1980 Urban Institute study of 17 large housing agencies reported that comparatively wide differences existed among housing agencies in expenditures for operating activities in 1975. The expenditures ranged from a low of $45.18 per unit-month in Columbus, Ohio, to $95.49 per unit-month in Los Angeles. The variations that existed in 1975 have been perpetuated by PFS until today, even though the operating circumstances for many agencies are likely to have changed significantly. Although HUD adjusts agencies’ allowable costs each year for inflation, the adjustment may not cover the agencies’ total cost growth. In determining the inflation adjustment to housing agencies’ allowable cost levels, one of the factors that PFS uses is the Wages and Salaries Index of the Employer Cost Index published by the Department of Labor. However, a similar index, the Total Compensation Index, also tracked and published by the Labor Department, may be more comprehensive because it includes the value of employee benefits, such as health insurance premiums. Using the Total Compensation Index instead of the Wages and Salaries Index would mean a higher subsidy because over the period 1980 through 1997, the Total Compensation Index increased by 6 percent more than did the Wages and Salaries Index. Because labor costs are approximately 60 percent of housing agencies’ expenses, estimated annual funding needs for PFS would more accurately reflect housing agencies’ costs each year if HUD calculated inflation on the basis of the Total Compensation Index rather than the Wages and Salaries Index. However, using the Total Compensation Index would also raise the annual subsidy by 3 to 4 percent, or approximately $100 million. At each of the four large housing agencies we visited, we found conditions similar to those described by HUD in its annual performance plan submitted to the Congress in early 1998. The Department noted decades of mistakes in public housing, including flawed site plans and architecture, buildings that have outlived their useful lives, and neighborhoods that have changed from healthy residential settings to isolated pockets of poverty and despair. We found that because of these conditions, housing agency managers believed that PFS significantly underfunds their need for subsidy. They attributed inadequate subsidies primarily to PFS’ inability to recognize that changing circumstances over the past 23 years have increased housing agencies’ costs in areas such as crime deterrence, management information systems, and maintenance. We observed housing conditions and spoke with housing managers at many of the agencies’ developments, who were nearly unanimous in their belief that crime, aging physical stock, and the poor design and layout of the housing itself were the primary factors causing their costs to rise today. They told us that their operating costs are significantly higher now—even taking inflation into account—than they were when PFS set their agencies’ allowable expense levels in 1975. Table 1 summarizes the information we obtained at the four housing agencies. Although all the housing agency managers we spoke with believed that PFS was insufficient to meet their agencies’ needs, this belief was not always shared by officials at the local HUD field offices. For example, the director of public housing in HUD’s Maryland State Office said that the Housing Authority of Baltimore’s allowable expense levels seemed to be sufficient to operate the agency’s developments; however, he also said that these expense levels would not be adequate to protect the investment Baltimore is making in its newly rehabilitated developments. He added that although other HUD-assisted properties not owned by the housing agency receive less revenue to operate than the Baltimore City agency receives, the housing agency has specific circumstances—such as high-cost family high-rises, large aged developments, very-low-income tenants, and higher crime rates—that raise its operating costs above those of privately owned properties. In Florida, HUD’s director of public housing said that PFS does not provide housing agencies with sufficient subsidy, even in years when the Congress funds it at 100 percent of HUD’s request. She said that despite the insufficiency of the subsidy, housing agencies generally perform satisfactorily and often add a small amount to their operating reserves at the end of the year. She also said, however, that most supplement their operating budgets with funds from other sources, including HUD’s Comprehensive Grant Program for major housing repairs and modernization; HUD’s Public Housing Drug Elimination Program; and other federal, state, and local grant programs. She said that supplemental funding is necessary because “PFS is an antiquated system that does not fund the operating costs of new programs that have come on-line in the public housing industry.” For the most part, officials at the four agencies that we visited told us that since HUD set their allowable costs in 1975, new cost categories have emerged and costs in established categories have risen. For example, abating lead-based paint has become a significant cost at some agencies. And the cost of protective services—while always necessary—has increased along with the cost of maintaining ever-aging buildings and the cost over time of poor geographic locations or physical layouts that facilitate increased crime. Conditions at the following housing developments illustrate some of the factors that increased operating costs in recent years: O’Donnell Heights in Baltimore. Illegal drug activity has worsened over the last decade but is difficult to deter because of the large size and openness of O’Donnell Heights. Because of the high crime rate—worse than in the surrounding neighborhood—residents frequently request to transfer or to relocate. To help control crime, the development uses special lighting and two police officers but does not have contract security, fencing, security cameras, or controlled entry. Claremont Homes in Baltimore. Claremont’s per unit-month expenses (before utilities) are about $383, 24 percent more than the average for the housing agency. Claremont’s housing manager said that renovating vacant units to abate lead hazards and replace almost all of the original plumbing fixtures and cabinetry has had the most impact on maintenance costs. Claremont’s low-rise units are very costly because they have the original steam-heated radiators and plaster walls that are damp because of poor ventilation and need constant repainting and replastering. This maintenance must be done frequently because the paint in the units is lead-based and poses a health hazard if it is allowed to peel and crack. These maintenance costs have grown until they have become a significant portion of the development’s total operating costs. Housing agency officials are concerned about the potential for incurring additional costs from litigation if they cannot keep up with the lead abatement needed as the paint continues to chip and peel. Chouteau Courts in Kansas City. At this development, both residential sewage and rain water feed into the same sewerage transfer system. Heavy rains cause the sewers to back up into the basement of one of the buildings, causing damage, creating significant health hazards, and resulting in additional costs for the housing agency. Dana Strand in Los Angeles. Housing managers cited increasing maintenance as having the greatest impact on their operating costs, and they attributed the increase to the age of Dana Strand’s buildings. Officials cited corroding water and gas lines, rotting window sashes, and old electrical conduits as not only maintenance problems but also contributing to hazardous living conditions. For example, water leaking from corroded plumbing accelerated the corrosion of gas pipes, resulting in a gas explosion that injured several tenants and blew off a portion of the building’s roof and walls. Housing agency officials told us that similar plumbing problems exist at other developments. Scott Homes in Miami. Increasing crime and vandalism, the age of the development, and the need for grounds keeping and waste management all contribute to the increased operating costs at Scott Homes. Crime in the development and its surrounding community gives Scott Homes a bad reputation that makes it difficult to attract residents, especially working families. Vandals steal copper pipes and security windows from vacant units, shoot out lights, and steal street signs. Physical deterioration of the housing is evident in rotting door frames, water pipes that break and leak into units, and appliances that have outlived their usefulness. Since fiscal year 1995, grounds-keeping costs have nearly tripled because of the extensive tree trimming needed to prevent damage to buildings and sidewalks. Meanwhile, Miami’s strict dumping requirements have caused the housing agency’s waste management costs to nearly double. To cope with insufficient subsidies, we found that the management teams at the four housing agencies we visited supplemented their operating budgets with funding from other HUD programs, including the Comprehensive Grant Program, the HOPE VI urban revitalization program for severely distressed housing, the Public Housing Drug Elimination Program, and any remaining funds from the Major Rehabilitation of Obsolete Properties program that were awarded several years ago. Some agencies also supplement their public housing operating budgets with a portion of the administrative fee they receive from HUD in return for operating Section 8 tenant-based assisted housing programs. We found that a frequently used source of additional funding was the Comprehensive Grant Program for modernizing and rehabilitating deteriorated housing stock. Federal statutes and regulations have provided two ways for housing agencies to use up to 30 percent of the grants from this program to address operations needs. First, provisions in the HUD appropriations acts for fiscal years 1996 and 1997 permitted housing agencies to use 10 percent of their Comprehensive Grant Program funding for activities related to operations. The Congress did not include this provision in the fiscal year 1998 act, however. Second, HUD allows a housing agency to use up to 20 percent of its Comprehensive Grant for “management improvements.” HUD’s regulations state that eligible costs under general management improvement include those incurred for operating activities like management and accounting systems, security, rent collection, and maintenance. In a survey of over 800 housing agencies done by the Public Housing Authority Directors Association, 20 percent responded that they use modernization funds to cover operating expenses. The Council of Large Public Housing Authorities, which represents over 100 of the larger agencies, believes that many of its member agencies use Comprehensive Grant funding to cover operating expenses, but the extent of the practice is unknown. Having maintenance costs eligible under the Comprehensive Grant is important to housing agencies because maintenance is generally the single largest expense in their operating budgets. The impact on a housing agency’s operating budget of using a significant portion of its Comprehensive Grant to cover the management and administration of the agency can be substantial. For example, officials at the Housing Authority of Baltimore City said that the agency generally uses the full 20 percent of modernization funding that it is allowed to cover management improvement costs. In fiscal year 1997, this amounted to about $6 million of the agency’s $75 million operating budget. An additional source of funding for operations is the Public Housing Drug Elimination Program that was authorized in the Anti-Drug Abuse Act of 1988 and implemented by HUD the following year to help housing agencies combat drug use and drug-related crime. The program authorizes many activities, including security and drug education. However, because the grants are competitive, agencies that receive a grant one year are not guaranteed to receive a grant the next year. Moreover, the funding has become more of a necessity in recent years. A 1994 HUD study of the program noted that all of the agencies included in the study had suffered from “the upsurge of drug activity during the 1980s as well as the increasing impoverishment of public housing resident populations.” Deferred maintenance and staffing cuts also rank high among housing agencies’ tools for coping with funding shortfalls. In Kansas City, officials said they reduced administrative and maintenance staff and deferred maintenance to fund the new or increased operating expenses. Deferred maintenance can be costly, however. For example, although the Miami-Dade Housing Agency has in the past replaced roofs before leaks occur, its current practice is to defer replacement until after leaks are detected. This practice leads to other costs, including damaged walls, floors, and electrical systems. According to housing agency officials, the long-term consequences of their coping strategies will be to undermine the viability of the housing stock and to place an unjustified dependence on grants, such as the drug elimination and HOPE VI grants, that may not continue indefinitely. Housing officials in Baltimore told us that deferring maintenance items means that they eventually become “extraordinary maintenance” or emergency items that must be addressed. The comptroller of the Baltimore agency said that although he requested modernization funds for extraordinary maintenance at the O’Donnell Heights development, so many other demands for this funding exist that O’Donnell’s needs are not yet a priority. Agency officials in Baltimore said that in general, the potential result of long-term underfunding is that many of their units eventually will become uninhabitable and need to be demolished. They said that HOPE VI program grants will help to deal with some of these problems, but accomplishing adequate maintenance before excessive deterioration becomes evident is more cost-effective. They also recognized that the HOPE VI funding will not continue indefinitely. Each year, HUD’s Office of Finance and Budget forecasts how much will be needed to fund PFS’ operating subsidies for the fiscal year by estimating the future costs of a sample of housing agencies and projecting these costs to the total population of nearly 3,200 agencies. HUD bases this estimate on expense data from a stratified sample of housing agencies; factors from the PFS formula; and several assumptions, including forecasts of tenant income, inflation, and energy costs. However, because agencies’ expense data may not accurately reflect their need for subsidy, the budget estimate likewise does not accurately reflect the costs of adequately providing public housing. In addition, in years when HUD’s budget estimate is not fully funded by the congressional appropriation, HUD prorates the appropriation across all agencies, which results in a relatively greater hardship for the agencies that are more dependent on the subsidy to help cover their expenses. HUD’s process for developing its PFS budget estimate begins with obtaining data on allowable expense levels, income, and utility expenses from a sample of 213 public housing agencies. This sample includes all of the 146 large agencies (those with 1,250 or more housing units) and a randomly selected sample of 67 small to medium-size agencies (those with 100 to 1,249 units). The 146 large agencies in the sample account for about 74 percent of total expenditures by public housing agencies to cover operating costs. To prepare the budget estimate for fiscal year 1999, HUD obtained data from fiscal years 1996 (the last completed fiscal year of the housing agencies in the sample) and 1997 (to the extent that data were available). HUD then adjusted the allowable expense level for each housing agency in the sample to reflect major changes in circumstances—such as significant additions or deletions to the housing stock—from fiscal year 1996 to fiscal year 1999. For agencies that reported changes in the PFS formula’s predictive cost factors, such as the number of units built before 1940 and the local government employee wage rate, HUD used the formula to adjust these agencies’ expense levels. After making these adjustments to individual expense levels on the basis of the most recent changes, HUD computed an overall weighted average for the sample of 213 housing agencies. HUD then determined the percentage change in the sample’s new expense level from the prior year’s level. HUD assumed that the expense levels of all housing agencies increase in the same proportion as the expense levels of the agencies in the sample. Finally, HUD increased the projected allowable expense levels according to the Office of Management and Budget’s estimate of inflation in fiscal year 1999. Other assumptions that HUD makes in preparing its budget estimates involve utility costs and residents’ incomes. To estimate utility costs, HUD obtains the value of utility costs in the last year for which data are complete and adjusts the value for projected changes in utility prices, using forecasts from the Department of Energy’s Energy Information Administration. HUD does not attempt to adjust utility costs for changes in weather or the aging or rehabilitation of buildings in specific markets or nationwide. HUD also makes projections of residents’ income. For several years in the early 1990s, HUD assumed that the income of public housing residents—and therefore the rental income available to housing agencies—remained unchanged. However, budget estimates for fiscal years 1998 and 1999 have assumed a small increase in incomes, based on recent income trends and the presumed effect of welfare reform. For several reasons, HUD’s budget estimate for PFS may differ from actual expenses in the budget year. As shown in figure 1, to develop projections for fiscal year 1999, HUD began in mid-1997 and based the projections on fiscal year 1996 data and some fiscal year 1997 data, when available. (The time line represents a typical budget cycle; specific dates may vary from year to year.) Thus, the data used for the 1999 budget estimate were generated 2 to 3 years before the budget year. Furthermore, because of the time lag between when housing agencies’ expenditures occur and when HUD obtains these data and uses them in the budget estimate, some estimating inaccuracy is introduced into this budget estimate. The inaccuracy could be further magnified because of the 2-year period between the time HUD completes its budget estimate and the time the housing agencies spend their allocations. Similar estimating errors are made in other agencies’ budget estimates across the federal government; however, housing agencies are particularly affected by errors that result in underfunding because they spend almost all their subsidies on salaries for their staff during the year that they receive the funds, rather than using the funds for capital expenses, contracting, and other spending over several years. Shortages, therefore, generally mean staff layoffs or other unplanned and immediate cost reductions. Because of the large number of housing agencies and the difficulty of obtaining current data for each agency, the potential inaccuracy in HUD’s budget estimate for PFS may be unavoidable. Instead of reducing the inaccuracy, therefore, accommodating it through a central supplemental or reserve fund might offer a funding cushion to absorb the effect of inadequate subsidies. In addition, encouraging housing agencies to maintain larger operating reserve funds at the local level could have a similar effect. To justify a central reserve fund, HUD may need to collect data to document the extent of any estimating inaccuracies. HUD’s procedure for reducing subsidy payments when the budget appropriation does not fully fund its budget request for PFS operating subsidies may be inequitable because it does not affect all housing agencies equally. When the appropriation is not sufficient to fully fund agencies’ operating subsidies, HUD reduces the amount of each agency’s subsidy by the same percentage. Although this represents an evenhanded reduction in the federal PFS subsidy amount across all housing agencies, it produces unequal reductions in local agencies’ operating budgets because some agencies depend to a higher degree than others on the PFS subsidy to supplement their operating budgets. For example, in response to the fiscal year 1996 appropriation for PFS being below HUD’s request by 11 percent, HUD reduced each agency’s subsidy by 11 percent. At an agency where the subsidy constituted 20 percent of the total revenues, that reduction in the subsidy would result in a more than 2-percent decline in total operating funds. At an agency where the subsidy constituted 60 percent of the total revenues, however, the same reduction would result in a more than 6-percent decline in total operating funds. As table 2 shows, HUD funding makes up between 20 and 60 percent of the operating income of 2,176 housing agencies (over 70 percent of all agencies). For 360 agencies (or 12 percent of all agencies), at least 60 percent of their operating income comes from HUD’s PFS subsidy. In addition, the larger the housing agency, the greater the reliance on HUD funding. For instance, while about 24 percent of the extra small and small housing agencies received more than half of their operating income from HUD, almost 41 percent of the medium-size agencies and nearly 68 percent of large agencies received more than half of their operating income from HUD. HUD funding represented more than half of the operating income for all 17 of the extra large agencies, which managed 31 percent of all public housing units in the country. To make PFS a system that more effectively supplements housing agencies’ operating budgets, HUD has several design options, including basing subsidies on fair market rents, comparing private and public housing costs to determine a reasonable cost and set of services, and using the five-factor cost model it developed in 1992. In redesigning PFS, HUD also will have the opportunity to better address questions of whether PFS is adequate to fund public housing and whether it provides an equitable subsidy to specific housing agencies, given the varying circumstances that exist across agencies. For example, HUD will be able to revisit its policy of not allowing housing agencies to appeal the subsidy provided to them through PFS. Under HUD’s Management 2020 Reform initiative, the Department plans to reorganize its field staff by creating centralized centers for payments and oversight that may be better able to administer an appeals process than the current network of field offices. HUD also is developing new data on the physical conditions in public housing that should assist the Department in understanding the magnitude of the current need for maintenance, which, in turn, should shed light on the adequacy of the operating subsidy and the Comprehensive Grant Program to meet that need. Finally, pending legislation in the Congress (H.R. 2 and S. 462 have passed the House and Senate, respectively, and are awaiting the results of a House-Senate conference expected later this year) would give public housing agencies greater flexibility in whom they house and greater certainty in their annual funding through block grants covering capital and operating expenses. If the pending legislation is enacted, HUD will be required to determine new formulas for providing the block grants to housing agencies. In revising PFS, we believe that HUD will need to address the issues of both adequate and equitable funding. Adequacy means determining whether available funding—both federal subsidies and income from tenants’ rents and other sources—is sufficient to fund a consistent set of housing services across all housing agencies to enable them to provide decent, safe, and sanitary housing to low-income people who cannot find affordable housing in the private market. Equity is concerned with distributing the subsidy fairly by accounting for operating circumstances unique to individual housing agencies. To achieve funding adequacy, HUD could define the standard housing services it expects of a housing agency operating a housing stock with average characteristics in terms of its age, size, design, and construction and serving a tenant population with average demographic characteristics, such as family size and income. Funding equity would, in principle, account for the number of units an agency manages and the unique operating circumstances it faces. In this way, PFS could adjust agencies’ standard expense levels to account for differences in housing stock, tenant population, and income received from rent and other sources. This model of funding adequacy and equity is represented schematically in figure 2. Funding adequacy is represented by a national standard expense level and equity by the factors associated with cost, the number of housing units, and the income of the agency. Defining funding adequacy and equity is relatively simple compared with the task of implementing these concepts in designing a new PFS. Developing statistical indicators for both the adequacy and equity factors involves many choices for HUD. In the following discussion, we identify the major possibilities and some of the pros and cons of each approach. The following discussion is based on our prior work and on work that we have ongoing to review and develop options for other formula-based funding programs similar to PFS. In addition to issuing reports on Medicaid, the Older Americans Block Grant, the Law Enforcement Block Grant, and the Highway Grant Formulas, we recently worked closely with congressional staff to develop options for targeting HUD’s Community Development Block Grant. Thus, we believe that to develop a national standard for operating public housing, HUD could take several approaches, including the following: HUD could base a national standard on the operating expenses necessary to deliver an allowable and expected “basket of services” at a “well-managed” housing authority and use data from a selected sample to estimate the national average cost of providing that mix of services. Some of these “should-cost” data could be based on the cost per unit of services in the private market. HUD considered this option during its formal review process in 1992 and decided against it partly because of difficulties in reaching a consensus as to what standards to use and what type of non-housing agency projects to select for comparisons.Although this approach would provide a comprehensive cost basis for determining funding adequacy, HUD officials believe that it would require a relatively large commitment of time and resources to develop consensus on the standard service basket and its costs. It would, however, preclude the need to determine actual housing needs and their costs for each individual housing agency. A second approach would be to base a standard on the cost of operating private low-income housing by using HUD’s data on fair market rents across the country. The advantage of this approach is that it would employ existing data that reflect rents in the private rental market. However, because the private rental market does not provide tenant social services but does consider replacement costs, depreciation, and taxes, it accounts for its costs much differently from those in public housing. This means that some research would be needed to effectively compare private and public housing environments and costs. Regardless of the approach chosen to resolve the adequacy issue, in redesigning PFS HUD would have the opportunity to revisit the way it adjusts housing agencies’ allowable costs for the aging of the housing stock and for inflation. For most agencies, HUD’s application of an 0.5-percent adjustment across the board for aging stock is appropriate. The inflation adjustment, however, captures only the growth in wages and not the cost of employee benefits such as health care coverage. But as we have discussed earlier and as housing agency officials have told us, the cost of employee benefits has grown more rapidly than wages in general, and this added cost has not been fully reflected in inflation adjustments for PFS. To improve equity by distributing subsidies according to the unique circumstances of individual housing agencies, HUD has several options, including the following: As an expansion of the option of costing out a standard basket of housing services to address the adequacy issue—if HUD were to choose to adopt such an option—HUD could collect the information relevant to address equity issues and develop an appropriate cost adjustment factor for each housing agency. This effort could be excessively time-consuming, expensive, and administratively burdensome for both HUD and housing agencies, especially where information on relevant factors affecting costs is not readily available or of comparable quality. Limiting the types of data collected and the types of agencies that must report would help to lessen the burden, though it would also lessen the accuracy of funding decisions. Another option for developing an adjustment factor based on local circumstances would be to apply to every housing agency the five-factor cost model from HUD’s 1992 review of allowable expense levels. Currently, its use is triggered only when an agency gains or loses 5 percent or more of it units or when it gains or loses 1,000 or more units. Use of this model would, on average, yield allowable expense levels that more systematically reflect circumstances affecting operating costs. The cost model also has the advantage of being readily available and therefore would not require additional time and effort to implement. The model is based, however, on housing agencies’ expenditures that have been constrained by the total of PFS subsidies and tenants’ rent since 1975, and, therefore, it may not portray an accurate picture of operating needs. Also, the model may not apply equally well to all agencies because it may not adequately reflect the full range of housing agencies’ circumstances and may overestimate or underestimate costs for agencies with unusual characteristics such as very high security costs or other circumstances not reflected in the data. Another approach would be to determine whether additional cost indicators besides those identified in the 1992 review might also be effective in developing a cost-adjustment factor. For example, under the recently implemented Indian Housing Block Grant Formula, a combination of historical allowable expense levels and geographic differences in fair market rents (FMR) is used to adjust a national standard expense level. Such an approach would allow housing agencies with comparatively high past expense levels to continue to have those levels reflected in the formula, while also allowing agencies that are predicted to have costs that exceed their past levels to have those costs reflected. Thus, under this approach, both the FMR in a housing agency’s metropolitan area and HUD’s cost model could be considered the basis for estimating an agency’s relative allowable costs. The Indian Housing Block Grant program also has developed a geographic cost index that reflects labor and materials costs associated with developing new housing units. Such an index, or other similar indexes, might also be suitably modified to reflect differences in labor costs associated with low-income housing maintenance and administrative services. In any reforms to PFS, HUD is likely to find it difficult to fully address all the issues associated with developing valid indicators for all the factors that affect both funding adequacy and equity. Consequently, a process to allow housing agencies to appeal their formula-calculated or allowable expense levels on the basis of their unique circumstances would enhance the equity of the overall process. When multiple factors affect the cost of delivering housing services, a thorough analysis of detailed information from all housing projects offers the possibility of accurately gauging the need for financial assistance. Similar attention to detail may aid the transition to a new system. The immediate budgetary impact of losses in funding, if any, could be tempered by phasing in changes. If a housing agency has few supplementary resources and minimal reserves, the impact of a loss of funds could swiftly result in consequences such as deferred maintenance, decreased services, and layoffs. As a result, changes to PFS would be more effective if implemented gradually, either by establishing a limit on the magnitude of any reductions in funding for individual housing agencies or by guaranteeing that funding for housing agencies does not fall below the amounts they received in the year prior to implementing the changes to the system. HUD considered an appeals mechanism in the past when it responded to the mandate in the Housing Act of 1987 that offered HUD a choice between establishing an appeals process or giving housing agencies a one-time opportunity to raise their allowable expense levels. At that time, HUD chose not to allow agencies to appeal their expense levels because it could not treat agencies in accordance with an objective standard and such a standard would not be as administratively feasible as using the existing approach to establishing subsidies. However, an objective standard may exist in the near future because several of HUD’s options for redesigning PFS would involve establishing an objective standard of expected housing services. Moreover, HUD’s Management 2020 Reform initiatives include establishing a centralized payment center to administer PFS, and this, in turn, could facilitate the administration of an appeals process. The housing reform legislation currently pending in the Congress contains provisions that would encourage housing agencies to admit a higher proportion of working families and require HUD to establish a block grant formula to fund housing agencies’ operating costs. These provisions could make some housing authorities’ funding less dependent on federal subsidies and more predictable and thereby assist their financial planning. For example, higher-income tenants would contribute more toward rent and reduce housing agencies’ vulnerability to the Congress’s not fully funding HUD’s budget request. HUD estimates that for fiscal year 1999, public housing tenant income nationwide will rise by 4 percent. In addition, as we have discussed earlier, because some housing agencies perceive a shortfall in PFS funding, they supplement their operating budgets with funds from other sources, including HUD’s Comprehensive Grant Program for modernizing housing stock and grants that are competitive but not available each year, such as grants from the Public Housing Drug Elimination Program. Under a block grant, funding that now is available competitively but not with certainty could be rolled into a single grant and provided with certainty by way of an appropriate formula. This would be likely to achieve administrative cost savings at both the federal and local levels. The approaches we have discussed for redesigning PFS’ basic funding formula would continue to be applicable under a block grant. Moreover, the approach taken in the Indian Housing Block Grant program may offer other alternatives to consider that address a more sweeping approach to funding operations, modernization, and the development of new housing stock. If legislative reform for public housing is enacted this year, HUD will be mandated to assess PFS and determine whether a more adequate and equitable system can be developed. In doing so, HUD will have the opportunity to address questions about both the overall adequacy of PFS to fund public housing and the equity with which it funds individual housing agencies. Since HUD implemented PFS in 1975, public housing agencies’ subsidies have been based for the most part on the actual costs those agencies incurred in the base year 1975, with annual adjustments–primarily for inflation. In many cases, these annually adjusted actual costs do not fully reflect housing agencies’ current need for resources to adequately house and serve low-income families because these agencies’ true funding needs have never been determined. However, these cost levels are part of HUD’s basis for developing its annual budget estimate for PFS and for determining subsidies each year for the nearly 3,200 housing agencies. Over the life of PFS, housing agencies have had only one opportunity to receive an overall correction to their adjusted base year costs to account for either unduly low initial cost levels or for gradual but costly changes in operating circumstances, such as the increase in crime and maintenance costs. Although we do not know how many housing agencies’ allowable costs are currently insufficient or excessive to meet their needs, housing conditions at the agencies that we visited and management actions at these agencies taken to supplement operating expenses indicate that PFS may be underfunding these and other agencies. We recognize that a process to allow housing agencies to appeal their allowable cost levels would be administratively burdensome and probably would increase the level of PFS funding. However, we believe that this subsidy cost increase could be mitigated in the near term by the increase in tenant income projected by HUD in fiscal year 1999 and in the long term by the gradual influx of more working families to public housing as a result of the assisted housing reform legislation now pending in the Congress. In response to pending legislation, HUD is likely to begin efforts in the near future to revise the way it provides subsidies to public housing agencies. As HUD considers its various options for redesigning the Performance Funding System, we recommend that the Secretary of HUD also consider establishing a process that (1) allows housing agencies to appeal their expense levels when they believe that significant changes have occurred over time in their operating circumstances that cause their subsidy to be inappropriate and (2) HUD can use to review housing agencies’ expense levels that it believes may be excessive. We provided copies of a draft of this report to HUD for its review and comment. HUD’s written comments and our responses appear in appendix VI. In its comments, HUD disagreed with several specific aspects of our report and provided detailed comments in these areas. Although HUD did not disagree explicitly with the thrust of our recommendations in the draft, the Department believed that the recommendations should be stated more clearly and could provide more specific direction for what we expected it to do. We agree with HUD and have withdrawn one recommendation and clarified the other one. HUD stated that we confused the issues of the adequacy of the Performance Funding System and the accuracy of HUD’s budget estimates of the Performance Funding System. HUD stated that the Performance Funding System is a formula and is not intended to reconcile funding with housing agencies’ actual expenditures. We disagree that our analysis confused the issues. We concluded that the adequacy of the Performance Funding System and the accuracy of HUD’s budget estimates for PFS are necessarily interrelated. Determining allowable expense levels is not only an integral part of allocating the PFS subsidy to housing agencies, but as we describe in our report, expense levels also play a significant role in HUD’s process of developing its annual budget estimate for the Performance Funding System because the estimate is based on a large sample of these expense levels. HUD also said that the draft report relied heavily on four case studies and that it did not contain sufficient data to draw conclusions about the overall adequacy of the Performance Funding System’s funding. We agree and therefore drew no specific conclusions about the Performance Funding System’s adequacy. On the basis of our case studies, we conclude that some housing agencies are underfunded, but we cannot project to the universe of all housing agencies. Therefore, we did not draw any overall conclusions about the adequacy of subsidies nationwide. Instead, our case studies, a survey of 800 housing agencies, and discussions with trade group and HUD officials enabled us to conclude that operating subsidies may not be adequate for housing agencies that had low base year expenditures or that had operating circumstances or costs that have undergone significant changes since 1975. On this basis, therefore, we do question the adequacy of the Performance Funding System and believe that options exist for improving its methodology for allocating congressional appropriations. HUD stated that the draft report did not define what costs subsidies should be covering. We assume HUD is referring to the costs of managing the housing agency and providing housing and other services to the residents that could be legitimately covered by an operating subsidy. The Congress did not ask us, nor did we intend, to define what specific costs the operating subsidies should be covering. Rather, we believe that HUD is responsible for defining the scope of costs that the Performance Funding System should cover, and one of the options that we suggest for redesigning the system includes developing such a definition of covered costs. Finally, HUD stated that much of the discussion in the report about the level of funding dealt with housing agencies’ funding needs that are more appropriately met through capital and grant funding. We disagree and believe that just the opposite condition exists. We report that some housing agencies are using substantial amounts of funding from capital and other grants to cover their operating expenses. This indicates that these agencies are not receiving enough funding through the Performance Funding System and rental income alone to cover these expenses. In its more detailed comments attached to its letter, HUD said that a recommendation in our draft report for revising the way HUD estimates its budget request was not clear because it did not state explicitly what changes we believed HUD should adopt. We agree and believe that it is premature for HUD to change its budget estimating methodology until the Department revises the way it provides subsidies to public housing agencies, as would be required under pending legislation. We also believe that given the data and timing constraints under which HUD must prepare its budget estimate, the estimate is reasonably accurate. We have, therefore, withdrawn our recommendation that the Secretary consider revising the way HUD makes its Performance Funding System budget estimate, and we have made changes to our report accordingly. To determine how PFS estimates the amount of operating subsidy housing agencies’ require on an annual basis, we interviewed HUD officials and evaluated the model HUD uses to make its annual estimates. Also, we reviewed the literature describing HUD’s methodology for establishing housing agencies’ allowable cost levels and reviewed how HUD uses these cost levels and other data in an estimating model for the annual PFS budget submission. To determine how well PFS distributes the subsidy funding, we analyzed financial data for fiscal years ending 1992 through 1996 from housing agencies’ Statements of Operating Receipts and Expenditures in HUD’s Integrated Business System database. We also interviewed HUD officials at headquarters and field offices and visited four housing agencies in different regions of the country to develop case studies of how they cope with insufficient operating funds. To develop options for HUD in revising its PFS, we relied on the extensive experience we have had in reviewing other formula-funded programs and in consulting with the Congress on options for funding these programs. A more detailed discussion of our objectives, scope, and methodology is in appendix VII. We are sending copies of this report to the appropriate congressional committees; the Secretary of Housing and Urban Development; and the Director, Office of Management and Budget. Copies are available to other interested parties upon request. If you or your staff have any questions, please call me at (202) 512-7631. Major contributors to this report are listed in appendix VIII. The Housing Authority of the City of Los Angeles’ (HACLA) total conventional public housing operating budget for 1997 was over $45 million (55 percent of which HUD subsidized). HACLA owns and manages over 8,000 conventional public housing units, almost half of which are over 50 years old. Despite the large number of units that are old, 99.5 percent are occupied. However, the increasing costs of maintaining the aging housing stock and the high crime rate associated with the developments have reduced the agency’s ability to provide services and have forced HACLA officials to defer maintenance and reduce their maintenance staff. Agency officials believe that the operating subsidy provided by the Department of Housing and Urban Development (HUD) is not sufficient to operate the housing agency effectively. To supplement their operating budget, HACLA officials have used—in accordance with HUD’s regulations—a part of their grant for capital improvements to defray operating expenses. HACLA owns and maintains 8,367 public housing units in 63 developments dispersed throughout the city of Los Angeles. The developments range in size from 2 to over 1,000 units and include many “scattered site” locations; 50 percent of HACLA’s units were built before the mid-1950s. The housing agency provides homes to over 32,000 residents, over 1,000 of whom are elderly. According to HUD officials, HACLA has an occupancy rate of approximately 98 percent. This high occupancy rate has helped the agency maintain a management assessment score in the high 90s over the last 3 years—making it a high performer in HUD’s Public Housing Management Assessment Program. Approximately 338 people work in HACLA’s conventional public housing program. Almost all of the maintenance positions are funded out of the conventional public housing funds. Between fiscal years 1994 and 1997, HACLA reduced its number of employees from 421 to 338, or by almost 20 percent. HACLA’s direct operating expenses for administration and maintenance of the public housing developments are estimated at $354 per unit-month; however, HACLA officials told us that total operating expenses for the full range of activities pertaining to public housing are even higher. A 1995 study of actual operating costs reflected per unit -month expenses for all services and activities (i.e., protective services, social services, and central office administration plus direct operating expenses) of $508. In that same year, the operating subsidy ($231) and rental income ($187) brought total revenue to $419 per unit-month. Other sources of federal funds include grants or portions of grants—from such programs as the Public Housing Drug Elimination Program and the Comprehensive Grant Program for modernizing the housing stock—make up the shortfall. The top five factors influencing operating expenses at HACLA, in order of importance, are the age of the developments, design features, crime, joblessness, and the percentage of working families in residence. HACLA officials ranked the age of the developments as the factor having the most impact on operating costs. They also said that overhead levels that are not sufficient to support field operations and the cost of employee benefit packages influence operating expenses. Officials in HUD’s Los Angeles Field Office believe that HACLA makes maximum use of the operating subsidy HUD provides and diligently takes advantage of the other funding sources available to it. Nevertheless, HACLA officials told us that the operating subsidy is inadequate. They attributed the inadequacy to HUD’s Performance Funding System (PFS) being based on 1975 expenses. The inflation adjustments over the last 23 years have not been sufficient to account for increasing maintenance costs, they said. These costs include those to repair the aging housing stock and infrastructure, such as broken water distribution lines or leaking gas distribution lines. According to HACLA officials, the allowable expense levels under PFS also do not adequately cover expenses for administration or for additional activities that did not exist when HUD set HACLA’s expense levels in 1975. To supplement its operating subsidy, the agency has reduced staff, deferred maintenance, and drawn on funding from other federal grants. HACLA’s allowable costs under PFS were based on maintaining buildings that were then 30 years old and had systems that were approaching the end of their useful lives and needed modernizing in 1975, HACLA officials said. However, even in 1975, the operating subsidy was not high enough to cover the modernization needs. Those same buildings are now 50 years old, and many years of inadequate PFS funding have caused an intractable amount of deferred routine maintenance that must now be funded utilizing modernization funds from HUD’s Comprehensive Grant Program that should be used instead for major repairs. Aging housing stock requires increased routine maintenance and is more prone to require extra maintenance, HACLA officials said. Adding to the expense are the replacement costs of fixtures that become irreparable when materials in the fixtures exceed their useful life or fixtures simply become obsolete and go out of production. For example, many units in older developments have wooden window sashes that have dry-rotted or metal windows that require repair parts made from “scratch” because the manufacturer is no longer in business or does not make the part. As housing stock ages and infrastructure—such as gas lines and water distribution lines—ages, unplanned maintenance expenses increase. Agency officials said that at several of HACLA’ s 50-year-old developments, deteriorating gas and water lines may cause potentially dangerous living circumstances. They estimate that $1 million will be needed to replace the lines. We observed the conditions the HACLA officials told us about at two developments—Aliso Village and Dana Strand. Aliso Village, built in 1942, is a low-rise development comprising 33 buildings and 685 units on 34 acres in East Los Angeles. It is a family development and home to 2,524 tenants. (The development’s housing managers estimate that an additional 1,000 tenants live unofficially in the development.) Aliso Village is in an area that has experienced over 60 years of gang activity. The managers said that crime in the area is a moderately serious problem, with gang-related vandalism and graffiti the crimes most frequently committed in the development. Still, the development’s occupancy rate is 99 percent. The architectural design and the age of the development are the uncontrollable factors that have the greatest impact on operating costs at Aliso Village. The design feature with the most impact on operating costs is the underground electrical and plumbing lines that have corroded over time. In addition, wooden window frames have rotted over time, and cracks in walls from the settling of the foundation cause water leaks that lead to leaking and rusty pipes in the walls. The age of the fixtures is also a maintenance problem—the original free-standing heaters in the units cannot be repaired at a reasonable cost because the manufacturer no longer makes the heaters and cannot support their maintenance. The Dana Strand development, built in 1942 near the Los Angeles harbor area, provides housing for families and the elderly. It is a low-rise development in fair condition on a 21-acre site and consists of 384 units with an occupancy level of approximately 99 percent. The area has a moderate crime rate, but the development itself is subject to gang-related crimes, such as graffiti on buildings. HACLA has installed bullet-resistant lights at Dana Strand at a cost of $800,000 to increase the level of security. Before the bullet-resistant lights were installed, criminals would shoot out lights to reduce visibility and give cover for criminal activity at the development. Highest on the list of factors contributing to maintenance expenditures at Dana Strand is the age of the development. Dana Strand officials cite deteriorating plumbing, rotting window sashes, and old underground electrical lines as problems at the development. For example, the plumbing in the walls of the units is corroding and, in one recent instance, leaking water from corroded plumbing accelerated the corrosion of gas pipes, resulting in an explosion in one unit. Several tenants suffered minor injuries in the explosion that blew off a portion of the building’s roof and blew the walls out of two units. Dana Strand officials listed three operating expenses that have increased: waste management, routine maintenance, and grounds keeping. Officials attributed the development’s increasing expenses for routine maintenance to its age. Environmental regulations have also contributed to increasing maintenance costs. Because of the new city requirements for waste management, for example, HACLA had to install a clarifying pit at each of its developments to separate caustic agents—used for cleaning stoves and appliances—from waste water before the water is discharged into the city’s sewer system. About once or twice per year, the pits have to be pumped out by an authorized waste handler at a cost of $2,500 per visit. Over the last 5 years, HACLA has reduced Dana Strand’s maintenance staff from 10 to 7 people—a loss of a painter, a gardener, and janitor. Without the painter, the staff had difficulty meeting the maintenance standard that calls for each unit’s interior to be painted every 5 years. HACLA officials said that the insufficient operating subsidy and the Congress’s periodic underfunding of the PFS appropriation are responsible for the agency’s inability to attract and retain qualified staff, the increased time for making vacated units available to new tenants, the deterioration of the housing stock, the difficulty with funding employee benefits, and the difficulties with providing adequate security. To address the funding shortfalls, the HACLA officials said they had reduced administrative and maintenance staff, deferred maintenance, and transferred funds from the Comprehensive Grant and Section 8 programs to cover operating costs. HUD’s director of public housing in the Los Angeles Field Office told us that HACLA is very aggressive in seeking funding and taking advantage of available funding sources. For example, HACLA has a large Section 8 assisted housing program and receives an administrative fee of over $25 million for administering it. In 1997, HACLA allocated $2 million of its Section 8 administrative fee to its public housing program. HACLA also used the largest part of its funding from HUD’s drug elimination program to pay for its security force in fiscal year 1996 and, as allowed under appropriation law provisions, used 10 percent of the funds it received for modernization to supplement its public housing program’s operating fund. Also, HACLA used funds from its Comprehensive Grant Program grants to pay for management improvements in its public housing program, such as the acquisition of its management information system. According to HACLA’s director of planning, when HUD established PFS 23 years ago, HACLA did not have an automated management information system. Thus, the agency’s allowable costs under PFS do not include the costs of developing and maintaining an information system. No process exists under PFS to change the allowable expense levels to cover new technology. Hence, HACLA used the Comprehensive Grant Program’s Management Improvement Program to fund the initial development of its system. However, using a portion of the Comprehensive Grant Program allocation that way resulted in delaying much-needed physical improvements to the housing stock; moreover, the ongoing operating costs of the automated system are not included in the PFS calculation. As table I.1 shows, aside from the spike created by the HOPE VI grant in 1996, total HUD grants to HACLA peaked in 1995 (not adjusted for inflation).One reason for the recent decline is the downward trend for modernization funding. The modernization awards declined during the period that the Congress did not fully fund HUD’s budget request for PFS. Hence, any movement of grant funds to the operating fund effectively resulted in a net reduction of modernization funds. Waste disposal, employee benefits, and security are expenditures that HACLA officials said increased. Litigation has raised HACLA’s insurance premiums, self-insurance payments, and legal expenses. Despite a one-time adjustment to the allowable expense level to offset higher insurance costs, HACLA had to take other steps to fund its higher insurance costs. It engaged in partnerships with community groups to provide resident services, reduced its administrative and maintenance staffs, and reduced the amount of maintenance being done. HACLA officials told us that the cost of employee benefits has grown more rapidly than wages in general and that the PFS inflation adjustments have not fully reflected the additional cost. They singled out two areas in which the agency’s employee benefit expenses increased: health care plans and retirement and disability. The officials told us that health care premiums have skyrocketed since 1975, and HACLA cannot afford to cover a full family or even a single dependent under some health care plans. However, the agency attempts to provide a competitive health care benefit package to retain qualified professional staff. HACLA officials said that if the operating subsidy is not increased in the near future, it is likely that the housing agency will engage in more partnerships with community groups, reduce its administrative staff even more, and continue to defer maintenance. Figure I.1 shows that for the most part, the proportions of the operating subsidy that HACLA used for most categories has remained flat except for the general expenses category, which has been erratic, and the ordinary maintenance category, which, since 1995, has trended downward. HACLA officials told us that maintenance expenditures charged to the conventional public housing budget might have declined, but that the overall maintenance expenditure is much greater. HACLA has shifted a sizeable portion of its routine maintenance budget to the nonroutine category, but funded it by using modernization funds. The disincentives built into PFS outnumber the incentives for HACLA to operate efficiently. HACLA’s management has had to produce the same or greater number of outputs (decent, safe, sanitary housing units) with a lesser amount of inputs (dollars). However, some PFS rules discourage efficiency because many revenue-generating or cost-saving actions result in the housing agency losing part of its subsidy. In some respects, the housing agency is better off doing nothing and receiving a full subsidy allocation. For example, present rules penalize housing agencies for good financial management in at least two areas: First, under the rules governing interest income, the Target Investment Income formula equation establishes a framework where interest earned cannot wholly be retained. Second, if a housing agency receives discounts from vendors in return for paying its bills within 30 days, the discounts must be recorded as income for the housing agency, and the operating subsidy is reduced by that amount. Therefore, a housing agency can only partially retain the interest on its investments and cannot benefit from efficient purchasing procedures. HACLA officials believe that HUD recognized some of the disincentives to efficient management in its notice PIH 96-24 (HA), “Performance Funding System Policy Revision to Encourage Public and Indian Housing Authorities to Facilitate Resident Employment and Undertake Entrepreneurial Initiatives.” They told us that the notice temporarily helped correct some of the problems inherent in the PFS logic, which does not recognize that efficiencies cannot be maximized by legislative mandate alone. Policies are needed that do not penalize a housing agency for operating in its own self-interest when to do so is good business, they said. HACLA officials noted that PIH 96-24 expires in 1998. The Housing Authority of Baltimore City (HABC) in Maryland is among the nation’s largest housing agencies. With an annual operating budget of over $75 million (70 percent of which is subsidized by HUD), it manages over 16,000 units of public housing. Of this total, about 14,000, or 84 percent, are occupied. HABC officials attribute the relatively low occupancy rate (the industry average is 92 percent) to the poor physical condition of much of the housing stock—some is uninhabitable and almost half is 35 years old or older—and to the high crime rate near the developments that results in costly vandalism, property destruction, and a lack of demand for the units. Limitations on HABC’s funding have prevented it from addressing either problem. To the extent that the agency has attempted to address the crime problem, it has covered the costs by forgoing routine maintenance. HABC officials believe that PFS underfunds the agency, and their management of the housing agency reflects this belief. They have reduced maintenance by one-third over 5 years, used funding from federal grants from the capital modernization program to support operations, frozen administrative expenses, and deferred ordinary maintenance to the point that it has, in some cases, become emergency maintenance. Officials believe that these actions jeopardize the long-term viability of their housing stock. The director of public housing at HUD’s Maryland State Office had mixed opinions about the sufficiency of HABC’s operating subsidy. He said that HABC’s cost base was sufficient when PFS was implemented and that the current allowable expense level seems to be adequate. But he also said that expense levels need to be revised to better protect the investment HABC is making in its newly rehabilitated HOPE VI developments. He added that although other HUD-assisted properties in the area receive less revenue to operate than HABC does, HABC has specific circumstances—such as high-cost family high-rises; large, older developments; very low-income tenants; and higher crime rates—that raise its operating costs above that of privately owned properties. HABC’s 16,558 housing units are located in 42 conventional developments and 18 “scattered site” developments that are mostly vacant houses. These developments are home to 30,414 people. Of the 42 conventional developments, the agency rates 24 as being in fair to very good condition and 10 as being in poor to uninhabitable condition; 8 are unrated. HABC officials said that the poor condition of some of its developments and crime account for its high vacancy rate—currently at 16 percent, twice the national average. Some housing units are vacant because HABC does not have the funds to modernize the units. HABC officials would like to sell some of the 3,000 scattered site units, where many of the vacancies exist, but it cannot afford the repairs needed to make the dwellings salable. The director of public housing in HUD’s Maryland State Office said that HABC could do a better job of managing and, if necessary, of disposing of these properties. A number of other vacancies are in developments that HABC plans to demolish. The large number of vacancies reduces HABC’s Public Housing Management Assessment Program score, which is currently in the range of about 70. But only a couple of years ago, HABC’s score was in the low 60s. Falling below 60 would have earned HABC a “troubled agency” designation. HABC’s operating budget for its fiscal year ending June 30, 1997, was approximately $75.6 million, of which HUD contributed $52.6 million, or about 70 percent; $28.3 million came from rental income. For that fiscal year, HUD also awarded significant grants to HABC to fund other types of activities. (See table II.1.) Officials of HABC’s top management, housing operations, and comptroller’s office told us that the agency is not receiving a sufficient subsidy under PFS. They said that increasing costs not anticipated or recognized by PFS, coupled with aging, poorly designed, and vacant housing stock, have created significant shortfalls in the funds provided to operate the housing agency effectively. Of the actions that HABC has taken to address this shortfall, the most striking is its substantial reduction in ordinary maintenance over the last few years. The maintenance cost category has declined from $32 million in fiscal year 1993 to $22 million in fiscal year 1997. As a result of the cost-cutting, fewer staff are available to prepare vacated housing units for new tenants. Because more units are being vacated than can be prepared for re-leasing, unnecessary vacancies, lower rental income, and a greater dependency on subsidies result. HABC has several new or increasing expense categories that PFS does not recognize adequately. These categories include the costs of security, litigation, and employee health benefits. At the time that HABC’s expense levels were set by PFS, the agency was not incurring significant security costs. HABC established a security force in 1987 and converted it to a sworn police force in 1991. It now has 88 police officers and a total security staff of 100. HABC’s deputy executive director said that HUD’s Public Housing Drug Elimination Program helps to defray the costs of this force (funding 30 to 40 of the officer positions at any one time) but that the costs of the force generally fall under other budgets, such as the Management Improvement Program portion of the Comprehensive Grant Program, which normally funds capital expenses for modernizing the housing stock and improving its management. By using these funds for security, HABC has less for modernization and risks continued deterioration and vacancies. In years when no drug elimination funding is available, HABC must find other funds to cover the security costs. The payment in lieu of taxes that HABC makes to Baltimore City is generally in the range of $300,000 to $400,000, which does not fund many City of Baltimore policemen to patrol and deter crime in HABC’s housing developments. Another cost that HABC’s allowable expense level does not adequately cover is that of health insurance benefits for employees. Although the agency’s operating budget now covers the costs of the benefits, these costs increased more since 1975 than the inflation rate HUD allows under PFS. To pay the higher benefit costs today, HABC must forgo some other expenditures such as routine maintenance. In addition, HABC officials told us that litigation costs have doubled from 1993 to 1997, primarily because of lawsuits filed to reduce the concentration of poor and minority households in public housing. HABC also faces rising costs from its aging housing stock and the combined effects of the poor housing design, conditions, and crime. We observed examples of these conditions at two of HABC’s developments—O’Donnell Heights and Claremont Homes. O’Donnell Heights is one of HABC’s largest developments, comprising 900 densely packed units with little curb appeal or open space but a great deal of access to surrounding city streets. Most heads of households are young, single women. Built in the early 1940s, O’Donnell Heights had significant modernization work in the early 1980s but none in the last 5 years, and none is planned in the next 5 years. Housing managers at O’Donnell said that the age of the housing contributes to the cost of maintaining it because of its general deterioration. The director of public housing at HUD’s Maryland State Office said that HABC is not allocating sufficient resources to O’Donnell Heights, but he could not determine whether the housing agency had enough maintenance funding in its budget to adequately address the development’s problems. O’Donnell’s housing managers said illegal drug activity is difficult to deter because of the size, openness, and demographics of the development. Because of the high rate of crime—worse than in the surrounding neighborhood—residents often request transfers, relocate, or move completely out of O’Donnell. To control crime at O’Donnell Heights, the development uses special lighting and two policemen, one from the City of Baltimore and one from HABC’s police force. However, O’Donnell has no contract security, fencing, security cameras, or controlled entry to the development—all of which can deter crime in housing developments. The development’s wide-open layout contributes to the prevalence of the gang-related drug activity that intimidates the residents, according to O’Donnell housing managers. They also said that the seriousness of the crime has grown significantly during the last decade. O’Donnell Heights’ design also contributes to the increasing maintenance costs. For example, hardwood floors, sheet-rock walls, and separate hot water heaters and furnaces for each unit increase costs. Each unit has two doors, front and back, and two screen doors, the maintenance of which increases costs; and the aluminum siding has been hard to maintain because of the wear and tear from the children living in the development. The many gutters and downspouts on O’Donnell’s units are also difficult to maintain, and officials described instances of water in the ground-floor units, flooding and drainage problems, and foundation leaks. At Claremont Homes, the most significant cost factors are the development’s architectural design, lead-based paint, and its 46-year-old buildings. Claremont’s low-rise units are very costly because they have the original steam-heated radiators that, in combination with the old plaster walls that are damp because of poor ventilation, create an almost constant need to repaint and replaster. The paint in all of the units is lead-based and needs frequent attention to keep it from being hazardous. The cost of addressing the problems caused by the steam heating system, damp walls, and lead-based paint has gradually grown over time so that it is now a significant portion of the development’s total operating costs. Because of Claremont’s generally stable, older population of tenants, its strong resident council, and its effective layout, crime—except for some minor vandalism—is not a serious problem and does not contribute significantly to the operating costs. Nevertheless, Claremont’s per unit-month expenses (before utilities) are about $383, 24 percent more than the average for HABC. Claremont’s housing manager said that routine maintenance, grounds keeping, and vacancy renovations were three costs that had increased over the years. Of these, the highest cost was for renovating vacated units to abate the lead-base paint hazard and replace almost all of the original plumbing fixtures and cabinetry. HABC officials are concerned about the potential for additional costs related to lead-paint litigation if they cannot keep up with the lead abatement needed as the paint continues to chip and peel. HABC’s housing operations officials told us that crime and poor physical conditions are the two most chronic problems at the housing agency. Nevertheless, two of the actions that HABC officials have taken to address perceived shortfalls in funding for operations include deferring maintenance and reducing maintenance staff. HABC has reduced its maintenance expenditures from $32 million to $22 million over the past 5 years, from fiscal years 1993 to 1997, a reduction of nearly one-third. At the same time, as figure II.1 shows, the cost of protective services has increased dramatically—nearly doubling from $16 per unit-month in fiscal year 1993 to $30 per unit-month in fiscal year 1997, totaling $5.9 million for fiscal year 1997. Because HABC’s operating subsidy increases each year only to offset inflation, the agency has been unable to address the mounting need to protect its residents while at the same time maintaining a constant expenditure for maintenance. HABC’s comptroller projects that the agency’s security costs will be about $9 million next year–$6 million in the security line item plus about 34 percent in fringe benefits–or about 50 percent more than the cost in 1997. He told us that the need for protective services is more immediate and is, therefore, a higher priority than routine maintenance. Fiscal year Other actions that HABC has taken to address shortfalls in funding for operations include reducing administrative staff, an action that officials said was the most effective in allowing HABC to operate within funding limitations; transferring funds from other programs, such as the modernization program, the second most effective action; deferring maintenance; reducing operating reserves in some years; and reducing maintenance staff, which officials said was the least effective. In addition, HABC’s HOPE VI director said that she thought that funding for the agency’s six HOPE VI projects contributed to defraying the agency’s operating costs in several ways. She cited the following as evidence of this effect: Because HOPE VI pays for site preparation for the redevelopment, it is likely to cover costs that the operating budget would ordinarily have had to cover, including abatement of lead-based paint hazards created by demolition and other costs not directly related to the redevelopment and revitalization of the immediate area. Expending HOPE VI funds often relieves the pressure on funding from other grant programs, such as the Comprehensive Grant Program for modernizing public housing stock, and various social service grants. Because a HOPE VI project—and its associated HUD grants, matching community funding, and other human and community service funding—is expected to address most of the redevelopment needs of a qualified housing development, HABC’s other grant and subsidy funding can be more focused on the remaining needs of the agency. The greater cost efficiencies inherent in a newly rehabilitated housing development—such as more efficient heating systems, more effectively insulated construction, and fewer routine maintenance work orders—lower the development’s operating costs, at least in the near term, and therefore tend to relieve the agency’s operating budget. In the future, to cope with reduced operating funds or funding shortfalls, HABC officials told us that the agency most likely would exercise management options such as those listed below, ranked by the relative ease with which they can be achieved: asking the City of Baltimore for a waiver of the payment in lieu of taxes, reducing maintenance staff, reducing operating reserves, reducing administrative staff, reducing or deferring maintenance, and entering into partnerships with community or private sector groups. One of the clear effects at HABC of not having sufficient operating funds is the necessity of laying off maintenance staff, which, in turn, leads to an increase in the time required to “turn around” vacant housing units after they have been vacated and return them to a rentable condition for new tenants. At HABC, approximately 150 units (out of nearly 14,000 under lease) are vacated each month (slightly more than a 1-percent turnover per month). However, with limited maintenance staff, only about 120 to 130 can be reconditioned for leasing to new tenants each month. A high vacancy rate means that rental income is below expectations, thus creating more of a dependency on the operating subsidy provided by HUD. As the agency has performed less and less preventive or ordinary maintenance over the years to cope with inadequate operating funds, more items have eventually become “extraordinary maintenance” or emergency items. In some cases, these items are aggregated into a request to HABC’s modernization committee to be done under the capital grant program. But the officials said that the reality is that much maintenance is not done because modernization funding also is not sufficient to meet HABC’s needs. For example, HABC’s comptroller said that he requested modernization funds for extraordinary maintenance at the O’Donnell Heights development, but so many other demands for this funding exist that O’Donnell’s needs are not yet a priority. HABC officials said that in general, the potential result is that many of HABC’s units will eventually become uninhabitable and need to be demolished. They said that HABC’s HOPE VI program awards will help deal with some of these problems, but that it would be more cost-effective if HABC had the money to do adequate maintenance before excessive deterioration became evident. They also recognized that eventually the HOPE VI money will not be available. Both the director of public housing at HUD’s Maryland State Office and HABC officials told us of ways that PFS currently affects operations and ways that it could better influence management decisions. For example, HUD’s director of public housing in Maryland said that combining funds for capital improvement and operating costs would give housing agencies a more predictable stream of income. And HABC’s deputy director said that HUD should establish some incentive for housing agencies to earn other income. Currently, earning other income reduces an agency’s subsidy on a dollar-for-dollar basis. HUD’s director of public housing in the Maryland State Office said that he would favor an incentive built into PFS that would encourage a housing agency to invest in maintaining its stock. He said that the reaction of HABC and many other housing agencies to budget cuts is to reduce their expenditures on maintenance. He would like to see a single formula that would provide both operating and capital funds so that a housing agency can predict its total income and make more informed decisions about how best to meet both operating and capital needs. Eventually, if the housing agencies do not adequately fund maintenance, the quality of their housing stock declines. He also said that several disincentives are inherent in the current formula. For example, an automatic annual inflation adjustment creates a disincentive for efficiency. In addition, a housing agency has little incentive to maximize its rental income over a several-year period because if income declines, the subsidy will rise the next year to compensate. On the other hand, if rental income increases unexpectedly during the current year, the housing agency can keep the rental windfall for that year. Finally, according to PFS rules, a housing agency’s fiscal audit costs are not limited, and no incentive exists to seek the most cost-effective contract for such audits. The director said he favored setting new allowable expense levels for developments that have been revitalized and rehabilitated with HOPE VI grants. He believes that it is important to fund maintenance at a high enough level to ensure that the investment in the property is protected. In addition, he believed that performance indicators needed to be better linked. For example, he said that establishing a high operating reserve account makes the financial performance indicator look good, but creating this high reserve at the expense of performing needed maintenance would be wrong and should not be rewarded. Combining the two indicators for physical and financial conditions would offer a means of better performance measurement, in his opinion. In years when PFS is funded at 100 percent of HUD’s forecast of housing agencies’ needs, additions that a housing agency makes to the “other income” line item cause a dollar-for-dollar reduction in the agency’s PFS subsidy, according to HABC’s deputy director. This provides no incentive for housing agencies to earn income from such activities as renting space on building roofs for radio or other broadcasting antennas or to operate services for tenants such as laundromats or day care. He also said that in 1993, HABC incurred significant operating expenses to reduce vacancies. To cover this expense, however, HABC needed to use funds from its operating reserve. Using this source of funding reduced the reserve to a level that resulted in a lower management assessment score under HUD’s Public Housing Management Assessment Program. Now, to increase the assessment score, HABC is building up its operating reserve levels at the expense of performing some needed maintenance, according to the deputy director. Although such incentives and disincentives exist, HABC’s deputy director told us that PFS is not a needs-based system that can provide a subsidy to a particular housing agency on the basis of what it needs to operate because HUD’s policy has been to use a generic system to address the needs of all housing agencies. He said that HABC makes most of its management decisions based not on PFS, but rather on the viability of the projects and on the long-term survival of the agency. Furthermore, small adjustments to PFS are not likely to affect HABC’s operating behavior or to “incentivize” better management, he said. HABC officials said that among the actions allowable or potentially allowable under PFS that they believe are most useful as incentives for increasing operational efficiency, are the ability to expeditiously evict difficult-to-manage tenants; lease to easy-to-house tenants or to working tenants; perform preventive maintenance; form partnerships with the local community, nonprofits, and the city to obtain funding for resident services or to obtain the services themselves; implement the income disregard options and ceiling rents; and implement minimum rents. HABC’s comptroller told us that as housing agencies begin to improve their stock through demolition and rehabilitation, they tend to lose their most costly-to-house tenants—those who do not work consistently, violate housing agency rules, or do not pay rent on time—and keep their best or most affluent tenants. He said that this could explain the trends of increasing rental income and employment of public housing tenants nationally. Therefore, it would make sense for HUD to allow agencies to keep at least half of the rent increases that result from higher-income residents for a given year, similar to the incentive that HUD allows for utility cost savings. As for utility cost savings, he suggested that HUD allow a housing agency to keep the savings beyond the current year if the agency was instrumental in negotiating the savings with the provider. Since being placed on HUD’s list of troubled housing agencies, the Housing Authority of Kansas City (HAKC), Missouri, has been operating under court-ordered receivership for about 3 years. The agency provides a full range of housing services for over 1,000 households. By using portions of other federal grants, particularly its modernization grant, to pay for some of its operating costs, HAKC is supplementing its operating budget and providing day-to-day maintenance of its housing stock. The availability of other funding sources has allowed HAKC to fund most operating areas while still increasing its operating reserve—which grew from $1.3 million at the end of fiscal year 1994 to $2.8 million at the end of fiscal year 1997—to a level that the receiver believes is more prudent to meet working capital and emergency repair needs of a capital nature. However, HAKC’s housing stock is almost all more than 35 years old—most of it located within a 5-mile radius in a high crime area. The costs of repairing an aging stock and coping with changing circumstances, such as the expense of deterring worsening crime, have grown significantly over the 23 years since HUD set HAKC’s allowable level of operating costs in 1975. In recent years, HAKC has attempted to address the problem of its relatively fixed operating subsidy from HUD by reducing spending in other areas, such as the salaries paid for the administration of the housing agency, although HAKC officials believe that this has threatened their ability to retain competent staff and management. In receivership for 3 years, HAKC is plagued with deteriorated housing stock and the high vacancies that accompany such conditions. It is a large housing agency that manages approximately 1,824 housing units; only 1,053 households occupy its conventional public housing. Its vacancy rate under receivership has been between 3 and 5 percent, however. Of those households, 680 (or 65 percent) are in family developments, with the rest living in developments for the elderly. Single heads of households constitute almost 90 percent of HAKC’s households. Two of HAKC’s developments are high-rises, both in good condition and having low vacancy rates but experiencing high operating expenses. One of the high-rises primarily houses elderly tenants and has high operating costs for security and support services for this population that were not contemplated when PFS was established. The other high-rise, which houses frail elderly and disabled households, has even higher operating expenses. Half of HAKC’s mid-rise units are uninhabitable, and just 13 percent of the livable half are in better-than-fair condition. Partly because of the poor housing conditions and high vacancy rate, HAKC has had a low Public Housing Management Assessment Program (PHMAP) score for many years. Its PHMAP score is currently 85, which classifies it a standard performer. HAKC’s total expenditures for fiscal year 1997 were $5.3 million, of which the operating subsidy funded $5.1 million or 97 percent. In addition, HAKC used over $3 million, or an additional amount equal to slightly more than 60 percent of its operating subsidy, from various grants and the administrative fees from its Section 8 tenant-based assisted housing program to supplement its operating funds. The grants included its Comprehensive Grant Program and Comprehensive Improvement Assistance Program grants for modernization, its Public Housing Drug Elimination Grant, its Public Housing Apprenticeship Grant, and its Vacancy Reduction grant. HAKC used these grants to pay for salaries, receivership administration, and software upgrades. HAKC is implementing three HOPE VI projects to substantially replace existing developments, which should improve the quality of HAKC’s housing stock. HAKC officials expect the new developments to be ready for occupancy over a 3-year period ending in 2000. Officials at HUD’s Kansas City Field Office and HAKC’s receiver stated that the operating subsidy is inadequate for HAKC to reasonably meet its expenses. The receiver said that the funding provided by PFS does not adequately supplement rental and other income because of the flawed composition of the formula that HUD uses to determine the amount of operating subsidy. He said that routine maintenance—HAKC’s highest expense category—and extraordinary maintenance are not adequately recognized under the PFS formula because factors affecting maintenance, such as building age and vandalism, have changed drastically since PFS’s implementation in 1975. Because of the inadequate operating subsidy, HAKC continues to face a wide range of operating problems, he said. The problems cited included the inability to attract and maintain qualified staff, the inability to fund employee benefits, the increased time required to prepare vacated units for new tenants, the deterioration of housing stock, and the inability to provide adequate security. To address funding shortfalls, HAKC has reduced administrative and maintenance staff, reduced employee training, and used funds from other programs when allowed under HUD’s regulations. Under the receivership, HAKC has been successful in obtaining special grant funds that have enabled the agency to make management improvements. The receiver is concerned that many of the grant funds are essentially nonrecurring, special purpose capital and social services funding. HAKC cannot rely on these funds to cover ongoing operations. Having developments located near high-crime areas increases the cost of preparing units for new households after previous tenants have departed. In HAKC’s developments, the primary crime problem is vandalism by drug users who break into unoccupied units, damaging screens, windows, and doors. After breaking in, drug users deface walls and floors or set fires and, once units have been broken into, children enter and cause further damage. Damage to a unit already prepared for new tenants means additional work for maintenance crews at a cost that could exceed the initial cost of preparing the unit. HAKC’s housing stock is also expensive to maintain because of its age and because of the quality of public housing design and construction in the era in which it was built. We observed some of the effects of these conditions at HAKC’s Chouteau Courts and West Bluff developments. Chouteau Courts, built in 1958, is a 140-unit mid-rise development that is home to 124 families. It is located in a high-crime area. The site manager estimated that more than half of Chouteau Courts’ units were in good to excellent condition. Within the last 5 years, the heating and air conditioning systems were modernized, and plans call for additional modernization within the next 5 years. The site manager told us that the selling of narcotics in and around the development is the criminal offense that is the most detrimental to the housing stock. The site manager described the continuing maintenance required by the way the development was built and said that utility costs at Chouteau Courts could be lower if the units were better insulated. Building specifications at the time the development was constructed did not require exterior walls to be insulated. Because the walls have a cement block core, insulating them now would be expensive. When it rains heavily, drainage problems cause sewer backups into the basement of one of the buildings because the basement is lower than the sewer line. Many units have doors that are difficult or impossible to open because the doorjambs are metal and have rusted to the point that the doors do not hang straight. HAKC is directing a substantial amount of modernization funds for repairs at this development through its comprehensive 5-year plan for Comprehensive Grant Program funds. The per unit-month expense for Chouteau Courts is $266, which contrasts with $189 for West Bluff, a newer development located in an area with a lower crime rate. West Bluff, built in 1964, consists of 100 townhome units and is home to 89 families. The site manager told us that all of the units were in excellent condition. Modernization work has been done on the roofs, windows, plumbing, and air conditioning systems within the last 5 years. Within in the next 5 years, HAKC plans to modernize the exterior water and sewer lines. HAKC officials rate crime at West Bluff as a moderately serious problem. HAKC officials said the following crimes and design features have an impact on the operating costs at West Bluff: Drug users breaking into vacant units cause 25 percent of the damage done to units at West Bluff. Prior to 1997, gang-related vandalism and damage to units from gang incidents also had an impact on the high operating costs at this development. Prior modernization efforts were partial and did not address all physical deficiencies. The lack of insulation in exterior walls has resulted in isolated incidents of frozen pipes. The pitched roof design, with valleys where the townhouses connect at a common wall between units, results in leaks in the units because, over time, the sheet metal that serves as the base for the valleys has separated between many units. In addition, HAKC officials told us that their costs for waste disposal and security had grown significantly and that HUD’s allowable expense levels for these costs are no longer adequate. Of the two cost categories, security is the greater; but together, these increasing costs are having a moderate to severe impact on HAKC’s operating expenditures. HAKC’s receiver told us that because the operating subsidy from HUD is insufficient, the housing agency has had to supplement its operating budget with funds from other sources. These sources include its grants from the Comprehensive Grant Program and Comprehensive Improvement Assistance Program established to modernize developments, the HOPE VI program established to rehabilitate distressed properties, the Public Housing Drug Elimination Program, remaining funds from grants received several years ago under the Major Rehabilitation of Obsolete Properties program, and a portion of the administrative fee reserve received from HUD in return for operating a large Section 8 tenant-based assisted housing program. In addition, HAKC has formed partnerships with local government and community groups, reduced administrative and maintenance staff, and deferred maintenance. Of these measures, the staff reductions were the most effective in freeing up operating funds to pay for increasing operating expenses. To address budget shortfalls in the future, HAKC officials said they would continue the partnerships and would use operating reserves rather than continue to reduce staff and maintenance. Table III.1 shows the grants HAKC received from HUD in fiscal years 1993 through 1997. Although HAKC’s pay scales are comparable to those of other government entities in the region, the pay scales are significantly lower than the those in private industry. HAKC’s financial analyst, for example, left the agency for a higher paying position in the private sector. Also, HAKC’s pay scale for its maintenance staff is low when compared to the private sector; its entry-level wage for a maintenance worker is about $6.80 per hour, while the wage for a comparable worker in the private sector is between $8.00 and $9.00 per hour. Figure III.1 shows that over the last 5 fiscal years, except for ordinary maintenance and operations, HAKC’s expenses have remained relatively flat when adjusted for inflation. HAKC’s receiver believes that PFS provides few incentives for good management. He offered the following observations on PFS: The artificial cost structure that PFS imposes on the housing agency places it in the position of constantly seeking funds because, under PFS, HUD has not defined the actual group of services the housing agency should provide and PFS does not address changing needs. Thus, the only incentive the housing agency has is to always look for ways to supplement an operating subsidy that is inadequate for the needs and services it provides. No incentive exists for a housing agency to maximize rental income, as would be the case in the private sector, because increased rental income results in the subsidy being reduced by an equal amount. PFS does not correctly address the expenses of newer developments that replace older developments. Units in newer developments are not brought back on line at an amount that is incrementally equal to the developments that they replace. When developments are modernized, they are sometimes reconfigured to decrease density. Less dense developments nurture more positive behaviors among tenants. Although the new development might have fewer units, the reduction in units is not commensurate with the loss in subsidy. When density is decreased, fixed costs are not necessarily reduced as a result. The Miami-Dade Housing Agency (MDHA) in Florida is one of the largest housing agencies in the country. In fiscal year 1997, it had an operating budget for public housing of over $38 million and a total agency budget of over $216 million. MDHA manages over 10,000 units of public housing and administers over 15,000 Section 8 certificates and vouchers. Over 4,400 of MDHA’s public housing units are at least 30 years old, with some units over 60 years old. MDHA officials said that much of their housing stock is in dire need of continual maintenance and major modernization and rehabilitation. They attributed a significant portion of that need to their allowable expense level under PFS not having kept pace with the agency’s increasing costs for such activities as security and employee benefits. As a result, MDHA has not been able to do all needed routine and preventive maintenance and has reduced maintenance staff. Moreover, because of the deferred maintenance, MDHA officials believe that the problems with the physical condition of their housing stock will worsen as the properties continue to age. To supplement its operating expenses, MDHA has relied on other sources of funding, including the Comprehensive Grant and the Public Housing Drug Elimination programs. MDHA maintains 10,100 conventional public housing units in 87 developments and serves over 33,000 individuals. MDHA also has 596 Section 8 project-based units and 506 units that are mixed income properties. MDHA contracts with four private companies to manage approximately 1,772 of its conventional public housing units. MDHA’s conventional public housing stock consists primarily of low-rise developments, with the high-rise developments occupied by elderly residents. A substantial number of the public housing units are over 30 years old, with some as old as 60. MDHA’s most recent occupancy rate was 93 percent. Its Public Housing Management Assessment Program (PHMAP) score was 91 percent for fiscal year 1996 and 95.5 percent for fiscal year 1997, making it a high performer. MDHA’s operating budget for public housing totaled over $38 million in fiscal year 1997, with over $25 million, or 66 percent, coming from the PFS operating subsidy and nearly $12 million from rental income. Other major sources of income in fiscal year 1997 that were used to supplement MDHA’s operating budget for public housing included nearly $13 million in Comprehensive Grant Program modernization funds and $2.7 million in Public Housing Drug Elimination Program funds. MDHA relies entirely on rents, grants, and subsidies from HUD to operate its public housing. The agency employs a staff of 708, 360 of whom are assigned as public housing support personnel. The employees are part of the Dade County system of government and also belong to the state’s retirement system; 97 percent of them belong to employee unions that represent supervisory employees, general employees, and professional employees. Most MDHA residents (79 percent) are unemployed, and 61 percent of the residents receive welfare. Heads of households are mostly female (93 percent), with 40 percent of the households headed by residents who are 20 to 30 years old. Officials from MDHA’s top management, housing operations, and finance and administration office told us that PFS does not provide an adequate subsidy. They said that increasing existing costs, combined with new costs not anticipated or recognized by PFS and deteriorating and poorly designed units, have created significant shortfalls in the funds needed to operate the housing agency effectively. The most significant impact of the insufficient funding has been on the physical condition of the housing stock because of the practice of deferring preventive maintenance to conserve funding. MDHA performs what preventive maintenance is possible under its budget, but each year it defers a substantial amount. Inadequate funding has also required MDHA to reduce staff, services to residents, and operating reserves. To cope with inadequate subsidies, MDHA officials told us that they supplement their operating budget with funding from other federal sources such as modernization and drug elimination grants, portions of which can be used to cover operating costs. The director of public housing at HUD’s Florida State Office stated that the PFS operating subsidy is inadequate for MDHA. She said that since PFS was established, MDHA has been required to provide additional services to its tenants, such as the Family Self-Sufficiency Program, without being given the funding to administer these programs. Moreover, MDHA, like other housing agencies, has not received its full subsidy in recent years when the Congress did not appropriate 100 percent of the funds HUD requested. MDHA has experienced several new or increasing expense categories that PFS does not adequately recognize. These include the costs of employee benefits, insurance, and security. Employee benefits are a major cost category at MDHA because housing agency employees are county employees, and their pay is based on county wage rates. MDHA employees also belong to the Florida State Retirement System. MDHA officials said that their employees’ benefits package is equal to 42 percent of salaries, which is significantly higher than the 28-percent average at housing agencies nationwide. Property-related insurance rates for MDHA have increased dramatically in recent years. From fiscal year 1993 through fiscal year 1997, MDHA’s property insurance costs have risen by 166 percent. The primary reason for this increase is the damage done by Hurricane Andrew in 1992. MDHA officials also said that insurers are reluctant to insure MDHA properties, partly because of their deteriorating condition. In 1975, when MDHA’s allowable expense levels were set by under PFS, the housing agency was not incurring significant security costs. Since then, however, MDHA has had to hire Dade County police officers to provide additional protection to its developments outside municipalities and to hire security guards for its housing developments for the elderly. MDHA initially used part of a subsidy it received from the county government to cover these costs. When the county discontinued the subsidy in fiscal year 1996, the housing agency used its grants from HUD’s drug elimination program to pay for security services at its developments for the elderly instead of at developments in other parts of the county. MDHA also used the county funds to provide some resident services and to help pay for employee benefits. In fiscal year 1995, for example, MDHA supplemented each development’s budget by $6 per unit-month to help pay for employee benefits. When the county discontinued funding in fiscal year 1996, developments had to absorb the reduction into their budgets. Ever-increasing city code requirements have also increased MDHA’s costs for maintenance. For example, the city code requires MDHA to have removable security screens in its units’ windows. Residents continually open and close the security screens, which causes the screens to need more maintenance because of the additional wear and tear. MDHA’s operating costs are rising because its housing stock is aging and poor housing design, conditions, and crime combine to drive costs up. We observed examples of these conditions at two of MDHA’s developments—Liberty Square and Scott Homes. The Liberty Square Housing Development was constructed in 1937, with additional buildings completed in the late 1940s. It is one of MDHA’s largest developments, comprising 753 units in one- and two-story buildings in a predominantly residential neighborhood. Liberty Square is a family development that is 93-percent occupied. Approximately 95 percent of the households are headed by single females. Liberty Square employs 17 full-time staff: 7 administrative staff and 10 maintenance staff. Security features at Liberty Square include city police patrols, fencing along the perimeter of the property, lighting, and security screens in the residents’ windows. Liberty Square officials attributed the development’s increased operating costs to crime, vandalism, the location and age of the development, its architectural design, and the type of residents. The officials said that crime was a very serious problem, with drug-related crimes occurring most frequently. Replacing the lights that are shot out by drug dealers and practically anything of value that vandals can steal from vacant units raises the development’s costs. Appliances are not stolen because the maintenance staff removes them immediately after a resident vacates a unit, but the time spent moving the appliances in and out of the units is costly. Painters spend 25 percent of their time covering graffiti. Housing management officials at Liberty Square said that the property is so old that the concrete walls are disintegrating, plaster is falling off the walls, pipes are rusting and leaking, and bathtubs are deteriorating. Because appliances have gone past their useful life, the staff receives approximately 20 calls a day from tenants asking to have refrigerators repaired. Design features of the buildings contribute to higher costs because the buildings are not insulated and the front doors have mail slots that criminals use to break into units and through which vandals insert water hoses and flood the units. The Scott Homes Housing Development was constructed in 1954 and consists of 754 units in two-story buildings. It is managed by a private management company. Primarily a family development, Scott Homes has a 97-percent occupancy rate, and employs 19 full-time staff. The development is in a neighborhood with a mixture of residences and commercial businesses. Over the past 5 years, approximately 290 units have had some modernization work done, and within the next 5 years, MDHA’s plans are to completely rebuild Scott Homes if the development receives a HOPE VI grant; however, MDHA’s application for such a grant has failed twice to receive HUD approval. Overall, officials at Scott Homes said approximately 40 percent of the units are in fair to poor condition. Eight units are in such bad condition that MDHA does not plan to rent or repair them because it would be too costly to bring the units up to standard. Security features at Scott Homes include county police patrols, fencing along the outside perimeter of the property, lighting, and security screens in the residents’ windows. Scott Homes provides the space, utilities, and furnishings for a police substation at the development. Despite the security measures and the police substation on site, Scott Homes officials attributed some of the development’s increasing costs to crime and vandalism. They attributed other increasing operating costs to the age of the development, its architectural design, and the residents. Crime is a serious problem at Scott Homes with drug-related crimes being the most serious. Because of the crime, the development and its surrounding community have a bad reputation that makes it difficult for the development to generate rental income, especially by attracting higher-income residents. Vandalism is also costly. Vandals rip out copper pipes from vacant units, steal security windows and street signs, and shoot out lights. The units’ age contributes to the cost of their maintenance because door frames are deteriorating, water pipes break and leak into units, and screen doors and appliances have outlived their useful life and are constantly in need of repair. Housing management officials attributed other increasing costs to the development’s architectural design: Porches and sidewalks have no underlying support, and the building pilings are sinking or leaning, becoming safety hazards to residents. Finally, officials at Scott Homes told us that residents contribute to higher operating costs because families with children cause a great deal of wear and tear on units and also use more utilities. Scott Homes officials also pointed to increased costs for such activities as grounds keeping and waste management, noting that since fiscal year 1995, grounds-keeping costs at Scott Homes have increased nearly 300 percent because staff have to trim tree limbs and roots to keep them from damaging the buildings and sidewalks. In addition, ground erosion has become a major problem at Scott Homes, and Miami’s strict dumping requirements have caused waste management costs to nearly double since fiscal year 1995. Officials at Scott Homes said the increased costs and inadequate operating subsidy have resulted in seven maintenance staff and one administrative person being laid off, primarily because of a reduction in the operating subsidy of $400,000 in 1996. Because of the reduction in the maintenance staff, the deferral of maintenance has increased further. The buildings are not being painted nearly as often as they should be, for example. To address the shortfall in its funding for operations, MDHA has reduced administrative and maintenance staff, used reserves for current expenses, and sought other sources of funding to supplement its operating budget, according to officials. The immediate effect of reducing the maintenance staff by 10 percent in 1996 was to delay preventive maintenance. For example, although MDHA previously replaced roofs before leaks occurred, the current practice is to defer replacement until after leaks are noticed. This results in damaged walls, floors, and electrical systems and other problems. MDHA officials also said that they have reduced the level of the operating reserve to maintain operations. For example, in fiscal year 1993, MDHA maintained 57 percent of the maximum amount that HUD allows in its operating reserve; in 1997, MDHA reduced that level to 39 percent. The other funding sources that MDHA uses include the Comprehensive Grant Program for modernization projects and the Public Housing Drug Elimination Program grant. An MDHA official estimated that the agency will use approximately $1.6 million, or 13 percent of $12.5 million in Comprehensive Grant Program funds for fiscal year 1998, to help pay the salaries of agency staff involved in resident services, accounting, housing operations, and the reinspection of units to ensure they meet HUD’s Housing Quality Standards. MDHA also uses the drug elimination grants to cover its security costs. This funding strategy is risky, however, because a housing agency cannot always count on receiving these competitive grants. Because MDHA did not receive a drug elimination grant in fiscal year 1998, and if an appeal does not result in an award of a grant, MDHA might be forced to discontinue its security services. Figure IV.1 shows that MDHA’s ordinary maintenance expenditures initially rose after 1993, but by fiscal year 1997, they had decreased 10 percent below the fiscal year 1993 level. It also shows that administrative expenditures increased 48 percent and general expenses increased 11 percent, while tenant services expenditures decreased 75 percent and protective services expenses decreased 89 percent. Protective services as a component of operating costs decreased because MDHA has begun using drug elimination funding to pay for this activity. In fiscal year 1996, MDHA used $1.1 million of its drug elimination funding and $312,000 of its operating funds to pay for security. In contrast, in fiscal year 1993, MDHA used $1.2 million of its operating funds for security. Although MDHA officials provided little information about incentives that they believed exist under PFS or that should be added, they did have some opinions about other regulatory incentives or changes that could be made that would permit more efficient operations: Housing agencies should be allowed to evict residents under state eviction guidelines rather than federal eviction requirements. Operating under state guidelines would greatly reduce the time needed to remove residents. Judges are familiar with state eviction guidelines because they continually review them for private landlords seeking to evict residents. Judges are much less knowledgeable about federal eviction guidelines and, therefore, take much longer and are more reluctant to evict public housing residents. Accelerating the eviction process would allow MDHA to more quickly house residents on its waiting list. MDHA needs a great deal more flexibility in the rents that are set for residents. The current HUD allowance to set minimum rents needs to be made permanent. MDHA also needs more discretion in the amount of the minimum rent and in the selection criteria for residents. More flexibility in rent-setting and resident selection would allow MDHA to increase its rental income and become less dependent on the PFS subsidy. HUD needs to change the regulations on project-based waiting lists. Currently, the household at the top of the list has to accept the first apartment that is available regardless of location. If the household does not want the available housing unit, the household is placed at the bottom of the waiting list and can decline only twice. Because MDHA’s housing developments are up to 69 miles apart, the first apartment available to a household on the waiting list is often not where they want to live. For working families, the regulation creates even more of an inconvenience and an added burden for MDHA because the agency is attempting to encourage residents to work. If residents accept units they truly do not want, they then can develop justification to transfer to other units. For example, a doctor’s opinion that a resident is not in good enough physical condition for a long commute is enough justification for a resident to receive a transfer. Every transfer increases MDHA’s maintenance costs. Finally, MDHA officials stated that although they have had excellent working relationships with the four private management companies that manage 1,772 of the agency’s housing units, they have seen no direct cost savings from the private management companies operating their properties. The officials did say, however, that they have learned a great deal from these companies and that they are operating their other developments more efficiently as a result. MDHA officials also told us that basing the operating subsidy on HUD’s fair market rent (FMR) would be the most efficient way of distributing the funds. A system based on FMR would more accurately reflect what the rents should be for public housing in a given municipality, they said. Even if the subsidy was based only on a percentage of FMR, at least the measuring would be based on a market-generated indicator that is independent and is based on current information. The amount of subsidy to be awarded to housing agencies could easily be calculated by subtracting the rental income and utility allowance from FMR. The annual data HUD collects from approximately 3,200 housing agencies nationwide show that average rental income is generally declining, while operating expenses are increasing. As a result, HUD’s contributions in the form of subsidies have increased. The data also show that, possibly as the result of outside influences and funding from sources other than HUD’s operating subsidies, many housing agencies have increased their operating reserves. HUD’s performance measurement program, for instance, might have influenced some agencies to increase their operating reserves to gain higher performance scores. Also, some housing agencies might have used grant funding from other sources to finance a portion of their administrative costs, routine maintenance, or protective services, allowing them to use a larger portion of their HUD-funded operating subsidies to cover increases in their operating reserves. Data used in this analysis are from HUD’s Integrated Business System (IBS), which contains financial data provided by public housing agencies on HUD’s Form 52599. On HUD’s Form 52599, housing agencies report their operating receipts and expenses for their public housing properties. The data, however, may not be indicative of the financial condition of a housing agency or the sufficiency of PFS funding because the data do not include all sources of income. Additional HUD funds are provided by the Comprehensive Grant Program, the HOPE VI Grant Program, and the Public Housing Drug Elimination Program. The IBS data do not include such supplemental income. Thus, our analyses, based solely on IBS data, are limited in their presentation of the overall financial picture of housing agencies. In addition, factors outside the housing agencies may influence their financial decisions. To even out its workload, HUD established four ending dates for the fiscal years of the local housing agencies it funds—the last day of March, June, September, and December. In doing our analyses, we annualized the IBS financial data reported in this appendix based on each housing agency’s fiscal year ending date. In addition, we adjusted all financial data to constant 1996 dollars. Finally, we categorized the housing agencies by size according to the number of their dwelling units, as follows: Extra small housing agencies have 1 to 99 dwelling units. Small housing agencies have 100 to 499 dwelling units. Medium housing agencies have 500 to 1,249 dwelling units. Large housing agencies have 1,250 to 6,599 dwelling units. Extra large housing agencies have more than 6,599 dwelling units. As reported on HUD’s Form 52599, housing agencies have three basic sources of operating receipts: (1) HUD’s contributions in the form of operating subsidies; (2) dwelling rental incomes; and (3) other operating income. HUD’s contributions were a major source of income for housing agencies in the fiscal years ending in 1992 through 1996; in fact, for large and extra large housing agencies, HUD’s contributions represented more than half of their total income for the fiscal year ending in 1996. As figure V.1 shows, the average housing agency’s per unit-month HUD contribution, when adjusted to constant 1996 dollars, generally increased between 1992 and 1996. In the fiscal year ending in 1996, HUD’s average per unit-month contribution increased for each successively larger size of housing agency, from an average of nearly $77 per unit for extra small housing agencies to a per unit average of almost $261 for extra large housing agencies. In addition, for each successively larger size of housing agency, HUD’s contributions represented a larger portion of the housing agency’s income in the same period. This portion ranged from an average of 35 percent of extra small housing agencies’ total income, including dwelling rental, to 61 percent for extra large housing agencies, while small, medium, and large housing agencies received, on average, 41, 47, and 56 percent of their total income from HUD’s contributions, respectively. Additionally, HUD’s average contribution, in constant 1996 dollars, increased in each size category when comparing the fiscal year ending in 1992 with 1996. However, while the average HUD contribution for large and extra large housing agencies increased by 12 and 10 percent when comparing the fiscal year ending in 1992 to 1996, for that same period the average HUD contribution increased by between 18 and 21 percent in all other sized housing agencies. Almost three-quarters of housing agencies submitting HUD Form 52599 data in the fiscal year ending in 1996 reported having received over 20 percent, but not more than 60 percent, of their income from HUD’s contributions. As table V.1 shows, 28 percent of the housing agencies received more than half their income from HUD’s contributions. For the fiscal year ending in 1996, for each successively larger size of housing agency, the percentage receiving at least half of their income from HUD’s contributions increased. About one-quarter of the extra small and small housing agencies received over 50 percent of their income from HUD contributions. About 41 and 68 percent of medium and large housing agencies, respectively, received over 50 percent of their income from HUD’s contributions. HUD’s contributions represented more than half of the income of all extra large housing agencies. In the fiscal year ending in 1996, dwelling rental receipts constituted over 90 percent of housing agencies’ average operating receipts, exclusive of HUD’s contributions in the form of subsidies. Figure V.2 shows that, comparing the fiscal year ending in 1992 with 1996, the average per unit-month dwelling rental income declined, except for housing agencies with fewer than 100 units. Comparing the fiscal year ending in 1992 with 1996, the average monthly dwelling rental income per unit declined by over 9 percent for small and extra large housing agencies and by 8 percent for large housing agencies. Medium-sized housing agencies saw their rental income decline by 6 percent. Only extra small housing agencies maintained a consistent level of rental income. However, while extra small housing agencies maintained their rental income in constant 1996 dollars, possibly because they had large increases in their operating expenses relative to housing agencies of other sizes, HUD made larger increases in its contributions to smaller housing agencies than it did for housing agencies in all other size categories. Other operating income represented about 9 percent of a housing agencies’ income in the fiscal year ending in 1996, exclusive of HUD’s contributions. Other sources of operating income reported in this category include nondwelling rental (e.g., from renting rooftop space for signs or broadcasting antennas), interest they earn on general fund investments, and receipts from other sources (e.g., from operating services for tenants, such as laundromats or day care centers). Operating expenses, as reported on the HUD Form 52599 consist of six major categories: (1) utilities, (2) ordinary maintenance and operations, (3) administration, (4) general expenses, (5) tenant services, and (6) protective services. As can be seen in figure V.3, a definite diseconomy of scale exists in the average per unit-month operating expenses of a housing agency. For each successively larger size of housing agency, the average total routine expense per unit increased. Utilities, including water, electricity, gas, fuel, and related labor expense, constituted approximately one-fourth of housing agencies’ routine expenses. In the fiscal year ending in 1996, utility expenses ranged from a low of 22 percent of the average routine expenses for an extra small housing agency up to 27 percent for large and extra large housing agencies. However, unlike other routine expenses, HUD calculates utilities on a 3-year rolling base system, so we could not analyze utilities in conjunction with the other routine expense categories. Thus, any references to total routine expenses are exclusive of utilities. Ordinary maintenance and operations consist of expenses for labor, materials, contracts, and garbage fees. On average, this category of routine expenses comprised the largest portion of a housing agency’s operating expenses in their reports for the fiscal year ending in 1996. Regardless of a housing agency’s size, on average over 40 percent of its per unit-month expenses were for ordinary maintenance and operations. The average per unit-month costs for this expense category were about $59 for extra small housing agencies, ranging up to an average per unit-month expense of $134 for extra large housing agencies. Small, medium, and large housing agencies reported average ordinary maintenance and operation expenses of approximately $62, $78, and $93, respectively. Although they did not have the largest increase in constant 1996 dollars, extra small housing agencies experienced the largest percentage change in their ordinary maintenance and operation expenses, when the fiscal year ending in 1992 is compared with 1996. While extra small housing agencies had an increase of over 9 percent (over $5 per unit) during that period, small and medium housing agencies had increases of 0.2 and 3 percent (about $0.15 and $2 per unit), respectively. Although, at about $8 per unit, the dollar amounts of the increases in large and extra large housing agencies were greater than those in other size housing agencies, they represented a smaller percentage change (9 and 6 percent, respectively) than that of the extra small housing agencies. Administration includes administrative salaries, legal expenses, staff training, travel, accounting fees, auditing fees, sundry, and outside management costs. In the fiscal year ending in 1996, the average per unit-month expense for administration represented between one-quarter and one-third of the housing agencies’ total routine expenses. Except for small agencies, for successively larger sizes of housing agencies, the average per unit administration expense increased. With the exception of large agencies, these expenses represented an increasingly smaller percentage of the housing agencies’ total expenses for successively larger sizes of agencies. In the fiscal year ending in 1996, extra small housing agencies spent an average of $48 or nearly one-third of their total routine expenses for administration, whereas extra large housing agencies spent an average of $78 per unit-month, or one-quarter of their total routine expenses on administration. Small, medium, and large housing agencies spent an average of $41, $48, and $58 per unit-month, respectively, for their administration, which represented about 27 percent of their total routine expenses. With the exception of extra small housing agencies, for successively smaller sizes of housing agencies, both the amount of their administration expenses per unit, in constant 1996 dollars, and the percentage change in those expenses, decreased when comparing the fiscal years ending in 1992 and 1996. The over $4 (10 percent) increase extra small housing agencies experienced in their administration expenses was greater than the nearly $1 and $3 (2 and 6 percent) increases for small and medium sized housing agencies, respectively, but less than the approximate $6 and $10 (12 and 15 percent) increases experienced by large and extra large housing agencies. General expenses include insurance, payments made to local governments in lieu of taxes, terminal leave payments, employee benefit contributions, collection losses, interest on administrative and sundry notes, and other general expenses. For the fiscal year ending in 1996, housing agencies reported that they spent, on average, between 24 and 28 percent of their total per unit-month expenses in this category. The lowest average per unit-month expense was about $37 by extra small housing agencies and the highest was nearly $80 by extra large housing agencies. Small housing agencies spent an average of more than $41, while medium and large housing agencies each spent about $50. When comparing the fiscal year ending in 1992 with 1996, extra small housing agencies had almost a $3 increase in general expenses, the largest of any size group. In contrast, small and extra large housing agencies had reductions in their expenses in this category of less than $1 each. As a percentage change, the 8-percent increase incurred by extra small housing agencies between the fiscal years ending in 1992 and 1996 was greater than that for all other sizes. While small and extra large housing agencies had decreases, the change for medium and large housing agencies was 3 and 4 percent, or about $1 and $2, respectively. Tenant services cover salaries, recreation, publications, contract costs, training, and other expenses. In the fiscal year ending in 1996, the average per unit-month expense for tenant services ranged from about $1.50, or less than 1 percent of their average routine expenses, for extra small housing agencies to $6 for extra large housing agencies, which represented 2 percent of their total routine expenses. The largest increase (in constant 1996 dollars) and percentage change in this expense category were experienced by extra small and small housing agencies. While medium, large, and extra large housing agencies had increases of 7, 1, and 11 percent (about $0.30, $0.05, and $0.60), respectively, when comparing the fiscal years ending in 1992 and 1996, extra small and small housing agencies had increases of 65 and 29 percent (nearly $0.60 each). Protective services include expenses for labor, materials, and contract costs. In the fiscal year ending in 1996, except for extra large housing agencies, the average per unit-month amount expended on protective services ranged from nearly $1 in extra small housing agencies to almost $4 in large housing agencies, which represented between 0.4 and 1.7 percent of their average per unit-month routine expenses, respectively. For extra large housing agencies, the average per unit-month expense for protective services was $21, or 6 percent of their average per unit-month total routine expenses. However, extra small housing agencies had the largest percentage change increase in this category. In fact, their 139-percent increase was the largest increase for any size housing agency and in any expense category. However, in constant 1996 dollars, the extra small housing agencies’ average increase of $0.40 was less than that of either medium ($0.45) or extra large ($0.50) housing agencies which, when comparing fiscal year ending 1992 to 1996, had increases of 21 and 2.5 percent, respectively. In general, the average per unit-month expenditures for nonroutine maintenance declined, in constant 1996 dollars, between the fiscal years ending in 1992 and 1996. The exception was extra large housing agencies, which had a net increase of about $0.10 per unit-month during that period. However, as table V.2 shows, the housing agencies did not experience a consistent decline in nonroutine maintenance expenses. All housing agency size groups had increases in the expenses in this category before showing decreases in the fiscal years ending in 1995 and 1996. The decline in average per unit-month nonroutine maintenance expenses ranged between nearly $2 to just over $3. Except for extra large housing agencies, which had a 3-percent increase in their nonroutine maintenance, all other housing agency sizes showed a decrease when comparing fiscal year ending in 1992 to 1996. The largest decrease was 41 percent for small housing agencies, and the least was 31 percent for extra small housing agencies. Medium and large housing agencies had decreases in their expenses in this category of 33 and 38 percent, respectively. Table V.3 shows that in at least 1 year, capital expenditures increased in each housing agency size group. However, in every size group, reductions occurred in expenditures in this line item between the fiscal years ending in 1992 and 1996. In addition, every size group had a net decrease in its average per unit-month capital expenditures when comparing the fiscal year ending in 1992 with 1996. In constant 1996 dollars, the range of the average per unit-month decrease was $0.10 for extra small housing agencies to almost $2.30 for medium housing agencies, with decreases of almost $2 for small agencies and about $1.50 for both large and extra large housing agencies. The decrease in capital expenditures for extra small housing agencies was almost negligible, representing a decrease of less than 2 percent. However, the average per unit-month expenses decreased about one-quarter in small, large, and extra large housing agencies and about 37 percent in medium-sized housing agencies. HUD requires housing agencies to maintain an operating reserve to cover emergency expenses and deficits in their operating budgets. Figure V.4 shows that, in constant 1996 dollars, the average per unit-month operating reserve amounts increased in all sizes of public housing agencies when comparing the fiscal year ending in 1992 with 1996. When adjusted to constant 1996 dollars, the increase in average per unit-month operating reserves ranged from $20 (25 percent) for small housing agencies to just over $28 (34 percent) for both medium and large housing agencies, when comparing fiscal year ending in 1992 to 1996. While the extra large housing agencies’ $25 increase in their per unit-month operating reserve was the second smallest, at 39 percent, it represented the largest percentage change increase of all housing agency size groups, when comparing fiscal year ending in 1992 with 1996. HUD administratively established a maximum allowable operating reserve that, until the fiscal year ending in 1995, limited the amount a housing agency could accumulate to 50 percent of its approved operating budget’s total routine expenses or $100,000, whichever was greater. During that period, HUD could reduce the amount of a housing agency’s operating subsidy if the housing agency’s estimated year-end operating reserve balance exceeded its established maximum allowable operating reserve. In February 1995, HUD removed this requirement and replaced it with the operating reserve measure used in its Public Housing Management Assessment Program. The revised 1997 Public Housing Management Assessment Program measure gave its highest score to housing agencies with cash reserves greater than 15 percent of their total actual routine expenditures. As a housing agency’s cash reserves—as a percentage of its routine expenditures—decreased, the housing agency’s score also decreased. Figure V.5 shows operating reserves as a percentage of estimated maximum allowable operating reserves, using pre-1996 criteria, for the fiscal years ending in 1992 through 1996. This analysis uses actual routine expenses as a surrogate for the HUD-approved budgeted routine expenditure. In general, housing agencies showed consistent increases in their operating reserves. Almost half (1,558) of the housing agencies reported increases in their operating reserves in at least 3 of the 4 fiscal years we analyzed, and 15 percent (485) had increases in all 4 years. However, 17 percent (530) of the housing agencies reported declines in their operating reserves for at least 3 of the 4 analyzed fiscal years and 2 percent (66) showed declines in all 4 fiscal years. Comparing the fiscal years ending in 1992 and 1996, for all housing agency size groups, on average, operating reserves in constant 1996 dollars got closer to the maximum allowed. Because the average per unit-month operating reserve for an extra small housing agency was about $111 in the fiscal year ending in 1996, and extra small housing agencies have less than 100 units, their average operating reserve would almost always be less than the $100,000 maximum allowed. Therefore, extra small housing agencies were allowed to maintain operating reserves in excess of 50 percent of their routine expenses without suffering a reduction in their subsidy. The following are GAO’s comments on the Department of Housing and Urban Development’s letter dated June 5, 1998. The comments are organized in the order of the major sections of the attachment to HUD’s letter. 1. Although we report the statements of officials at four housing agencies and the conditions we found there, we have not drawn any overall conclusions about the adequacy of PFS funding nationwide. Instead, on the basis of our case studies, a survey of 800 housing agencies done by a trade group representing housing agencies, discussions with officials of trade groups and HUD, we conclude that operating subsidies may not be adequate for housing agencies whose base year expenditures were low or whose operating circumstances or costs have undergone significant change since 1975. We provide income and expense trends in an appendix to our report. Our analyses focused on HUD’s database of housing agencies’ statements of operating receipts and expenses. The analyses are limited and we draw few conclusions because the underlying data do not fully reflect housing agencies’ incomes and because their expenditures are limited by the income available to cover them. We were unable to obtain complete information on housing agencies’ incomes—including income from states and other federal grants—even from the four agencies we visited. Nevertheless, we believe that the analyses we present will provide other analysts with insights not available previously. The Congress did not ask us nor did we intend to define what costs the operating subsidies should be covering. Rather, it is HUD’s responsibility to define the scope of costs that the PFS subsidies should cover, and one of the options that we suggest HUD might consider for redesigning PFS includes developing such a definition of covered costs. Finally, we disagree that much of the discussion in the report deals with needs that are more appropriately met through capital and grant funding instead of operating subsidies. Our analysis shows that just the opposite is true. We report that some housing agencies are using substantial amounts of funding from capital and other grants to fund their operating expenses. This indicates that these agencies are not receiving enough funding through PFS and rental income alone to cover these expenses. 2. We disagree that we confuse the issues of PFS adequacy and the accuracy of HUD’s budget estimate. In fact, we conclude that the adequacy of PFS for individual housing agencies, which is determined by their HUD-approved allowable expense levels, and the accuracy of HUD’s budget estimates for PFS are interrelated. We show that determining allowable expense levels is an integral part of the PFS methodology, and we explain that these expense levels also play a large role in developing the annual PFS budget estimate. We conclude that to the extent that expense levels are too low for agencies whose base year expenditures were low or whose operating circumstances or costs have undergone significant change since 1975, HUD’s budget estimate may also be too low. 3. We agree with HUD’s comment on our recommendation for revising the way HUD estimates its PFS budget request. It is premature for HUD to change its budget estimating methodology until the Department revises the way it provides subsidies to public housing agencies, as would be required under pending legislation. We also believe that given the data and timing constraints under which HUD must prepare its budget estimate, the estimate is reasonably accurate. We have, therefore, withdrawn our recommendation that the Secretary consider revising the way HUD makes its PFS estimate, and we have made changes to our report accordingly. 4. HUD raises several concerns about the draft report’s recommendation that the Department consider an appeals process. In recommending such an appeals process, we intended that HUD could address both overfunded and underfunded housing agencies, and our recommendation now reflects this intent. Whether HUD designs a process that entails a labor-intensive, subjective review of all housing agencies or an analysis-based, formula-driven review would be HUD’s decision. 5. We agree with HUD that the best way of knowing whether housing agencies are adequately funded is to establish a set of core services that should be provided and to determine what the cost of those services should be in each case. In our report, we offer this as one of the options available to HUD as it plans to revise PFS. However, we believe that HUD should be able to recognize whether some agencies are underfunded even if it does not precisely know the best composition of the set of core services. Our report shows that symptoms of inadequate funding are clear at certain housing agencies, and that if left to worsen, the condition of the housing stock is threatened. 6. HUD states that its approach to dealing with housing stock deterioration and social problems in public housing is to address the root causes of such problems with supplementary and competitive grants to provide protective services, maintenance, and resident services rather than to increase the subsidy. However, these activities are also covered under long-standing public housing operating expense categories that are designed to be funded with rental income or, if necessary, the operating subsidy. We conclude, therefore, that the supplementary grants are necessary because the operating subsidy has been insufficient to adequately fund these activities. 7. Our draft report noted examples of housing agencies’ using funding from their operating budgets to temporarily repair their housing stock—as in painting over peeling lead-based paint—instead of performing necessary modernization work. However, this practice results in unexpected uses of the operating subsidy and inadequate funding in other areas. 8. HUD’s letter to us lists several changes adopted by the PFS, including add-ons for legislative changes to social security, unemployment compensation, and flood insurance. HUD states that the draft report did not recognize these and other changes showing that PFS has adapted to housing agencies’ changing needs. We recognize that over the years, several changes have been adopted by PFS for application across the board. However, the changes that HUD notes in its comments have little relation to the cost increases—including the costs of deteriorating housing stock and increasing crime and poverty—that agencies told us accounted for most of the increases in their operating costs. 9. HUD’s letter disagrees with our conclusion that employee benefits have not been adequately factored into the PFS wage inflation factor increases. HUD states that we incorrectly assumed that the cost of employee benefits has grown more rapidly than the increases in the PFS wage inflation factor. In response, we contacted HUD to obtain further elaboration on HUD’s inflation adjustment factor. A HUD official in its Policy Development and Research office explained that HUD’s methodology for adjusting its budget estimate from 1975 to 1988 used wage survey data but excluded observations which showed a decrease in wages. As a result, HUD’s inflation adjustments were too high. On this basis, we agree with HUD’s comment that its wage inflation methodology kept up with actual changes in wages and benefits, albeit for the wrong reasons. Although HUD no longer adjusts the wage data in this manner, it still uses wages as its measure of labor cost change. Because housing agencies pay both wages and benefits, we still believe that a broader measure of compensation would provide a more accurate basis for making adjustments for inflation. 10. We chose not to include the issue of utilities in our report because utility expenses are relatively straightforward compared to other issues we report on. Changes in utility rates are covered by HUD, and the utility expense level is adjusted at the end of the year to reflect changes in estimated consumption. Housing agencies and HUD share on a 50-50 basis the savings or additional costs because of reductions or increases in energy consumption. 11. We have changed the text of our report accordingly. 12. We disagree with HUD and believe that at some housing agencies the overall level of income in the base year and earlier did have an impact on the initial allowable expense level and, therefore, on whether the housing agency is currently adequately funded. HUD states that before PFS was implemented, operating subsidies were based on a HUD-approved operating budget that was subsidized to cover the gap between rental income and approved expenditures. However, during the interim period from 1972 to 1974, HUD placed a cap on operating expenditures, which meant that even these HUD-approved and subsidized budgets could have been inadequate. Moreover, the amount of HUD’s subsidy was based on what was available from the Congress in the first few years of subsidizing public housing—an amount that grew quickly from $233 million in 1972 to over $700 million by 1979. 13. We have reconciled these points with the relevant housing agencies and made changes to our report where necessary. 14. We stand by our conclusion that for a housing agency to make extensive use of modernization and other supplementary funding to cover operating expenses is evidence of an inadequate operating subsidy. In addition, we neither state nor imply that housing agencies were using their operating subsidies for capital replacement needs, and we disagree with HUD’s statement that the operating subsidy should not accommodate increases in an established operating cost category such as protective services. Moreover, by using significant portions of their modernization funding to cover operating costs, housing agencies are jeopardizing the viability of the housing stock that is in need of major repair. We also disagree with HUD’s conclusion that housing agencies that use their supplementary funding to maintain or increase their operating reserves are doing very well. Some housing agencies might add to their operating reserves in order to score better in HUD’s Public Housing Management Assessment Program, and increasing operating reserves might reflect this motivation and mask underfunding. 15. HUD correctly points out that we have reported in the past that wide differences in costs exist among public housing developments. Within a single housing agency, in fact, high-cost and low-cost developments can exist. However, cost differences among developments do not mean that housing agencies themselves are receiving sufficient subsidies. Furthermore, knowing whether public housing costs are higher or lower than the cost to house families under the Section 8 Certificate and Voucher Program does not in itself determine whether housing agencies are receiving enough subsidy to cover their expenses. Therefore, we conclude that those housing agencies with operating circumstances that have changed significantly or whose initial base year expenses might have been too low might be currently underfunded. 16. We are aware of both of the studies mentioned by HUD and reviewed them closely as part of our background research. These studies for the most part compare expenditures of public housing with those of alternative housing programs or funding options and do not draw conclusions regarding the adequacy of PFS funding to meet public housing needs. As a result, we believe that these studies do not provide data showing that housing agencies are adequately funded. In Senate Report 105-53 in support of the Departments of Veterans Affairs, Housing and Urban Development, and Independent Agencies Appropriations Bill, 1998, the Senate Committee on Appropriations requested that we study HUD’s Performance Funding System (PFS) for allocating appropriated funds to housing agencies as operating subsidies. To provide information to the Congress about HUD’s administration of PFS and to guide the revision of PFS so that it better accommodates changing operational costs and circumstances in public housing and permits greater local flexibility in managing public housing, we agreed with the staff of the Committee on Appropriations’ Subcommittee on VA, HUD, and Independent Agencies to address the following questions in our study: How does PFS allocate the congressionally appropriated subsidy among public housing agencies? How well does PFS meet the subsidy needs of individual housing agencies? How does HUD develop budget estimates of housing agencies’ annual need for operating subsidies and are the estimates appropriate? What are some of the possible options that HUD might have for changing PFS to make it a more effective tool for subsidizing housing agencies? To determine how PFS allocates the congressionally appropriated subsidy among public housing agencies, we reviewed and evaluated the history and documentation of the PFS prototype formula. We also reviewed the studies done by HUD and its contractors on the development of PFS, its shortcomings, and the various implications of PFS for the effective funding and functioning of public housing. We also interviewed HUD officials to obtain their views on the historical development and strengths and weaknesses of PFS. To determine how well PFS meets the subsidy needs of housing agencies, we visited four housing agencies and developed case studies of their use of funds based on our review of their financial data and interviews with housing agency officials. To obtain information on PFS’ adequacy to fund operations at these housing agencies and to discuss the impact of potential underfunding, we visited two developments owned by each housing agency. We discussed with housing managers at these developments the impact that various factors, such as location and crime, have on the operating costs of those developments. To ensure that we asked officials at the housing agencies the same questions, we developed and used a standardized interview guide. In addition to our visits to the housing agencies, we reviewed and analyzed housing agency data from HUD’s Integrated Business System (IBS) for fiscal years ending in 1992 through 1996. These data comprised 15,705 records and contained detailed information on each housing agency’s Statement of Operating Receipts and Expenditures. IBS data represent only data collected on HUD’s Form 52599. Many housing agencies supplement their income with funding from other HUD grants and their local governments. This funding is not captured in the IBS data, and obtaining information on it was beyond the scope of this report. Our analyses were limited to the data housing agencies report on their Statement of Operating Receipts and Expenditures. We adjusted all financial data in the IBS records to constant 1996 dollars, using the Consumer Price Index for all items as reported in the February 1998 Economic Report of the President. We also reviewed documents describing the development and implementation of IBS, tested the edit criteria specified in the system documents, and checked the data’s internal validity. We discussed the reliability of IBS with its developers and users at HUD, and we selected a random sample of 300 records from the IBS data spanning fiscal years ending in 1992 through 1996. HUD officials asked the public housing directors in HUD field offices to send us copies of the original forms provided to HUD by the housing agencies. We received 222 usable forms of the 300 requested and checked the data on them against the data in IBS. On the basis of our sample, we estimated that the error rate for the IBS amount field was between 0.2 and 0.6 percent. This estimate applies to about 75 percent of the records in the database. On the basis of the response rate to our request and the limited number of data errors we found in our data verification process, we are satisfied that the IBS data are of sufficient accuracy to be useful in our analyses. To determine how HUD develops budget estimates of housing agencies’ annual need for operating subsidy, we interviewed HUD officials and reviewed and analyzed HUD’s methodology for developing its estimates. Our review included the time frames involved in the process and the steps involved in the process. In addition, we reviewed the documentation for the model HUD uses to calculate the budget estimate and the assumptions used in the model. Also, we discussed with HUD officials the sampling process HUD uses as part of the estimating process. To determine what options HUD has for changing PFS to make it a more effective tool for subsidizing housing agencies, we reviewed relevant literature and interviewed HUD officials and representatives of industry professional groups. We relied on our prior experience and ongoing work to develop options for other formula-based funding programs, including the Indian Housing Block Grant, Medicaid, the Older Americans Block Grant, Law Enforcement Block Grant, the Chapter I Education Grant, Highway Grant formulas, and technical assistance to the Congress for options in targeting HUD’s Community Development Block Grant. To advise us on all aspects of our work, we retained Mr. Wayne S. Sherwood, a consultant with extensive knowledge of the history and functioning of PFS and expertise in the operations of public housing agencies. We performed our work from August 1997 through May 1998 in accordance with generally accepted government auditing standards. Robert J. Dinkelmeyer, Economist Jerry C. Fastrup, Assistant Director The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a legislative requirement, GAO reviewed the Department of Housing and Urban Development's (HUD) Performance Funding System (PFS) for allocating appropriated funds to housing agencies as operating subsidies, focusing on: (1) how PFS allocates the congressionally appropriated subsidy among public housing agencies; (2) whether PFS meets the subsidy needs of individual housing agencies; (3) how HUD's budget estimates of housing agencies' annual need for operating subsidies are developed and whether the estimates are appropriate; and (4) some of the possible options that HUD might have for changing PFS to make it a more effective tool for subsidizing housing agencies. GAO noted that: (1) PFS allocates the congressional appropriation by providing an operating subsidy to each housing agency based on that agency's HUD-approved operating expenses during the base year 1975, less its income, plus certain annual adjustments; (2) the adjusted base year cost is known as the allowable expense level; (3) HUD did not develop its allocation method on the basis of standards of housing needs because it believed that reaching a consensus on these standards would have been too difficult; (4) however, twice over the last 23 years, HUD developed and used cost models based on specific factors directly related to the operating costs of well-managed housing agencies, including the age and height of buildings and the prevailing government wage rates; (5) the operating subsidies that the PFS provides to housing agencies may not be adequate for agencies with base year expenditures that were low or agencies with operating circumstances or costs that have undergone significant change since 1975; (6) although the PFS provides for annual adjustments to account for inflation and the aging of public housing stock, these increases might not have been enough for the agencies with base year spending that did not adequately reflect their needs or those with expenses that have increased more rapidly than HUD's allowed adjustments; (7) GAO found that agencies have experienced significant operational changes since 1975 that have affected their costs; (8) to develop its budget estimate for the operating subsidies housing agencies will need in a coming fiscal year, HUD estimates the needs of a representative sample of housing agencies and projects this estimate to the population of nearly 3,200 housing agencies; (9) inadequate subsidies can be a serious problem for housing agencies that are highly dependent on subsidies and need them to meet current obligations; (10) HUD has several options for making PFS a more accurate and effective funding tool; (11) in the past, information on physical housing conditions, comparative costs, or other data needed to implement a cost model has not been readily obtainable, and the cost of developing such information for all agencies was believed to be high; and (12) data that HUD is currently developing on housing agencies' financial and physical conditions should be useful to HUD as it considers new ways of allocating operating subsidies. |
U.S. international trade agreements that cover U.S. government procurement include the GPA and bilateral and regional FTAs. Two versions of the GPA currently coexist: the prior GPA, which was signed on April 15, 1994 (in this report, “the 1994 GPA”), and a revision of the agreement, which entered into force on April 6, 2014 (in this report, “the 2014 GPA”). According to the WTO, the 2014 GPA reflects refinements to the 1994 GPA, including updates to the agreement’s text and expansion of market access commitments. The 2014 GPA has 19 parties (including the EU) covering 47 WTO member countries (including the 28 EU member countries). Another 29 WTO members are observers; of these, 9 are in the process of acceding to the agreement. In addition to the GPA, the United States has 14 FTAs with 20 countries, 4 of which (Canada, Israel, Singapore, and South Korea) are also parties to the GPA. Almost all of the FTAs include provisions covering government procurement. The GPA aims to mutually open government procurement markets for goods, services, and construction services among its parties, according to the WTO. Under the GPA, foreign suppliers are able to compete alongside U.S. suppliers for U.S. government contracts covered by the agreement, and U.S. suppliers are able to compete for covered foreign government contracts in accordance with the framework established by the GPA. Under this framework, parties to the GPA are obligated to follow the processes for carrying out government procurement listed below: Parties to the agreement must treat other parties’ goods, services, and suppliers no less favorably than those of domestic sources or any other party and may not discriminate against locally based suppliers on the basis of foreign affiliation or ownership. The agreement prohibits the use of offsets in covered government procurement—that is, any condition or undertaking that encourages local development by means of local content or investment requirements, countertrade, or similar requirement. The agreement generally requires that the covered government procurement be conducted in a transparent, fair, and nondiscriminatory manner. The agreement specifies three methods of procurement that may be specified in a contract, provided that the procuring entity meets the conditions set out in the agreement: 1. open tendering, in which all interested suppliers may submit a 2. selective tendering, in which only qualified suppliers are invited to submit a tender; and 3. limited tendering, in which the procuring entity may contact a particular supplier (or more than one supplier) of choice. According to USTR, to implement U.S. obligations under the international agreements that cover government procurement, the United States waives preferential purchasing requirements—such as the requirement to purchase U.S.-made products—that would otherwise be inconsistent with the agreements. For example, USTR has waived the Buy American Act and other preferential provisions for eligible products in acquisitions covered by various trade agreements. Under the agreements we reviewed, each party’s covered government procurement is defined in part through coverage schedules in annexes to the agreement. These annexes identify the procuring entities covered by the agreements at the central and subcentral government levels as well as, in some agreements, procuring entities at an additional level (in this report, “other government entities”). These annexes further identify the goods and services and construction services whose procurement by the specified entities is covered by the agreement. In addition, each agreement delineates threshold values for coverage of government procurement. Below these thresholds, procurement activities are not covered by the agreement, and foreign access in accordance with the procedure in the agreement is not guaranteed. In the GPA, these threshold values are expressed as special drawing rights (SDR) in coverage schedules delineating covered entities. The United States converts the threshold values set in the GPA to official dollar amounts, which USTR reviews, and may revise, every 2 years and publishes in the Federal Register. For calendar years 2016 and 2017, the United States converted the GPA threshold values to $191,000 for procurement of goods and services and to $7.4 million for procurement of construction services for covered central government entities. These amounts help define the opportunities available to U.S. and foreign firms seeking to compete for government procurement contracts in the countries that are parties to the agreements. Moreover, parties to these agreements identify, by general category or entity, exclusions or exceptions to the coverage schedules. According to USTR officials, all international parties to the agreements we reviewed have certain procurements not open to foreign suppliers, including those not open for social, economic, or national security reasons. For example, the United States specifies exclusions that include set-asides for small businesses and for women-owned and veteran-owned businesses. According to USTR officials, OMB, USTR, Commerce, and GSA participate in overseeing the U.S. commitments related to government procurement under the trade agreements in a number of ways, including the following: OMB’s Office of Federal Procurement Policy sets the overall direction for federal procurement policies and regulations, which are driven by federal laws. USTR negotiates the agreements and submits data to the WTO. Commerce’s International Trade Administration monitors compliance with the agreements, supports USTR’s activities, and provides services to promote U.S. exports. GSA provides technical support to USTR in preparing the data for statistical notifications required by the GPA. While recent and complete data on covered government procurement are not available, we estimated, using data available for 2008 through 2012, that GPA and U.S. FTA parties’ annual average government procurement covered by these agreements totaled about $1.6 trillion—approximately one-third of their average total annual government procurement in those years. Overall, the amount of GPA-covered government procurement that the United States reported for 2010—the most recent year for which U.S. data are available—was more than double the combined amount reported by the five GPA parties with the next largest procurement markets (in this report, “the next five largest GPA parties”). At the central government (federal) level, U.S. covered government procurement reported for 2010 was also higher than the combined total reported by the next five largest GPA parties. Using available macroeconomic data, we estimated that average annual covered government procurement reported by the United States and the 57 other countries that are parties to the GPA and U.S. FTAs totaled about $1.6 trillion per year from 2008 through 2012—about one-third of the average annual $4.4 trillion total government procurement that we estimated for these countries for this period. This amount estimated for covered government procurement comprises covered government procurement of goods and services by specified government entities at the central and subcentral levels, above certain predetermined thresholds, and not excluded by the agreements; is largely a measure of the opportunities available to domestic and foreign firms seeking to openly compete for government procurement contracts in the countries that are parties to the agreements; and includes procurements conducted through limited tendering procedures. In a larger context, covered government procurement under the GPA and U.S. FTAs represents less than one-tenth of the 58 countries’ estimated $18.7 trillion in average annual government expenditures. Figure 1 shows our estimates of GPA and U.S. FTA parties’ average annual government procurement covered by the agreements, relative to their estimated government expenditures and total government procurement, in 2008 through 2012. Data available from the WTO for 2010 show that the United States reported more than twice as much GPA-covered government procurement as the next five largest GPA parties combined, although total U.S. government procurement is less than the combined total for the other five parties. In its statistical notification for 2010—the most recent U.S. submission to the WTO to meet the 1994 GPA statistical requirements, providing the most complete data for all selected countries—the United States reported covered government procurement totaling about $837 billion. In contrast, the combined covered government procurement reported by the next five largest GPA parties—the EU, Japan, South Korea, Norway, and Canada—for 2010 was about $381 billion. Using macroeconomic statistics, we estimated that total government procurement by the United States and the next five largest GPA parties in 2010 was about $1.7 trillion versus $2.4 trillion, respectively. (See fig. 2.) According to the available data, the EU’s reported covered government procurement ranked second to the United States’ in 2010, at about $331 billion. For the same year, Japan reported about $25 billion in covered government procurement; South Korea reported about $18 billion; Norway reported about $5 billion; and Canada reported about $2 billion, although the data available for Canada represent only central government procurement. Table 1 shows these GPA parties’ reported covered government procurement by central governments, subcentral governments, and utilities and other government entities as well as our estimates of the value of each party’s total government procurement. The U.S. and EU total government procurement markets are comparable in size, with estimated annual procurement of about $1.7 trillion and $1.6 trillion, respectively, in 2010; however, the United States reported more than twice as much covered government procurement as the EU—$837 billion versus $331 billion, respectively. (Elsewhere in this report we discuss limitations in the data that affected our ability to perform certain analyses and precluded more precise comparisons.) We found that the United States and the other five largest GPA parties reported for 2010 that an average of about 27 percent of all covered government procurement was at the central government level and 67 percent was at the subcentral level; however, there is large variation among the parties’ reported procurement. For the United States, the EU, and Norway, subcentral government procurement constitutes over half of the covered government procurement reported by each party. For South Korea, procurement by utilities and other government entities constitutes close to 75 percent of reported covered government procurement. For Japan, central government procurement constitutes over half of reported covered government procurement. Overall, covered government procurement by government entities such as utilities represents about 6 percent of the combined covered government procurement reported by the United States and the next five largest GPA parties; however, some GPA parties, such as Canada and Japan, do not report procurement by these entities. We calculated the percentages of covered central government procurement relative to total central government procurement for GPA parties, based on data reported to the WTO. Total central (federal) government procurement includes above-threshold and below-threshold procurement by covered entities reported to the WTO as well as procurement excluded from GPA coverage but reported to the WTO. Our analysis of detailed data on central government procurement, which were available only for the United States, Japan, and South Korea, shows that the United States reported opening its central (i.e., federal) government procurement market to foreign competitors to a greater extent than Japan and South Korea. The $198 billion in U.S. covered federal procurement reported for 2010 (see table 1) represents about 80 percent of the $247 billion in total reported U.S. federal procurement that year. In contrast, Japan’s and South Korea’s reported covered central government procurement for 2010 constituted about 30 percent and 13 percent, respectively, of their reported total central government procurement. (See fig. 3.) These amounts of covered central government procurement are the value of contracts largely open to all domestic and foreign competitors. However, covered government procurement also includes procurement made under limited tendering provisions. According to USTR officials, limited tendering is considered to be covered procurement under the GPA. GPA parties are to report the use of these provisions. (See app. II for more information about limited tendering.) The EU reported covered central government procurement of about $111 billion for 2010. However, we were unable to estimate the percentage of the EU’s total central government procurement that this amount represented because, unlike the United States, Japan, and South Korea, the EU does not separately report below-threshold procurement by covered entities. For 2010, the EU reported a macroeconomic estimate of about $676 billion in total central government procurement that does not distinguish procurement not covered by the GPA, including below- threshold amounts. According to EU officials, these data are not available because the EU does not require member states to report data on below- threshold procurement in the EU procurement database. According to the EU notification to the WTO, below-threshold procurement can be estimated by deducting above-threshold procurement from the reported total central government procurement; using this calculation, we estimated that the EU’s covered central government procurement represented 16 percent of its total central government procurement in 2010. We did not estimate this percentage for Canada and Norway, because Canada does not report below-threshold central government procurement or procurement excluded from the agreement and Norway does not disaggregate limited tendering or exclusions by level of government. There are several possible explanations for the large differences between the United States and the next five largest GPA parties’ covered government procurement relative to their total government procurement. For example, because parties negotiate coverage, the percentage value depends on (1) the value of actual individual procurements vis-à-vis the set threshold levels, (2) the list of covered entities and covered types of government procurement in parties’ GPA commitments, and (3) exclusions from coverage. Many EU member states, as well as Japan and South Korea, have actual government expenditures smaller than the United States’ and are therefore likely to have more smaller-value individual procurement contracts that fall below the GPA threshold levels. There is also variance in parties’ commitments in terms of covered entities. For example, Canada, the EU, Japan, Norway, and South Korea use a positive list approach for designating covered services—that is, listing only the services covered by the GPA—while the United States uses a negative list approach—that is, listing only services by a covered entity meeting the procurement threshold that are not covered by the agreement. According to Commerce officials, a negative list approach provides more liberal coverage than a positive list approach because it is not an exhaustive list and allows for coverage of new services. Moreover, our analysis of EU-reported data found that over 80 percent of EU total government procurement is not covered by the EU commitments. Procurements can fall outside EU commitments if they are below threshold or for other reasons, such as when they are specifically excluded. For example, EU procurement for hotel and accommodation services, water, defense equipment, and fuels for the production of energy are excluded from the agreement. Government procurement statistics reported by the GPA and U.S. FTA parties that we reviewed have deficiencies and inconsistencies that limit detailed comparisons of, and transparency regarding, the parties’ covered procurement. These statistics provide transparency—one of the GPA’s main goals, according to the WTO—about parties’ implementation of the GPA as well as the agreement’s benefits. However, our review of data that the United States and next five largest GPA parties submitted to the WTO for 2008 through 2013 found that a number of parties did not submit the reports annually, the submitted reports did not include all required data, and each party’s reports included inconsistencies that limit the data’s comparability. Further, a lack of common understanding on definitions of key terms has led to inconsistent reporting practices among the GPA parties, and a GPA statistical working group has made little progress in addressing such challenges. Of the U.S. FTAs we reviewed, only NAFTA requires its parties to report annual statistics on government procurement; however, the last data exchange between the three NAFTA parties took place in 2005. As a result, information about the extent to which U.S. FTA partner governments open procurement to U.S. suppliers is not available. The UN’s Principles Governing International Statistical Activities states that high-quality international statistics are a fundamental element of global information systems and that sources and methods should be chosen to ensure timeliness and other aspects of quality. Moreover, related good practices encourage countries to continually improve the quality and transparency of their statistics and systematically establish common concepts, classifications, standards, and methods. Under the 1994 GPA, which entered into force in 1996, countries are required to provide detailed statistics on their procurement, though the requirements will change with submissions of 2014 procurement data under the 2014 GPA. Under the 1994 GPA, each party is to collect and provide to the committee, on an annual basis, the following statistics for central government entities’ procurement: the estimated value of contracts awarded, both above and below the threshold values, on a global basis and broken down by entity; the number and total value of contracts awarded above the threshold values, broken down by entity and by category of products and services according to uniform classification systems; the number and total value of contracts awarded through limited tendering, broken down by entity and by categories of products and services; and the number and total value of contracts awarded under exceptions to the GPA, broken down by entities. The statistical reporting requirements on procurement by subcentral government and by utilities and other government entities are generally similar to the requirements for procurement by central government entities. However, under the 1994 GPA, parties are not required to report the value of contracts awarded by subcentral government and other entities below the threshold values or the number of contracts awarded. In addition, under the 1994 GPA, each party is required to provide statistics on the country of origin of products and services purchased by its entities to the extent that such information is available. The 2014 GPA’s statistical reporting requirements differ in some respects from the 1994 GPA’s. For example: The 2014 GPA requires countries to provide their annual statistical notifications within 2 years of the end of the reporting period, whereas the 1994 GPA does not specify a reporting deadline. While the 1994 GPA requires parties to report the estimated value of below-threshold contracts awarded for central government procurement and procurement excluded from the agreement, the 2014 GPA does not require these data. As a result, policymakers will not have available data to calculate GPA parties’ total central government procurement in 2014 and subsequent years, unless parties voluntarily report such data. Further, it will not be possible to determine the extent of covered government procurement as a percentage of total central government procurement. Whereas the 1994 GPA requires data on the country of origin of purchased goods and services, the 2014 GPA does not require such data. As a result, policymakers will not be able to use government procurement data that GPA parties submit to the WTO for 2014 and subsequent years to assess the degree to which procuring entities award contracts to foreign sources. The 2014 GPA allows a party, instead of submitting data in its notification to the WTO, to notify the WTO of the website address where the party publishes its statistics, with any instructions necessary to access and use such statistics, as long as the statistics are published in a manner that is consistent with the GPA statistical reporting requirements. As a result, the format of data that parties report to meet their GPA annual statistical reporting requirements may vary from the format of data they reported for previous years. Although the data the United States and next five largest GPA parties reported for 2010 enable broad comparisons, deficiencies in their reporting prevent more detailed comparisons of their covered procurement. A lack of timely, complete, and consistent statistical reporting by the parties limits transparency, one of the GPA’s main goals stated by the WTO. As a result, trade officials are limited in their ability to identify anomalies in, and monitor, other parties’ compliance with their GPA commitments. These reporting deficiencies also reduce policymakers’ ability to obtain an accurate understanding of the relative benefits of the GPA—that is, the extent to which they and other parties have opened procurement to one another’s suppliers. We identified the following deficiencies in the GPA statistical notifications we reviewed. Incomplete reporting. Parties have not provided data for all entities covered by the agreement, as required. For example, although Canada submitted annual notifications with central government procurement data for 2008 through 2013, the notifications did not include data on procurement by subcentral governments or by other government entities. According to Canadian officials we spoke with, only 10 to 15 percent of Canada’s government procurement occurs at the central government level. These officials said that Canada is working to devise a methodology to report on subcentral government procurement. Similarly, Japan’s annual notifications have not included procurement by entities such as utilities and state-owned enterprises that are covered by the GPA. Moreover, Norway reports total limited tendering for all levels of government and other covered entities rather than disaggregating these data by level of government. In addition, while the GPA requires parties to provide data on the value and number of covered contracts, EU member countries report only the contracts’ value. Lack of timely reporting. A number of parties have not provided their annual statistical notifications for 2008 through 2013 to the WTO in a timely manner. For example, the United States submitted its most recent notification, for fiscal year 2010, in September 2016 and has not submitted notifications for fiscal years 2011 through 2013. South Korea has not submitted notifications for any year except 2010, and Japan has not submitted a notification for 2012 although it did so for other years through 2013. Inconsistencies in reporting. Our review of the statistical notifications submitted by the United States and next five largest GPA parties found a number of inconsistencies. For example, Canada switched its reporting from fiscal to calendar year in 2010, making it more difficult to compare Canada’s data over time. Japan denominates central government procurement in SDR and subcentral government procurement in yen, but its statistical notifications do not provide a conversion rate. Norway reports three estimates of covered government procurement, which are disaggregated by different characteristics, but none of the estimated totals match the others. The United States provided data on federal procurement for 2008, 2009, and 2010, but the U.S. data on overall and covered federal procurement in 2008 and 2009 are inconsistent because of a change in the reporting methodology that began with the 2009 notification. Figure 4 shows the deficiencies and other issues that we identified in the United States and next five largest GPA parties’ statistical reporting. We found several areas where there was a lack of common understanding about the definition of key terms for reporting procurement data required by the GPA. This led to inconsistency in the reporting practices of the GPA parties we reviewed, which affects the usefulness of the reported data for detailed comparisons of the parties’ covered government procurement, diminishing transparency. Government procurement. According to WTO officials, there is no official definition of government procurement; as a result, GPA parties lack a clear, common understanding or practice for computing its value. Our review of statistical data submitted by the United States and the next five largest GPA parties for 2010 found that they generally measured procurement by the total value of contracts awarded or by actual expenditures on goods and services in a given time frame. However, we found that the reported contract values represented different measures of procurement at different points in time, which resulted in inconsistent reporting. For example, Canada and Japan report data on government procurement based on the full value of awarded contracts, the EU reports data on government procurement based on total contract values at the time of award, Norway reports the agreed full value of contracts when they are signed, and the United States reports the total dollars obligated against GPA-covered contracts in the year they are signed and any subsequent obligations on those contracts during the following 5 years. In addition, while the GPA outlines the scope of covered government procurement, our analysis found that GPA parties interpreted standard statistical terms differently, leading to inconsistencies in their reporting. For example, the degree to which the GPA parties’ notifications include data on procurement by state- owned enterprises is unclear. As a result, the parties’ notifications may provide different measures of covered government procurement. Below-threshold central government procurement. While the 1994 GPA requires that parties report the estimated value of below- threshold contracts awarded at the central government level, GPA parties interpreted this requirement differently, leading to inconsistencies in their reporting. We found that GPA parties reported different types of data for below-threshold central government procurement—some parties reported data for all central government entities, while other parties reported data only for entities covered by the GPA. For example, the EU does not report the value of contracts below the GPA thresholds. Instead, according to the EU notification, these values can be estimated by deducting the reported above-threshold procurement from the estimated total government procurement of goods and services, which also includes procurement below GPA thresholds and other noncovered government procurement. In contrast, the United States reports below-threshold central government procurement only for GPA-covered entities. As a result, estimates of GPA parties’ below-threshold central government procurement are not comparable. Uniform classification system. There is no single classification system for reporting procurement by economic sector, which has led to the use of different systems to categorize reported procurement by GPA parties. For example, the United States uses the U.S. product and service codes to classify federal government contracts in product groups, categorizing reported procurement as either goods and services or construction services. The EU uses its common procurement vocabulary to classify EU contracts, categorizing reported procurement as supplies, services, works, or “miscellaneous.” Canada codes reported procurement by its goods and services identification numbers and groups it into goods, services, and construction, but plans to replace the current classification with the UN standard products and services codes in 2017. Without consistent categorization, it is difficult to compare parties’ covered government procurement by product group. Country of origin. According to the 1994 GPA, parties are to apply the same rules of origin to products or services supplied for covered government procurements as they apply in the normal course of trade. In addition, parties are to provide statistics on the country of origin for products and services purchased by its entities, to the extent that such information is available. Japan reports suppliers’ nationality, using it as the basis for determining country of origin for its imported goods and services, but a supplier’s nationality may differ from the origin of the product or service. The EU, Canada, South Korea, and the United States do not report this information, although the United States collects it in its Trade Agreements Report (TAR), which USTR uses to generate the WTO notifications at the federal level. Until 2008, in its TAR reporting, the United States defined country of origin for goods as the place where the product was manufactured, which, according to OMB officials, aligns with data on place of manufacture, as defined in the FAR, for purposes of U.S. government contracting. However, since 2009, U.S. statistical data— the source of U.S. procurement information reported to the WTO— have defined country of origin for goods as the place of performance of the contract and have defined country of origin for services as the country of the supplier (vendor). Without consistent reporting of suppliers’ country of origin, it is difficult to estimate the extent to which GPA parties award covered government procurement contracts to foreign suppliers. In March 2012, GPA parties convened a working group—the Committee on Government Procurement’s Work Programme on the Collection and Reporting of Statistical Data—to review the collection and reporting of procurement statistics. According to WTO officials, GPA parties recognized that they faced challenges in collecting data related to government procurement to meet the GPA reporting requirements and that different methodologies were used to collect these data, including data for central government entities and subcentral government entities. WTO officials noted that the work group was created because GPA parties could not agree on how to address statistical reporting challenges in the 2014 GPA and is part of parties’ GPA obligations. In forming the working group, the United States and other GPA parties agreed to submit relevant information and review the submissions in order to make recommendations on whether the parties should adopt a common method for collecting statistics, standardize the classifications of statistical data, facilitate the collection of country of origin of goods and services data, and address other technical issues in government procurement data reporting raised by any party. According to a WTO document, the working group was also to consider the “potential harmonization” of parties’ statistical data to provide transparency regarding procurement covered under the GPA and consider how these data may be used for further analyses to facilitate greater understanding of the agreement’s economic importance. The WTO document states that statistical data illustrating the extent to which the parties procure goods and services covered by the agreement from other GPA parties could be an important tool in encouraging other WTO members to accede to the agreement. As of December 2016, nine parties had provided submissions to the working group. According to USTR, the parties’ submissions show variance in the methods used to measure government procurement above and below agreement thresholds as well as variance in data sources, classifications, and availability of country-of-origin statistics. According to WTO officials, the working group is still taking stock of this information. As a result, it has made limited progress in addressing its goals. Although NAFTA requires its parties—the United States, Canada, and Mexico—to exchange annual statistics on government procurement, they have not exchanged this information since 2005. As a result, the parties are unable to compare their covered government procurement with that of the other parties, reducing transparency and hindering their ability to monitor activity under the agreement. NAFTA requires the reporting of annual data on the estimated value of government procurement contracts awarded, both above and below threshold values. According to a USTR official, NAFTA parties are not required to publish any statistical data but are required to exchange such data among themselves. According to USTR officials, NAFTA data have not been exchanged since 2005 because NAFTA partners have been focused on negotiations for the Trans-Pacific Partnership. U.S. statistical data related to NAFTA can be accessed electronically via the FPDS-NG through the TAR, but the most recent complete report is for fiscal year 2010. Moreover, Commerce officials noted that all three NAFTA members have had difficulty in providing accurate statistics. Other U.S. FTAs that we reviewed do not require reporting of such data, and information about the extent to which FTA partner governments open procurement to U.S. suppliers is not readily available. Although other U.S. FTAs contain provisions concerning government procurement, NAFTA is the only U.S. FTA with a statistical reporting requirement among the FTAs we reviewed. According to Commerce officials, procurement statistics can be used to convince prospective members to join a bilateral or multilateral procurement agreement by empirically demonstrating the financial benefits other member states have achieved. While some FTA partner countries—that is, Canada, Israel, South Korea, and Singapore—are parties to the GPA, most other U.S. FTA partners are not parties to the GPA or NAFTA and therefore are not required to provide any statistics on their government procurement, according to USTR officials. As a result, data that could be used to make detailed comparisons of, and provide transparency regarding, FTA parties’ covered government procurement and to demonstrate the agreements’ economic benefits are not available. U.S. agencies’ approach to statistical reporting of covered government procurement to the WTO does not ensure the timeliness, accuracy, or comparability of the reported data. The methodology that agencies used to report covered federal (central government) procurement until 2009 produced timely data but overstated the value of procurement opportunities. An interagency revision of the methodology improved these data’s accuracy, but it has significant disadvantages. For example, the revised methodology introduces a 6-year delay in reporting to the WTO, whereas the 2014 GPA requires reporting within 2 years of the end of the reporting period. Also, the interagency decision to revise the methodology was based on a misinterpretation of reported federal procurement data, and the agencies involved in the decision were unable to provide documentation supporting the decision. Further, U.S. statistical notifications submitted to the WTO, as well as the TAR on which the reports are based, contain inconsistencies and errors. In addition, USTR lacks a methodology for reporting states’ and other government entities’ GPA-covered procurement, as the GPA requires, and instead reports estimated total government procurement, which exceeds covered procurement. Finally, no U.S. agency has taken responsibility for ensuring the accuracy, timeliness, or comparability of the procurement data submitted to the WTO. Federal standards for internal control call for U.S. agencies to issue relevant, accurate, and reliable information, recording and communicating it within a time frame that enables entities to carry out their responsibilities. Without timely, accurate, and comparable data on GPA-covered U.S. procurement, U.S. agencies and Congress, as well as other GPA parties, lack information necessary for assessing the economic benefits of participating in the agreement. The U.S. methodology used from 1996 through 2008 to report federal procurement to the WTO produced timely data but inflated procurement values. In 2009, U.S. agencies began a revision of this methodology, resulting in a more accurate measure of federal procurement based on actual cumulative obligations rather than award values. Applying the revised methodology caused the reported value of covered U.S. federal contracts to drop by more than 75 percent from fiscal year 2008 to fiscal year 2009. However, the revised methodology introduces a 6-year delay in reporting to the WTO, whereas the 2014 GPA requires reporting within 2 years of the end of the reporting period. Also, the revised methodology provides data on the value of U.S. federal procurement obligations that are only broadly comparable to the value of central government procurement that some other GPA parties report. Although the 1996-2008 methodology for reporting U.S. federal procurement provided timely annual data on award values, it overstated procurement opportunities. This methodology, which calculated the total potential value of GPA-covered federal government contracts at the time of award, provided a simple and direct measure of covered federal procurement, since the method used to determine the number of covered contracts and determine the contracts comprising the aggregate contract values is based on information reported in in FPDS-NG. The methodology also provided timely annual data based on the bidding opportunities for prospective domestic and foreign suppliers in that year. (After a contract is awarded, contract changes may occur, and additional funds may be obligated to the contract, which would change the contract value.) In addition, the methodology provided data that were consistent with information posted on the official U.S. government website of federal procurement opportunities for GPA purposes. However, the original methodology overstated the value of U.S. central government procurement, primarily because of the way data is reported in FPDS-NG and by aggregating multiple-year, multiple-award federal contracts, which resulted in the counting of some award values more than once. Multiple-award contracts result from a single solicitation and are awarded to multiple suppliers. The government then selects among the multiple suppliers to issue individual orders for supplies, services, or both as needed. Federal contracts, including, multiple-award contracts, can include options that the government may, or may not, exercise; contracts with options are often referred to as multiple-year contracts and, according to OMB staff, generally include a base year with four 1-year option periods. In FPDS-NG, data on each supplier’s multiple-year, multiple-award contract reflects the base and all option value, since each supplier could receive up to the full value of the contract if all options are exercised. For example, a contract for which FPDS-NG shows an award value of $10 billion, comprising a base value of $5 billion and a $5 billion option, might result in only $5 billion in obligations if the option is not exercised. In addition, the contract’s $10 billion award value might be entered in FPDS-NG for each supplier that is awarded a multiple-award contract, since each supplier could receive up to the full value of the contract, and could be entered for each year of the contract’s duration. The original methodology reported a multiple-year contract’s potential award value— that is, the contract value including all possible options that could be exercised against the contract—and aggregated across multiple-award contracts, even though the options may not be exercised on each supplier’s contract. Commerce officials explained that contract options allow for additional purchases under the same contract at the discretion of the U.S. government entity. For example, Commerce officials told us that because multiple-year, multiple-award contracts are intended to be used as needed, contracting officials may set a high total award value for a group of contracts to allow the contracts to be used repeatedly and to ensure that there are sufficient funds to pay any awardee for each contract option. According to Commerce officials, they sought to improve the accuracy of WTO notifications based on the award-value methodology. These officials said they recognized that the data anomalies in FPDS-NG related to multiple-year, multiple-award federal contracts materially skewed the overall statistics and, as a result, cumulatively misrepresented the total value of U.S. federal procurement for 2008. Because FPDS-NG records hundreds of thousands of contracts across many agencies, Commerce did not identify all multiple-year, multiple-award federal contracts. Instead, Commerce identified three Department of Defense entities that frequently used this type of contract and two blanket purchasing agreements reported by the Department of Interior Bureau of Land Management and deleted these contracts from the FPDS-NG TAR data they used to draft U.S. notification. However, this approach resulted in inconsistent treatment of multiple-award contracts with other agencies and also needlessly excluded all other contracts. Using the TAR, we searched FPDS-NG for, and identified, all GPA- covered multiple-year, multiple-award federal contracts awarded in fiscal year 2009. Our analysis shows that these contracts—which were the main cause of the original methodology’s inflated estimates of covered federal procurement—accounted for 12 percent of all covered federal contracts awarded in fiscal year 2009 (3,637 of 30,243 contracts). We found that these contracts represented 95 percent of the total dollar value of all awards ($18.666 trillion of $19.625 trillion), based on the old methodology and the way these contracts are reported in the FPDS-NG system. In 2009, USTR officials informed EU officials that OMB, in consultation with USTR and Commerce, was planning to change the U.S. methodology for preparing U.S. statistical reports as part of an OMB effort to improve the quality of federal procurement data, and that U.S. statistics reported to the GPA in the future would measure federal procurement based on actual cumulative obligations against awarded contracts over a 5-year period, which is consistent with what OMB considers the standard life of such contracts. In October 2015, USTR notified the WTO that the United States had revised its methodology for preparing GPA statistical reports on federal procurement. To more precisely reflect the value of the federal procurement market at the time of each report, the revised methodology would reflect total amounts obligated under GPA-covered contracts over a 6-year period–that is, the year the contract was awarded plus 5 years after the award. As a result, the United States did not report procurement data to the WTO for 5 years, despite the 1994 GPA requirement to report annual statistics. In December 2015, the United States submitted its statistical notification of U.S. federal procurement in fiscal year 2009, based on the revised methodology. Our analysis shows that compared with the original methodology, the revised methodology has both advantages and disadvantages. The revised methodology provides a more accurate estimate of federal procurement value than the original methodology, as it uses data for actual obligations for procurement contracts rather than potential award values and avoids the inflated values resulting from the aggregation of multiple-year, multiple-award federal contracts. Because of the change in methodology, the estimated value of covered central government contracts in the United States decreased by more than 70 percent from fiscal year 2008 to fiscal year 2009, dropping from about $712 billion in fiscal year 2008 to $204 billion in fiscal year 2009. However, the revised methodology’s use of cumulative obligations data leads to a more than 6-year lag in reporting annual data to the WTO. If this methodology is used to report data for fiscal year 2014 and subsequent years, the resulting delay would appear to be inconsistent with the 2014 GPA’s requirement that parties provide their statistical notifications within 2 years of the end of the reporting period. The delay would also reduce the transparency of U.S. covered government procurement for U.S. policymakers and GPA parties. In addition, it is inconsistent with federal standards for internal control that call for U.S. agencies to issue relevant, accurate, and reliable information and to record and communicate the information within a time frame that enables entities to carry out their responsibilities. Finally, in measuring actual obligations for procurement contracts rather than the value at the time of award, the new methodology is inconsistent with the methodology used by other large GPA members, such as the EU and Norway, which report contract values at the time of award rather than actual obligations (or expenditures). As a result, the revised methodology makes comparisons of the United States’ and other GPA parties’ central government procurement less consistent. In addition, the United States continues to report the number of covered contracts to the WTO based on their award value, which leads to an inconsistency between the reported numbers and values of reported U.S. government procurement contracts. The contracts comprising the reported value of covered (above-threshold) procurement are determined at a later time under the new methodology and can result in a different set of contracts. Table 2 shows advantages and disadvantages of the original and revised methodologies. Our analysis also found that, despite using 6 years of data, the revised methodology does not produce final obligated contract values, because it does not capture obligations that can occur after the 6-year period. Since the 2014 GPA requires parties to provide their annual statistical notifications within 2 years of the end of the reporting period, we analyzed the distribution of cumulative obligations. As table 3 shows, a preliminary estimate of 3 years of cumulative obligations for contracts awarded in fiscal year 2009, consistent with the 2014 GPA’s requirement to report annual statistics within 2 years of the end of the reporting period—that is, obligations in fiscal years 2009 through 2011—covered about 67 percent of cumulative obligations through July 2016. Updating this estimate with obligations made for these contracts in fiscal year 2012 would raise the amount covered to about 78 percent. Using the revised U.S. methodology to analyze 6 years of cumulative obligations against the 2009 awards— that is, obligations in fiscal years 2009 through 2014—we found that the amount USTR reported to the WTO in December 2015 equaled about 96 percent of total obligations for these contracts over the 6-year period. In other words, using 6 years of cumulative obligations, in accordance with the revised methodology, produced about 30 percent higher procurement value than using 2 years of obligations consistent with the 2014 GPA requirement to report within 2 years of the end of the reporting period. However, the revised methodology did not account for 100 percent of the contracts’ value after 6 years. The methodology assumes that cumulative obligations against awarded contracts over a 6-year period—a year longer than a contract’s typical duration, according to OMB—will capture the full value of those contracts. Our analysis of federal contracts awarded in fiscal year 2009 shows that the U.S. estimate of covered government procurement based on the revised methodology is $200 billion for fiscal years 2009 through 2014. However, cumulative obligations for these contracts from fiscal year 2009 through July 2016 amounted to $209 billion—about $9 billion more than the amount obligated for these contracts by the end of the revised methodology’s 6- year period. Further, in compiling the fiscal year 2009 U.S. statistical notification submitted to the WTO in December 2015, USTR did not use the revised methodology as it was described to the WTO in August 2011. Whereas that methodology was to use 6 years of obligations data (i.e., fiscal years 2009 through 2014), the fiscal year 2009 statistical notification used 6 years and 6 months of obligations data. While the notification reported that $204 billion was obligated in fiscal years 2009 through 2014 for fiscal year 2009 contracts, the reported data were extracted from FPDS-NG in June 2015. While analyzing the original and revised U.S. methodologies, we identified an alternative methodology that uses annual obligations for covered contracts as a measure of covered government procurement. (See app. III.) The rationale on which U.S. agencies based their decision to change the U.S. methodology for reporting covered federal procurement to the WTO suggest that the agencies had an incomplete understanding of U.S. procurement data reported to the WTO in response to the GPA requirements. In 2011, OMB determined, in consultation with USTR and Commerce, that U.S. statistical reports to the WTO on federal procurement were misleading and that the methodology should be revised. At the same time, USTR and Commerce were receiving questions from other parties about the U.S. statistics, according to a USTR document. According to OMB documents, the TAR, which is used as a basis for the U.S. statistical reports to the WTO, overstated available bidding opportunities as a result of the original U.S. methodology. However, our review of agency documents and interviews with agency officials found that this conclusion was based on a misinterpretation of the reported data. The United States’ statistical notification for fiscal year 2008 stated that $700 billion worth of procurement was available to GPA trading partners, while the Office of Federal Procurement Policy reported obligations of only $527 billion. Agency documents show that this identified gap of $173 billion was the basis for the decision to remove the 2008 TAR from the standard FPDS-NG statistical reports and to develop the new methodology. However, the two amounts, which capture different measures of federal procurement, are not comparable. The $700 billion reported to the WTO was a measure of all contracts awarded in a particular year—that is, all newly awarded contracts in fiscal year 2008, which could be obligated any time over a 5-year period. In contrast, the $527 billion reported by the Office of Federal Procurement Policy reflected all obligations made within a 1-year period—that is, obligations in fiscal year 2008 against any contract, regardless of the year of the initial contract award. The agencies involved in the decision to revise the U.S. methodology for reporting federal procurement to the WTO were unable to provide documentation supporting the decision. Federal standards for internal control call for U.S. agencies to carry out internal control activities to help ensure that management’s directives, such as changing the U.S. methodology, are carried out. These activities include the need for appropriate review of data (and software) used in information processing as well as properly recording and documenting significant events. We requested, but could not obtain, documentation of the original methodology, any comparison of the original and revised methodologies, and any analysis of the revision’s effects on U.S. reported awarded contract values. According to OMB staff, the agency reviewed data in the TAR that Commerce shared with them via e-mail, but no documentation of these reports was available from OMB, Commerce, GSA, or USTR. In addition, we were unable to obtain copies of the TAR that were the basis of statistical notifications submitted to the WTO. As a result, we had to rely on interviews with current and former USTR, GSA, and Commerce officials to reconstruct the original methodology from GSA computer programs. OMB staff stated that staff turnover prevented them from providing complete information about how and why the TAR was initially developed and revised. In addition, although OMB and GSA provided us with documentation of the TAR requirements that were approved by OMB, USTR, Commerce, and GSA, we found no documentation of any steps to validate that the requirements for applying the revised methodology were correct and implemented successfully to produce the intended results. According to OMB officials, OMB established the requirement for the new TAR after consultation with USTR and trade agencies. The agencies concluded that it was appropriate to determine the total value of obligations for a contract 5 years after it was awarded because they considered federal contracts to generally include a base year and four 1-year option periods that the federal government may or may not exercise. OMB officials said that the Federal Acquisition Regulation (FAR) provides that the base and option periods shall not exceed 5 years for services and the total of the basic and option quantities shall not exceed requirements for 5 years in the case of supplies, unless otherwise approved. OMB officials stated that the TAR was established using this reporting methodology. However, according to an unpublished October 2015 communication to the WTO GPA statistical working group, the U.S. methodology is based on the amount spent during the base year and five 1-year option periods (i.e., the 6 years after the award date). We found several reporting inconsistencies and errors in the FPDS-NG TAR and in U.S. GPA notifications submitted to the WTO. USTR reviews the GPA thresholds, which are developed by Commerce, and publishes them in the FAR every 2 years on a calendar-year basis.However, the GSA-run program that generates the TAR begins applying those thresholds every other fiscal year. (See fig. 5.) As a result, the U.S. procurement statistics that USTR reports to the WTO, based on the TAR, for contracts awarded in the first quarter of each 2-fiscal-year period’s initial year reflect the new biennial thresholds instead of the thresholds that U.S. procurement officers used in determining the applicability of trade agreements for those contracts. This discrepancy may affect the accuracy of data on covered procurement reported to the WTO. When the new thresholds are higher than the old ones, the reported data may exclude contracts with values lower than the new thresholds; when the new thresholds are lower, the data may include contracts that were not covered by the GPA at the time they were signed. The TAR, which is used as a basis for the WTO notifications, applies a methodology to capture covered government procurements under the GPA that does not reflect the process U.S. procurement officers use to determine whether contracts are covered by the GPA. Consequently, some contracts considered to be covered when awarded may not be reported to the WTO. To determine whether a contract is covered by the GPA, procurement officials calculate the estimated acquisition value using a methodology set out in the FAR. However, the new GSA-run statistical program used to generate the TAR considers a contract to be covered by the GPA only when cumulative obligations against that contract exceed the GPA thresholds, which can happen at any time during the contract’s duration. As a result, contracts that were determined to be covered by trade agreements at the time of contract award but for which cumulative obligations never exceed the GPA thresholds are not included in the TAR and WTO notifications until a later and uncertain point in time, if at all. The fiscal year 2009 U.S. notification of state procurement reports inaccurate data for Florida’s total government procurement. USTR calculated that amount as $45 billion. However, using the U.S. methodology for estimating total state procurement, we calculated that Florida’s total government procurement in fiscal year 2009 was $37 billion. Although the GPA requires that parties provide annual statistics on covered procurement by subcentral governments, USTR and Commerce have not developed a methodology for using available state data to report these data. Under the 1994 and 2014 GPA, notifications for states’ and other government entities’ procurement are required to include statistics on the value of contracts awarded by covered entities above the threshold value. However, for fiscal years 2009 and 2010, the United States reported total instead of covered government procurement for the 37 states that make up U.S. subcentral level commitments under the GPA. As a result, the reported U.S. data are only broadly comparable with other GPA parties’ data on covered subcentral government procurement. Further, USTR’s reporting does not meet federal standards requiring relevant, timely, and accurate reporting by U.S. agencies. To estimate states’ total procurement, USTR uses the U.S. Census Bureau’s state government financial data, which include below-threshold procurement by noncovered entities. Also, these data do not account for any restrictions that the federal government or a state government may place on procurements for specific goods or services that are excluded from U.S. GPA commitments. There is no central repository for statistics on GPA-covered state procurement. An unpublished U.S. submission to the GPA working group on the collection and reporting of statistical data acknowledges that reported U.S. subcentral-level procurement data do not distinguish between covered and noncovered government procurement or reflect the amount or percentage of procurement below or above the GPA threshold. Although data on states’ GPA-covered procurement are not centrally available, we estimated—using data that we obtained from 3 of the largest states covered by U.S. GPA commitments—that the total state government procurement reported to the WTO exceeds covered state government procurement by about 10 percent. We calculated that in 2010, about 40 percent of estimated total government procurement by the 37 states covered by the GPA took place in California, New York, Texas, and Pennsylvania. Three of these states—California, New York, and Pennsylvania—collect electronic data on their contract awards and have databases that contain information on the amount spent on state procurement contracts (Texas does not). We calculated that contracts representing over 90 percent of total government procurement in these 3 states were awarded in 2014 and 2015 by covered entities, had values higher than the GPA thresholds, and therefore could be considered covered government procurement. For example, we estimated that on average contracts representing 99 percent of the value of New York’s goods and services contracts and 64 percent of the value of its construction services contracts were awarded to covered entities and exceeded the U.S. GPA thresholds for 2014 and 2015. Goods and services contracts represent 92 percent of the value of all state contracts in New York. Therefore, we estimated that 96 percent of total government procurement by covered New York state entities was above GPA thresholds and was therefore covered by the GPA. For California, which is the largest state among the 37 covered states and accounts for about 14 percent of their total government procurement, we estimated that 92 percent of the value of goods, services, and construction contracts awarded to covered entities fell above GPA thresholds and therefore were covered by the GPA. For Pennsylvania, we estimated that 95 percent of such contracts were covered by the GPA. In estimating covered procurement for New York, California, and Pennsylvania, we did not correct for procurements that are excluded by the U.S. GPA commitments; therefore, our estimates may overstate these states’ covered government procurement. With regard to other government entities, including utilities, the United States reported estimates of covered government procurement for 9 of the 11 entities covered by the U.S.GPA commitments in 2009 and 2010. These estimates are based on the entities’ financial statements. While the methodology for these estimates varies on the basis of the data that the statements provide, the general methodology adopted by the United States calls for the estimate to include operating expenses other than wages and salaries and newly acquired capital expenditures. Commerce calculates the estimates using data on operations and maintenance expenses; however, for certain entities, the available data aggregate wages with other operating expenses. As a result, estimates based on these data overstate these entities’ covered government procurement. Conversely, covered government procurement reported for some entities, such as the Port Authority of New York and New Jersey, includes capital expenditures, while for other entities, such as the Port of Baltimore, covered government procurement does not include these expenditures. Since capital expenditures under the methodology adopted by the United States should be included in the estimate of covered government procurement, the data reported for entities that exclude capital expenditures understate covered government procurement. We found that gaps in collaboration among the four agencies involved in preparing, using, and submitting the required procurement data to the WTO—USTR, OMB, Commerce, and GSA—contributed to deficiencies in the reporting of these data. The preparation of GPA statistical notifications requires expertise in procurement data, procurement policy and regulations, and WTO agreements. However, none of the agencies has all of the expertise needed to prepare and submit the U.S. notifications, and statements made by agency officials to us indicated gaps in their collaboration in leveraging each other’s expertise. For example: An official from USTR stated that he was the “consumer” of procurement data received from OMB and GSA but that USTR currently has no technical expertise in federal procurement data collection. OMB staff noted that USTR relies on OMB’s interpretation of procurement data during trade negotiations. They also stated that USTR is the report owner and the program officer for trade agreement data and reporting, since it negotiates all trade agreements. Officials from Commerce told us that they provide “technical assistance” to USTR in developing and finalizing the trade agreement and reviewing procurement data in the TAR but that they were not responsible for U.S. notifications or for submitting those notifications to the WTO. Officials from GSA told us that GSA is the “technical executor” of data requests received from agencies, including Commerce and USTR, with regard to report design and provided technical assistance on reporting requirements, but the GSA officials were not involved in any policy decisions. USTR, Commerce, and GSA officials stated that OMB’s Office of Federal Procurement Policy is responsible for setting procurement policy and therefore is responsible for the methodology used in U.S. reporting of procurement data. However, an OMB Office of Federal Procurement Policy official stated that although her office employed procurement data specialists, the TAR was prepared according to USTR specifications. OMB staff stated that they worked with USTR, Commerce, and GSA to establish and finalize the reporting requirements and methodology for the TAR to meet the GPA and NAFTA reporting requirements. Moreover, no U.S. agency has taken responsibility for ensuring the accuracy, timeliness, or comparability of the procurement data submitted to the WTO or for recording related decisions and activities. This resulted in an incomplete understanding among the agencies of the U.S. methodology for reporting procurement statistics to the WTO, a number of technical deficiencies, a lack of documentation, and some errors in U.S. statistical reporting to the WTO. Our prior work has shown that in such cases, agencies can improve their activities through enhanced interagency collaboration—for example, by agreeing on roles and responsibilities, including leadership; by leveraging resources, including expertise; and by developing mechanisms for effective collection, analysis, and use of data. Government procurement constitutes a significant potential market for international trade that the U.S. government has sought to open through the GPA and FTAs. Reporting of government procurement statistics required by trade agreements provides transparency about the extent to which the parties have opened government procurements covered by their commitments under the agreements to foreign competitors. This transparency, in turn, allows policymakers to gain an understanding of the agreements’ relative benefits and helps other countries judge the potential benefits of undertaking similar agreements. While the data that the United States and next five largest GPA parties reported to the WTO for 2010 allow for broad comparisons of their covered government procurement, we found that deficiencies in the data prevent more detailed comparisons, limiting transparency. In some cases, the parties’ statistical reporting in response to GPA requirements was not timely, complete, or consistent. In other cases, a lack of common understanding of the definitions of key terms as fundamental as “government procurement” led to inconsistency in the parties’ reporting practices. In forming the working group for the GPA statistical work program, the United States and other GPA parties committed to submit relevant information, make recommendations, and consider the “potential harmonization” of parties’ statistical data in order to provide transparency regarding procurement covered under the GPA and improve understanding of the agreement’s economic importance. However, the GPA working group charged with recommending actions to address technical issues, such as those we identified, that impede transparency regarding covered procurement has made little progress. Moreover, recent data on procurement covered by U.S. FTAs are not available— NAFTA parties last exchanged such data in 2005, and the government procurement chapters of the U.S. FTAs we reviewed do not require statistical reporting of covered government procurement. We found that the introduction of the revised methodology for reporting covered federal procurement affected the timeliness, accuracy, and comparability of U.S. reporting of procurement statistics to the WTO. While the methodology enables more accurate reporting, its use of 6 years of cumulative obligations data does not appear to be compatible with the 2-year timeframe allowed by the 2014 GPA. In addition, gaps in collaboration among USTR and the other agencies involved in collecting and reporting U.S. government procurement data contributed to other deficiencies we identified, such as the absence of documentation of the methodology’s revision and inaccuracy in the U.S. statistical notifications. Finally, the lack of a methodology for reporting state-level covered procurement consistent with GPA requirements has led USTR and Commerce to report only total procurement, limiting the comparability of the United States’ and other parties’ covered subcentral government procurement. To improve the quality and transparency of statistical reporting of international government procurement by GPA and U.S. FTA parties to fulfill their commitments under these agreements, we recommend that the U.S. Trade Representative take the following two actions: Prepare and submit a proposal to the WTO GPA working group on statistical reporting established by the Committee on Government Procurement that aims to improve the quality of statistical reporting by WTO parties to address the weaknesses we identified. Resume the annual exchange of statistical data on covered government procurement with the other NAFTA parties as NAFTA requires. We also recommend that the U.S. Trade Representative take the following four actions in consultation with appropriate experts in Commerce, OMB, and GSA: Improve the U.S. methodology for providing federal government procurement statistics to the WTO to ensure both accurate and more timely reporting, consistent with GPA requirements—for example, by providing preliminary estimates and updated values of covered federal procurement or by using an alternative methodology that bases measures of covered government procurement on actual annual obligations, if USTR determines that such an approach is consistent with WTO obligations. Develop a methodology for reporting statistics on state governments’ covered procurement to the WTO consistent with GPA requirements. Ensure that methodologies and data sources used to prepare GPA statistical notifications are documented. Ensure that calculations using U.S. procurement statistics and other data are reviewed for accuracy before reporting them to the WTO. We provided a draft of this product to USTR, Commerce, OMB, and GSA for comment. USTR, Commerce, and OMB officials did not comment on our findings and recommendations but provided technical comments, which we incorporated as appropriate. For example, in response to Commerce officials’ comments, we clarified our description of their efforts to address data anomalies created by multiple-year, multiple-award federal contracts. GSA concurred with our findings and recommendations and also 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 to 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, the U.S. Trade Representative, the Secretary of Commerce, the Director of the Office of Management and Budget, the Administrator of the General Services Administration, and other interested parties. 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) 512-8612 or [email protected]. 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 IV. For this report, we (1) broadly compared covered government procurement reported by the United States and other parties to the World Trade Organization’s (WTO) Agreement on Government Procurement (GPA) and U.S. free trade agreements (FTA); (2) assessed the usefulness of GPA and U.S. FTA parties’ statistical reporting for more detailed comparisons of—and transparency regarding—their covered government procurement; and (3) examined the extent to which U.S. agencies’ approach to reporting statistical data on covered government procurement to the WTO ensures timeliness, accuracy, and comparability. The following describes our general analysis of data on procurement by the United States and other GPA and U.S. FTA parties. To estimate total government expenditures and total government procurement for the United States and the 57 other countries that are parties to the WTO GPA and U.S. FTAs, we analyzed macroeconomic data from 2008 through 2012 from the United Nations’ (UN) National Accounts Official Country Data database and the International Monetary Fund’s Financial Statistics and World Economic Outlook. We used the 2008-2012 time period for these estimates in order to base them on the most reliable, consistent, and comparable sets of data available. Government procurement includes a government’s current purchases of goods and services, such as machinery and equipment; purchases of accounting or information technology services; and investment expenditures. The amount of covered government procurement is a subset of total government procurement. We defined covered government procurement under the GPA and U.S. FTAs as procurement by covered government entities at the central and subcentral levels that falls above certain predetermined thresholds and outside certain exclusions stipulated in the agreements. This amount is largely a measure of the opportunities available to domestic and foreign firms seeking to compete under open tendering procedures for government procurement contracts in the countries that are parties to the agreements. Covered government procurement also includes procurement conducted through limited tendering that is covered under the agreements but is not open to all interested suppliers. (GPA parties report data on the use of limited tendering procedures; we analyzed these data and present our findings in app. II.) We compared data on government procurement reported by the United States with data reported by five other selected parties to the GPA—the European Union (EU), comprising 28 member countries; Japan; Canada; South Korea; and Norway. We selected these parties because they represent, after the United States, the next five largest GPA procurement markets. The combined total government procurement reported by these six parties (33 countries) accounts for 92 percent ($4.0 trillion of $4.4 trillion) of average annual total government procurement for the United States and the other 57 countries that are parties to the WTO GPA and U.S. FTAs from 2008 through 2012. For the remaining 25 countries in the dataset, total government procurement during this period amounted to about $370 billion; we assumed that all of their estimated procurement is covered by the agreements. In addition, we interviewed federal agency officials from the Office of Management and Budget’s Office of Federal Procurement Policy, the General Services Administration’s Integrated Award Environment Business Operations Division, the Office of the U.S. Trade Representative’s (USTR) Office of WTO and Multilateral Affairs, and the Department of Commerce’s International Trade Administration in Washington, D.C. We also discussed the availability of U.S. state procurement data with state officials, reviewed state government documents, and contacted state audit organizations to determine whether the data we used had any significant deficiencies. We interviewed WTO secretariat, EU governmen, Japanese government, Canadian government, and other officials in Geneva, Switzerland, and reviewed related documents issued by their offices. In addition, we interviewed a former USTR procurement trade negotiator and reviewed relevant studies, papers, and articles. The following describes our detailed analysis of covered government procurement by the U.S. central (federal) government and subcentral (state) governments and other entities and by the other selected GPA parties. To analyze covered government procurement by the U.S. federal government, we used data that the United States reported to the WTO in September 2016 covering procurements in fiscal year 2010—the most recent data available—after determining that these data provided a reasonable basis for noting general patterns and making broad comparisons with other parties’ central government procurement. We used data from annex 1 of the U.S. WTO statistical notifications for fiscal years 2009 and 2010. We did not use data from before fiscal year 2009 because the 2009 revision of the U.S. methodology for estimating federal procurement rendered earlier data incomparable with data produced with the revised methodology. To assess the reasonableness of using the 2010 data for our reporting purposes, we also analyzed U.S. data on federal procurement that were not reported to the WTO but that allowed us to estimate likely covered government procurement in more recent years. Specifically, we examined data from the Federal Procurement Data System–Next Generation (FPDS-NG) for fiscal years 2010 to 2014 and estimated the amount of actual obligations in a given fiscal year regardless of the year of the original contract award (see app. III for a discussion of this alternative to the two methodologies used by the United States to report federal covered government procurement). Our analysis found that there is little variation in U.S. covered government procurement measured using actual obligations as a share of total federal procurement from year to year. We also found that the percentage of covered federal procurement as reported by the United States in 2009 and 2010 was consistent with FPDS-NG obligations data. As a result, we determined that using the 2010 data was reasonable. To analyze covered government procurement by U.S. state governments and other entities, we used data from annexes 2 and 3, respectively, of the U.S. WTO statistical notifications for fiscal years 2009 and 2010. We found that the United States reported total instead of covered government procurement for the 37 states that comprise U.S. subcentral-level commitments under the GPA. We estimated covered procurement by the U.S. states by collecting data for 2014 and 2015 from three of the states that have the largest amounts of procurement—California, New York, and Pennsylvania—and calculating the percentage of their total government procurement that was covered by the trade agreements. We calculated state covered government procurement as the cumulative dollar value of contracts by covered entities that were higher than the thresholds set in the GPA; we did not otherwise correct for other specific exclusions, if applicable. We were unable to obtain any data from another of the largest states, Texas, as it does not collect such data in a central database. We determined that the degree of overstatement of states’ covered government procurement was likely relatively minor and would therefore not affect our analysis of differences in orders of magnitude in subcentral government procurement by the United States and the five selected GPA parties. To analyze covered government procurement by utilities and other government entities, we examined the U.S. methodology for reporting procurement by the 11 entities covered by the GPA. We examined the disaggregated data from the financial statements of 9 of the 11 entities; data for the remaining 2 were not available. We identified the components used to estimate covered government procurement and the relative effects of the inclusion of certain elements that should have been excluded from the estimate and of the exclusion of certain elements that should have been included in the estimate. We determined that these effects were likely small and would not affect our overall conclusions. We analyzed all available data reported to the WTO by the five selected GPA parties for 2008 to 2013 as well as estimates of their total covered government procurement during this period. We assessed the internal consistency of their WTO notifications and determined that despite some annual variations, the 2010 data provided a reasonable basis for comparing these parties’ and the United States’ covered government procurement. For example, we sequentially expanded the analysis to include data from 2008 through 2009, 2008 through 2010, 2008 through 2011, and 2008 through 2012, and we excluded years to match the last two U.S. submissions for 2009 and 2010. We found that procurement by central and subcentral governments and other entities appeared to be stable at levels and as shares of covered and total covered government procurement for the various time periods. Because EU member governments’ procurement in 2010 accounts for more than 85 percent of procurement reported by the five selected GPA parties other than the United States, we focused our analysis and assessment of the selected parties’ data quality on EU data. We took the following steps to assess the reliability of EU procurement data, from the EU’s Tenders Electronic Database. We spoke with EU officials and reviewed publicly available data and analysis of EU covered government procurement. We performed a detailed comparison of data from two sources—the 2011 EU WTO GPA notification and the 2012 EU Public Procurement Indicators. We used several measures related to EU general government procurement, such as above- and below-threshold procurement from the Official Journal of the European Union and from member states reporting, and GPA covered government procurement. After EU officials clarified certain relevant differences in the data, we found the results from the two sources to be largely consistent. Therefore, we determined the data we used were sufficiently reliable to discuss differences in the United States’ and EU’s reported covered government procurement in terms of orders of magnitude. Because alternative data sources were not publicly available for GPA parties other than the United States and the EU (i.e., for Canada, South Korea, Norway, and Japan), we were able only to check for consistency across time periods and were not able to otherwise assess the comprehensiveness and accuracy of the procurement data reported to the WTO by these parties. In addition, other than noting that the amounts reported are relatively consistent, we were unable to determine the reliability of the data reported by parties other than the EU or the extent to which the reported data represent the actual amounts of covered government procurement for each party. Because the fact that some GPA parties reported far less covered government procurement than the United States is relevant to our report, we present these data for the purpose of a broad comparison with data on U.S. covered government procurement. We also present a table of what these nations reported in 2010 to indicate what was and was not reported. We performed a similar analysis of 2009 and had consistent results. In our report, we discuss the effects of a number of other data limitations on the precise measurement and analysis of differences in the parties’ covered government procurement under trade agreements as well as on analysis of covered government procurement over time. These limitations include the absence of U.S. statistical notifications to the WTO for years after fiscal year 2010; the lack of timeliness, completeness, and consistency in GPA parties’ reporting; the lack of common understanding and practice among GPA parties regarding reporting of procurement data; the 2009 change in the U.S. methodology for reporting federal procurement; and the failure of U.S. notifications to distinguish covered from noncovered government procurement for the states. We determined that these limitations may affect our ability to perform certain analyses. For example, we were unable to disaggregate covered government procurement of goods, services, and construction work, owing to the lack of a generally accepted uniform classification system among all GPA parties. Moreover, the changes in reporting methodology by the United States and gaps in reporting by a number of parties made trend analysis over a period of time inappropriate. However, while these limitations preclude precise comparisons, we nevertheless determined that data were sufficiently reliable for broad comparisons in terms of orders of magnitude between parties’ covered government procurement. We conducted this performance audit from August 2015 to February 2017 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 World Trade Organization’s (WTO) Agreement on Government Procurement (GPA) recognizes the importance of transparent measures for government procurement. Our analysis of covered government procurement focused on procurement conducted under open tendering procedures. In certain situations, the GPA also permits procurement through limited tendering—that is, by contacting a supplier or suppliers of choice directly rather than using open tendering procedures. The GPA permits limited tendering when, for instance, no tenders are submitted, no tenders conform to essential requirements of the tender documentation, no suppliers satisfy conditions for participation, or tenders submitted are collusive. Limited tendering is a restrictive practice for making individual procurement decisions, according to the Office of the U.S. Trade Representative. According to the GPA, limited tendering may not be used to avoid competition among suppliers or to discriminate against foreign suppliers. Procurement data that the United States and the next five largest GPA parties reported to the WTO for 2010 show varying use of limited tendering. The United States, Japan, and Norway reported the use of limited tendering in at least 20 percent of central government contracts covered by the GPA. The practice was less common in the European Union and South Korea, which reported limited tendering in fewer than 10 percent of GPA-covered central government contracts. (See fig. 6.) During our analysis of the original and revised U.S. methodologies for reporting U.S. covered federal central government procurement to the World Trade Organization (WTO), we identified an alternative methodology that could be used to measure the openness of U.S. central government procurement under the Agreement on Government Procurement (GPA). We found that the original and revised methodologies each have advantages and disadvantages. The original methodology allowed for timely reporting by capturing the value of awards in the given year, but it overstated procurement opportunities by reporting the full value of multiple-year, multiple- award contracts multiple times for each award recipient. Because some reported funds were never obligated, aggregating those contracts at the time of award and reporting this aggregate value for a particular year overstated the value of covered federal procurement opportunities. The revised methodology accurately captures the dollars obligated against awards in a particular year, but it leads to a 6-year reporting lag by tracking the funds actually obligated for multiple-year contracts. It also results in underreporting, as obligations against those contracts can continue after the methodology’s 6-year time frame. Our analysis of the revised methodology showed that reporting preliminary estimates of dollars obligated in a multiple-year contract’s first 3 years would meet the 2014 GPA requirement to report within 2 years of the reporting period and would cover the majority of funds that could be obligated against such an contract. However, this approach could result in the underestimation of funds obligated against the contract, as more funds could be obligated in subsequent years. Therefore, such a preliminary estimate would need to be updated several times to reflect the actual total value of the contracts awarded. We identified an alternative methodology that would estimate GPA- covered federal procurement based on actual obligations for covered contracts in any given year, regardless of the year the contracts were awarded. This approach would ensure timely reporting since these data are available on an annual basis without a time lag; moreover, these data would be largely consistent with total federal expenditures reported in the macroeconomic data used to estimate total federal procurement. However, these data may not represent opportunities available to foreign and domestic firms in the reported fiscal year, since obligations in any given fiscal year include obligations on task orders against contracts awarded in prior years. Using this alternative approach, we found that, whereas total obligations for GPA-covered contracts declined from $540 billion in fiscal year 2009 to $445 billion in fiscal year 2014, or by 18 percent, there was little yearly variation in federal covered government procurement as a percentage of total federal procurement. For example, in fiscal year 2009, covered contracts represented 53 percent ($289 billion) of total obligations, while in fiscal years 2010 through 2014, they represented 51 percent ($274 billion), 48 percent ($261 billion), 48 percent ($248 billion), 48 percent ($221 billion), and 48 percent ($214 billion), respectively. Kimberly M. Gianopoulos, (202) 512-8612 or [email protected]. In addition to the contact named above, Adam R. Cowles (Assistant Director), Marisela Perez (Analyst-in-Charge), Gergana T. Danailova- Trainor, and Julia Kennon made major contributions to this report. Martin de Alteriis, Gezahegne Bekele, Christopher Cronin, Neil Doherty, Bradley Hunt, Reid Lowe, and Grace P. Lui provided technical assistance. | Globally, government procurement, estimated at $4.4 trillion annually, constitutes a significant market for international business. However, according to officials from the Office of the U.S. Trade Representative (USTR), which is responsible for reporting to the WTO, government procurement markets are often closed to foreign competition. GAO was asked to review U.S. participation in international procurement agreements, which seek to ensure fair and open competition on a reciprocal basis. This report (1) broadly compares GPA-covered government procurement reported to the WTO by the United States and other parties; (2) assesses the usefulness of statistical reporting of government procurement data by GPA and U.S. FTA parties for more detailed comparisons; and (3) examines the extent to which the U.S. approach to reporting such data ensures timeliness, accuracy, and comparability. GAO analyzed WTO and U.S. documents and data pertaining to the GPA and U.S. FTAs and interviewed officials in Washington, D.C., and Geneva, Switzerland. Under the World Trade Organization (WTO) Agreement on Government Procurement (GPA), the United States has reported opening more procurement covered by the agreement to foreign firms than have other parties to the agreement. For example, U.S. data for 2010—the most recent available—show that the United States reported $837 billion in GPA-covered procurement. This amount is about twice as large as the approximately $381 billion reported by the next five largest GPA parties—the European Union, Japan, South Korea, Norway, and Canada—combined, even though total U.S. procurement is less than that of the other five parties combined. (See figure.) Deficiencies in the statistical reporting of government procurement by GPA and U.S. free trade agreement (FTA) parties, including the United States, limit detailed comparisons as well as transparency—one of the GPA's stated goals. For example, the GPA parties' reports that GAO reviewed were not always submitted on time and often lacked certain required data. Also, a lack of common understanding of key terms' definitions led to inconsistencies in GPA parties' reporting. Moreover, while parties to the North American Free Trade Agreement (NAFTA) are required to exchange government procurement data annually, NAFTA's parties have not done so since 2005; other U.S. FTAs GAO reviewed do not require reporting of government procurement data. As a result, policymakers and others have limited information with which to monitor the agreements or assess their financial benefits. The U.S. approach to statistical reporting of GPA-covered government procurement to the WTO does not ensure the data's timeliness, accuracy, and comparability. For instance, while a recent revision of the methodology for calculating covered U.S. federal procurement improves accuracy, it creates a 6-year reporting delay. In contrast, the GPA requires the reporting of annual procurement statistics within 2 years. In addition, U.S. agencies have not developed a methodology for reporting states' covered government procurement, as the GPA requires. Instead, the United States reports total state-level procurement, which GAO estimated may exceed covered procurement by about 10 percent. Further, the expertise needed to report government procurement data to the WTO is fragmented among the four agencies involved, leading to inconsistencies, errors, and deficiencies. Federal standards for internal control call for U.S. agencies to issue relevant, accurate, and reliable information within a time frame that enables entities to carry out their responsibilities. GAO is making six recommendations to USTR to improve statistical reporting of government procurement under the GPA and U.S. FTAs, including working with GPA parties to enhance their reporting, resuming the required data exchange with NAFTA parties, improving U.S. federal and state procurement data reported to the WTO, and ensuring that U.S. statistical notifications to the WTO are well documented and reviewed for accuracy. USTR did not provide official comments. |
From 1913 until 2002, USDA was responsible for the inspection of plants and animals at U.S. ports of entry. Following the September 11, 2001, terrorist attacks, Congress passed the Homeland Security Act of 2002, which combined the inspection activities of the Department of the Treasury’s Customs Service, the Department of Justice’s Immigration and Naturalization Service, and USDA’s APHIS into the newly created DHS. The Secretaries of DHS and of USDA signed a memorandum of agreement in February 2003, agreeing to work cooperatively to implement the relevant provisions of the Homeland Security Act of 2002. Under the memorandum of agreement, APHIS’s responsibilities include managing user fees, overseeing agriculture specialists’ training, and providing pest identification services; and CBP’s responsibilities include conducting inspections and related activities. Consistent with the Homeland Security Act of 2002 and the agreement, in 2003 approximately 1,500 agriculture specialists who had formerly worked for APHIS became CBP employees. In 2003, CBP established an initiative called “One Face at the Border,” which unified its three missions—customs, immigration, and agricultural inspection—by cross-training CBP customs and immigration officers and agriculture specialists in all three areas. The inspection procedures vary somewhat by the transportation pathway, such as airports, seaports, or land border crossings, but, generally, CBP officers conduct primary inspections, including interviewing passengers, and may refer passengers to agriculture specialists who conduct more detailed secondary inspections, including subsequent interviews of passengers or examination of baggage. Figure 1 shows an example of primary and secondary inspection procedures at an airport. As of April 2012, approximately 2,360 CBP agriculture specialists, including those who formerly worked with APHIS and those hired by CBP, were assigned to about half, or 167 of the 329 U.S. ports of entry. Each U.S. port of entry can include one or more pathway, such as airports, seaports, or land border crossings. For example, the port of Baltimore, Maryland, has an airport and seaport, whereas the port of Dallas, Texas, has just an airport. CBP port directors are responsible for overseeing operations at ports of entry and assigning agriculture specialists to specific port facilities. The ports of entry are organized into 20 district field offices across the United States, and these district offices are headed by CBP field office directors who also serve as liaisons between CBP headquarters and port management. In 2005, APHIS and CBP established a formal assessment process at select ports—known as joint quality assurance reviews—to ensure that ports of entry carry out agricultural inspections in accordance with APHIS’s regulations, policies, and procedures. APHIS and CBP spent about $33,000 conducting eight such reviews in 2011, and, according to CBP officials, the reviews focus on ports that are considered to be high risk for agriculture. The Food, Agriculture, Conservation, and Trade Act of 1990, as amended, authorizes the Secretary of Agriculture to set and collect user fees for AQI services provided in connection with the arrival, at a port in the customs territory of the United States, of commercial vessels, commercial trucks, commercial railroad cars, commercial aircraft, and international passengers. The Secretary subsequently delegated this authority to APHIS. The fees are paid either directly by shipping companies or indirectly by air passengers through fees on tickets. CBP collects user fees for commercial vessels and trucks and deposits the collections into APHIS’s user fees account. APHIS collects all other user fees and periodically transfers a pre-agreed portion of the total collections to CBP to support CBP’s agriculture-related operations. APHIS has revised the AQI user fees several times since the act was passed. For example, through the rulemaking process, APHIS increased the user fees in November 1999 and, in January 2003, extended the adjusted fees indefinitely. In August 2006, APHIS published a final rule affirming a December 2004 interim rule that increased user fees again. We have previously reported on how the fees are set, collected, and distributed, and the benefits and challenges of this process to agencies and stakeholders, including the implications of consolidating these fees under the authority of DHS. DHS and USDA took steps to implement all seven recommendations we made in our May 2006 report, but they faced challenges fully implementing four of them. DHS and USDA have implemented our recommendations to (1) improve information-sharing, (2) undertake a full review of DHS’s financial management system for the AQI program, and (3) remove barriers to timely and accurate AQI user fee transfers from USDA to DHS. Improve information-sharing. In our May 2006 report,that DHS and USDA ensure that they more effectively share urgent alerts and other information essential to safeguarding U.S. agriculture and that they transmit such information to agriculture specialists at the ports. At that time, we reported that agriculture specialists were not consistently receiving notifications of changes to inspection procedures or policies and urgent alerts from APHIS—notices of emerging concerns about foreign pests and diseases––in a timely manner. In response to our recommendation, in 2007, DHS established the position of Deputy Executive Director for Agriculture Operational Oversight to serve as a we recommended primary point of contact for coordination among CBP, APHIS, and AQI stakeholders, such as state departments of agriculture, who would be largely responsible for eradicating foreign pests. In addition, CBP implemented a policy to disseminate urgent agriculture alerts to its field offices within 24 hours of receipt, and the alerts are then disseminated to agriculture specialists at the ports. These alerts, as well as any changes in inspection procedures or policies, are also available on the AQI program’s intranet site. Our survey results indicate that an estimated 83 percent of the agriculture specialists and supervisors at CBP found that information regarding agriculture regulatory changes was delivered in a timely manner either always or most of the time. Our survey results also indicate that an estimated 4 percent of agriculture specialists and supervisors at CBP believe that the timeliness of information provided to agriculture specialists is a very major challenge, while an estimated 57 percent believe it is only a minor challenge or not a challenge. Review DHS’s financial management system. In 2006, we recommended that DHS undertake a full review of its financial management systems, policies, and procedures for the AQI program to ensure financial accountability for funds allocated for agricultural quarantine inspections. GAO-06-644. spent on agriculture activities and the associated costs. Since we last reported, CBP added agriculture-specific activity codes to its financial management system, which, according to CBP officials, allows CBP to provide APHIS with actual costs related to user fees. In addition, CBP issued guidance to clarify how employees should account for activities that are simultaneously related to immigration, customs, and agriculture activities so that this information could be tracked for the purpose of collecting AQI user fees. According to APHIS and CBP officials, the new activity codes and guidance allow CBP to accurately report its costs by user fee type to APHIS and ensure financial accountability for funds allocated to AQI user fees. Accurately transfer user fees. In 2006, we recommended that USDA take steps to assess and remove barriers to the timely and accurate transfer of AQI user fees to DHS. At that time, transfers of user fees from USDA’s APHIS to DHS’s CBP were often delayed and their amounts were sometimes less than CBP expected, which adversely affected agricultural inspection activities. For example, in 2006, we reported that during fiscal years 2004 and 2005, CBP frequently did not receive the transfers at the time specified or for the agreed upon amount, causing some ports to reduce spending for supplies or to delay hiring or purchasing equipment. Since that time, APHIS and CBP have fully implemented a user fee transfer agreement that allows for a bimonthly transfer schedule that better accommodates the inflow of AQI user fee funds. This new user fee agreement also created chief budget liaisons at APHIS and CBP and provides for meetings at least 4 times a fiscal year to discuss AQI funding. Our analysis of transfer records provided by APHIS shows that, from fiscal year 2006 through 2011, 34 of the 36 scheduled user fee transfers were made in accordance with the new, bimonthly transfer schedule. During that time, six scheduled transfers were less than the scheduled amount, and, for each, APHIS made up the difference either by adding an unscheduled transfer or by adding the difference to the next scheduled transfer. APHIS and CBP officials told us that transfers have been more timely and accurate since the changes were implemented. DHS and USDA faced challenges in fully implementing our recommendations to (1) adopt meaningful performance measures, (2) establish a national risk-based staffing model, (3) improve the agriculture canine program, and (4) revise user fees to cover AQI program costs. In 2006, we recommended that DHS and USDA adopt meaningful performance measures for assessing the AQI program’s effectiveness at intercepting foreign pests and disease on agricultural materials entering the country by all pathways and posing a risk to U.S. agriculture. At that time, CBP had not adopted performance measures that took into account the agency’s expanded mission or considered all pathways by which prohibited agriculture items or foreign pests may enter the country. In response to our recommendation, in 2007, APHIS and CBP created a joint task force that expanded existing performance measures to more pathways, including passengers’ baggage, pedestrians, and vehicles, as well as some cargo pathways. These performance measures provide information about the amount of prohibited agriculture items expected to be found in specific pathways during inspections, which can then be compared with data on the actual amount found. According to APHIS and CBP officials, this comparison can provide some information regarding the effectiveness of agricultural inspection activities as well as the relative risk that prohibited pests pose in a particular pathway. For example, in fiscal year 2011, APHIS estimated that 3.5 percent of international airline passengers were expected to be carrying prohibited agriculture items, and agricultural inspections actually found prohibited items in 3.2 percent of international airline passengers, suggesting that the agricultural inspections may not have found all items for that year. Even as APHIS and CBP expanded existing performance measures, they did not develop measures for all aspects of the AQI program that are important for its management. Thus, existing performance measures are not sufficient to assess the program’s overall effectiveness. For example, APHIS officials told us that the AQI program does not have performance measures for gauging the timeliness of APHIS’s pest identification services, which form the basis for deciding how to treat inspected material. According to APHIS officials, they are working independently to develop such measures. In addition, CBP officials told us that there are no performance measures for gauging the extent to which the AQI program targets inspections to commodities or pathways of higher risk. Furthermore, there are no performance measures for assessing progress related to the AQI program’s expanded mission to prevent agroterrorism, such as preventing the intentional introduction of pests harmful to agriculture by coordinating with intelligence entities. According to the Director of CBP’s Agriculture/Bio Terror Countermeasures division, there is an ongoing effort to develop a measure of CBP’s ability to prevent intentional introductions of harmful pathogens. CBP officials also told us that because the current performance measures are not designed to indicate what type of inspection procedure would most likely identify a prohibited item––for example, whether an item would be more likely to be found using an x-ray or a canine team—they are limited in their usefulness for effectively deploying their inspection resources. According to APHIS and CBP officials, the two agencies have not created additional performance measures for the AQI program because they have largely focused their performance management efforts on expanding their existing performance measures to additional pathways. In addition, they told us that developing additional performance measures has been a challenge because of the diverse missions of the two agencies. Our work on results-oriented organizations states that performance goals and measures that successfully address important and varied aspects of program performance are key elements of results-oriented organizations. Pub. L., No. 103-62, 107 Stat. 285, amended by GPRA Modernization Act of 2010, Pub. L. No. 111-352, 142 Stat. 3866. divisions, programs, or initiatives.established APHIS and CBP roles in the AQI program also emphasized the need for coordination between the two agencies. In 2007, a task force comprising of APHIS and CBP employees identified the need to create a joint agency AQI strategic plan, but an official with the task force told us that this effort was not successful because the two agencies took fundamentally different approaches to strategic planning that could not be resolved. Instead, according to APHIS and CBP officials, the two agencies have incorporated elements of AQI activities into each agency’s separate strategic planning efforts. For example, the strategic plan for APHIS’s Plant Protection and Quarantine program has a program goal of optimizing the effectiveness of pest exclusion and prevention activities. At the same time, CBP’s Office of Field Operations has a separate draft strategic plan that contains an objective for protecting against the introduction of plant pests and foreign animal diseases. Each plan has different performance measures. These separate strategic plans do not reflect a coherent joint mission with program goals that can serve as the foundation for developing performance measures for the AQI program as a whole. Without a joint strategic plan defining the mission and goals of the AQI program, APHIS and CBP do not have a unified framework for developing meaningful performance measures. GAO-06-644. develop a model, and the agency received the model in September 2010. However, CBP determined that the model was inadequate because it did not incorporate specialized staffing needs, such as ports where unique commodities (e.g., cut flowers) are inspected. CBP is in the process of soliciting for a new contract to revise the staffing model to account for these specialized staffing needs, and they estimate that this new contract will cost an additional $300,000. CBP officials told us their goal is for the revised staffing model to be completed and approved by September 2014, but as of June 2012, officials said that the effort to finalize the contract solicitation is 4 months behind schedule. In addition, CBP officials were unable to provide contracting documents to substantiate their timeline. CBP officials told us they are having difficulty writing the new contract solicitation because DHS’s information requirements for contracting documents have changed since they wrote the previous contract, and they were unaware of the new requirements when they submitted their draft documents. In addition, a CBP official involved in the contracting process told us that the AQI program generally does not use contractors; therefore, the program’s experience in managing the contracting process is limited. CBP officials told us they anticipate that the revised staffing model will recommend significant increases in staff at many locations because the staffing model they received in September 2010 recommended a 32- percent increase in the total number of agriculture specialists for the AQI program. CBP officials also told us they currently do not have the resources to increase staff above replacement levels. However, the agency has not developed a plan or strategy that assesses the risk of potential fiscal constraints on their ability to implement the staffing model. Under standards for internal control in the federal government, agencies are to assess the risks they face from external and internal sources and to determine what actions should be taken to mitigate them. Because the AQI program may not have the fiscal resources to add the number of agriculture specialists that the model recommends, CBP faces the risk of being unable to keep up with the demand for agricultural inspections. In 2006, we reported that the changing nature of international travel and agricultural imports creates risks for introducing pests and disease. These risks include the volume of passengers and cargo, the type of agricultural products, countries of origin, and ports of entry where passengers and cargo arrive in the United States. Without a plan or strategy to optimize the allocation of staff to those ports of highest need that considers the fiscal resources that may realistically be available, CBP risks investing in a staffing model it cannot execute and increasing the vulnerability of the agriculture sector to foreign pests and disease. International trade could also be affected if agriculture specialists are not available to inspect cargo in a timely manner. In 2006, we recommended that DHS and USDA work together to improve the effectiveness of the agriculture canine program by reviewing policies and procedures regarding training and staffing of agriculture canines and ensure that these policies and procedures are followed in the ports. At that time, the agriculture canine program was understaffed and proficiency scores of canine teams had declined. Agriculture canines are a key tool for targeting passengers and cargo for inspection by detecting the scent of specific prohibited agricultural items, such as citrus or beef. CBP officials told us that the use of canines can increase the number of agriculture interceptions. For example, at one port of entry that we visited, after a canine handler was assigned to work a pathway where no canine team had previously worked, interceptions increased by 800 percent. In response to our recommendation, CBP has Increased staffing levels. According to CBP officials, there are currently 114 active agriculture canine teams compared with the approximately 80 teams that were in place in 2006. We could not determine if the staffing levels were adequate without a final staffing model for the AQI program. According to CBP officials, the staffing model being developed by CBP includes staffing recommendations for agriculture canine teams. However, as discussed above, CBP officials told us that they do not have a plan to implement the staffing model results for deploying canine teams effectively at the ports because of current resource constraints. Increased canine training requirements. In 2006, we reported that 60 percent of the 43 agriculture canine teams tested failed the 2005 proficiency test—an annual performance evaluation all canine enforcement teams must undergo to maintain certification of their detection capability. We recommended that USDA and DHS review canine training policies. In response, in 2007, trainers from USDA’s National Detector Dog Training Center—the training center for agriculture canine teams— evaluated the annual agriculture canine certification program at selected ports. As a result of these evaluations, officials from CBP and the training center decided to extend the agriculture canine field training course by 1 week to add, among other things, hands-on training for conducting certifications at the ports. According to the national agriculture canine program manager, all current canine teams have passed the annual proficiency test. Expanded management oversight. CBP hired a national agriculture canine program manager with canine and agriculture experience to help ensure that staffing and training policies are followed in the ports. This program manager is responsible for canine handler recruitment activities; monitoring the training and staffing status of canine handlers; and coordinating the flow of information among canine handlers, field offices, and training centers. For example, the agriculture canine program manager noted that one of her primary responsibilities is to coordinate with the National Detector Dog Training Center to assist agriculture canine teams with training procedures and policies. Even with these efforts, the agriculture canine program still faces challenges related to supervisory training and data reliability. First, supervisors may not have canine training or experience. Based on the results of our survey of agriculture specialists, we estimate that 35 percent of agriculture canine specialists at CBP believe that their supervisor did not have adequate agriculture canine expertise to advise them on any work-related concerns in the past year.findings from the joint CBP-APHIS quality assurance reviews in 2010 and 2011 shows that canine handlers at 4 of the 15 ports with canine handlers that were reviewed reported to a supervisor who had not taken the formal canine supervisory training course. According to USDA’s National Detector Dog Manual, the supervisory training class covers topics related Our analysis of to using canine teams, proficiency training, veterinary requirements, and work expectations. The agriculture canine program manager told us that this formal training class is available, but not mandatory, for canine supervisors. Port directors at individual ports of entry are responsible for determining whether a canine supervisor should take the class and whether the port has the resources to support sending the supervisor to the class. Not having supervisors with experience in agriculture canines can, according to the canine handlers we spoke with at ports of entry, make it difficult for the canine handlers to get support when they encounter difficulty or have questions. Also, in March 2004, we reported that investing in and enhancing the value of employees through training and development is crucial for the federal government to successfully acquire, develop, and retain talent. Second, we found that some data being used to support the agriculture canine program may not be sufficiently reliable for assessment because they are incomplete and inaccurate. In addition, some data being collected may not be meaningful. The agriculture canine program relies on multiple types of data to track the work activities of canine handlers, such as whether the handler is active or on leave and what training activities the team has completed. However, we found the following: Some data are incomplete and inaccurate. For example, we analyzed data from fiscal years 2010 and 2011 on canine teams’ weekly training exercises. The program manager uses this information to ensure that canine teams are meeting their training requirement and maintaining a minimum required proficiency level to conduct agricultural inspections. However, we estimate that the percent of missing values in this data set ranges from 13 percent to 22 percent from January 2010 through July 2011. We could not accurately determine the precise number of missing values because, according to the canine program manager, the field offices do not maintain accurate records of the number of active canine teams. The canine program manager told us that canine teams periodically become inactive for a variety of reasons, such as medical leave or temporary reassignment of canine handlers, but the field offices do not change the team’s status to inactive in the human capital tracking system, and as a result, the number of active canine handling teams in each quarter may be overstated. The canine program manager also noted that the proficiency data—which are collected quarterly by CBP field offices and forwarded to the agriculture canine program manager in CBP headquarters—have missing values because field offices do not consistently review the data for errors or missing values. When there are missing values, too much time may have elapsed for the canine handler to remember what the correct data should be. According to the agriculture canine program manager, to compensate for these data problems, she maintains a separate record of the current status of each canine team, which is generated from personal communications between her, the field offices, and canine handlers. The agriculture canine program manager also told us she is developing a web-based data reporting system that is intended to have a supervisory review process before the data are submitted; however, she did not have a timeline for this project because it is being developed informally. Without complete and accurate information regarding its canine teams, the AQI program does not have sufficient information to assess the status of the canine teams’ proficiency level to ensure agriculture canine inspections are being conducted by qualified canine teams. Some data being collected may not be meaningful. Specifically, the agriculture canine program is gathering data on the amount of time canine teams actively inspect and intercept pests; however, according to CBP officials, these data are not useful for the AQI program. Before the creation of DHS, the U.S. Customs Service collected these data to measure the cost effectiveness of its drug-detecting canines, and CBP continued to collect these data for agriculture canines. The use of these data to determine the cost effectiveness of a canine program depends heavily on determining the value of the seized contraband, which is not easily determined for agriculture. For example, according to CBP officials, a pound of seized cocaine has an associated street value that can be compared with the cost of performing inspections. For agriculture products, the monetary value of the seized item may be minimal; instead, the value of the activity is in preventing the introduction of a harmful agricultural pest or disease and avoiding the potential economic harm, which, according to CBP, is difficult to project or calculate. Without sufficiently reliable data, the AQI program cannot assess the effectiveness of the canine program. Furthermore, by collecting data that are not meaningful or useful for assessing the effectiveness of its canine handlers, the AQI program may be using resources to collect data it does not need. In 2006 we recommended that DHS and USDA work together to revise the user fees to ensure that they cover the AQI program’s costs. At that time we found that, although the Secretary of Agriculture had the discretion to prescribe user fees to cover the costs of the AQI program, program costs had exceeded user fee collections since the transfer of AQI inspection activities to DHS’s CBP. In 2009, APHIS attempted to increase the AQI user fees using an interim rulemaking process that increased AQI user fees by approximately 10 percent. However, later that year they withdrew the interim rule because, according to APHIS officials, stakeholders objected to the lack of a formal comment period in the interim rulemaking process. We have previously reported that APHIS’s use of interim rules to adjust user fees limits stakeholder input. APHIS officials are exploring other regulatory alternatives for adjusting the fees. In October 2010, APHIS hired a contractor to conduct a comprehensive fee review to determine the full cost of AQI services, identify potential changes to the fee structure, and recommend new fees. APHIS officials estimated that, should APHIS and DHS agree that user fees need to be increased, APHIS will publish a proposed rule by the summer of 2013. GAO is conducting a separate evaluation of the AQI user fees’ structure and options for setting and distributing them. The AQI program uses data on arrivals, inspections, and interceptions to determine how well agricultural inspections identify prohibited materials and to review ports’ performance, but data quality issues may prevent AQI program officials from making full use of the data. More specifically, CBP and APHIS officials told us that they determine how well agricultural inspections identify prohibited materials by comparing the actual counts of arrivals, inspections, and interceptions against the existing performance measure of the amount of prohibited agricultural items expected to be found in a specific pathway. In addition, AQI officials use the data to identify annual trends specific to a particular port and to determine whether any changes in the number of inspections or interceptions at that port can be explained by external factors––such as a change in trade or travel patterns––or indicate a performance problem at the port that needs to be corrected. However, we found limitations that may undermine the data’s overall usefulness for managing the program. Specifically: The data may not be reliable. According to APHIS officials, data quality is an ongoing issue with the AQI data systems, including the Work Accomplishment Data System (WADS)—the primary repository for arrival, inspection, and interception data. As a result, in 2004, APHIS and CBP created an interagency stakeholder group with a goal of ensuring data quality and accuracy by performing quarterly visual checks of WADS data and providing data quality training to agriculture specialists at the ports upon request. Since 2006, 30 of the 167 ports with agriculture specialists have received this training. At some ports, agriculture specialists record arrivals, inspections, and interceptions every day on paper or spreadsheets and enter this information into WADS at the end of the month, which may affect the reliability of the data by introducing transcription errors. In addition, from 2010 through 2011, the joint CBP-APHIS quality assurance reviews, which focused on 22 ports, found instances of discrepancies between data recorded in WADS and data recorded on daily logs at about half of the ports reviewed (10 out of the 22 ports). For example, at one port that was reviewed, the number of passengers referred to secondary inspection was underreported by nearly 10 percent, and reviews of other ports identified some data that were overreported or had not been recorded. APHIS and CBP officials told us that supervisors review the data monthly at all the ports, and that there is a quarterly review process by the interagency stakeholder group; however both of these reviews rely primarily on a visual comparison of current and historical numbers and thus detect only unusually large changes at a port. According to APHIS officials, the monthly supervisory review process does not require supervisors to compare the numbers in WADS with the daily log sheets or other databases because the policy and procedures do not have specific requirements on how data are to be reviewed. We have previously reported that agencies should ensure that data are free of systematic error or bias and that what is intended to be measured is actually measured. According to a senior APHIS official, ensuring AQI data quality and accuracy is a continuing challenge because of various factors, including changes in the APHIS and CBP personnel involved in data collection. The data cannot be easily analyzed. WADS captures data on the number of arrivals, inspections, and interceptions independently from one another, and these data cannot be linked without extensive analysis. CBP officials told us that being able to connect a specific arrival to an inspection and the resulting interceptions would be useful information for assessing the effectiveness of targeting activities and inspection procedures. However, the analysis necessary to do so is time consuming and cumbersome, undermining the use of the data for managing the program. In addition, the way in which some data are recorded in WADS complicates analysis, according to APHIS and CBP officials. For example, WADS captures the number of agricultural inspections carried out at individual ports by agriculture specialists. It does not count the number of agricultural inspections carried out by CBP officers when agriculture specialists are not present. Therefore, WADS is not a representation of the total number of agricultural inspections carried out at ports and cannot be used to analyze the number of agricultural inspections conducted in relation to total number of arrivals. In another example, each inspection is counted once in WADS, but the number of interceptions that are recorded from an inspection varies depending on what is found. Specifically, if a passenger were inspected and found to be carrying five different types of fruit, the agriculture specialist would record that result as five interceptions for one inspection. However, if the passenger had five pieces of one type of fruit, it would be recorded as one interception. As a result, it is difficult to analyze the number of agricultural interceptions found in relation to the total number of inspections conducted. The data have inherent limitations beyond AQI program control. The number of agricultural arrivals, inspections, and interceptions varies from year to year and by pathway. According to APHIS and CBP officials, the variation is caused by numerous factors, including weather, economics, and politics that affect travel and trade, as well as variances in inspection targeting procedures. For example, arrivals of a commodity from a particular country may drop sharply because of severe weather conditions, such as hurricanes or droughts, or because trade sanctions and embargoes have been put in place for political reasons. APHIS and CBP officials noted that they target inspections on the basis of factors such as pathways, commodities known to be a risk for agricultural pests, country of origin, and a shipper’s history of violations. Together, these factors can result in inspection and interception numbers that do not correlate with the number of arrivals for a particular pathway. For example, APHIS officials told us that one pathway, such as cargo trucks, may have a high number of arrivals, but if the cargo these trucks are carrying is considered a low risk for carrying prohibited pests, then it would be expected that the data for this pathway would show fewer inspections and interceptions. Some of these data limitations have the potential to affect other key efforts that are currently underway, such as the program’s staffing model and the effort to analyze the structure and amounts of AQI user fees–– both critical to the AQI program. For example, contractor documents related to the staffing model stated that WADS data are not reliable for understanding the actual workload of agriculture specialists, and that the contractor had to undertake significant effort to make the data usable. Specifically, the contractor’s analysis estimated that about 2 percent of pedestrians are inspected by agriculture specialists, but that the data in WADS indicated that agriculture specialists inspected 33 percent of pedestrians.concerns regarding potentially inconsistent or inaccurate data entry, which could result in decreased confidence with data reporting and analysis. Without reliable data on work activities, AQI program officials cannot be assured that they have the information they need to manage the program. According to our analysis of agriculture specialists’ and supervisors’ responses to our 2012 survey and the results from our 2006 survey, some aspects of agriculture specialists’ and supervisors’ views about their work environment have changed since 2006. The responses to our open- and closed-ended questions show that views about some areas have improved, some concerns expressed in 2006 have persisted, and some concerns have increased. (To view the full results of our survey, please see the electronic supplement to this report, GAO-12-884SP.) According to our analysis of the responses to the 2006 and 2012 surveys, agriculture specialists and supervisors believe some aspects of the AQI program have improved since we last reported. Notably, in 2006, “nothing is going well” was the second most common response to our open-ended question, “What is going well with respect to your work as an agriculture specialist?”; in 2012, it was one of the least common responses, suggesting that, in general, respondents believe aspects of the AQI program have improved. (See appendix II for a summary of responses to this open-ended question for 2006 compared to 2012.) Based on our analysis of survey results, agriculture specialists and supervisors specifically believe that training and information-sharing have improved. Training. More agriculture specialists and supervisors at CBP now believe they are sufficiently trained to perform their agriculture inspection duties than did in 2006, according to our analysis of responses to the closed- ended questions in our 2012 survey. Specifically, we estimate that 76 percent of agriculture specialists and supervisors at CBP employed before the merger believe they are definitely sufficiently trained to perform their agricultural inspection duties, and 51 percent employed after the merger believe they are definitely sufficiently trained. This represents an increase from 2006, when we estimated 58 and 36 percent, respectively. (See table 1.) Additionally, based on our analysis of the responses to our closed-ended questions, we estimate 28 percent of agriculture specialists and supervisors at CBP believe that the sufficiency of training is not a challenge to conducting agriculture duties at their port, and another 29 percent believe it is only a minor challenge. We did not ask about whether or not training was a challenge in our closed-ended questions in 2006, but at that time, training was the fourth most frequent response to our open-ended question, “What would you like to see changed or improved with respect to your work as an agriculture specialist?” Our analysis of the responses to our 2012 survey shows that views about training have generally improved, but out of 406 respondents, we received 68 comments in response to an open-ended question listing certain aspects of training they would like to see changed or improved. For example, some respondents commented that they would like to see more specific or refresher training on agriculture pests that they may encounter on the job, and one respondent commented that he would like the opportunity for more hands-on—rather than web-based—training. Information-sharing. According to our analysis of 2006 and 2012 survey responses, information-sharing has also improved. Based on the responses to our closed-ended question on whether information is delivered in a timely manner, we estimate that 36 percent of agriculture specialists and supervisors at CBP believe that information on agriculture regulatory changes is always delivered in a timely manner, and another 48 percent believe the information is delivered in a timely manner most of the time. These views reflect an increase from 2006, when we estimated 17 percent of agriculture specialists and supervisors at CBP believed such information was always delivered in a timely manner, and 38 percent believed it was delivered in a timely manner most of the time. Additionally, we estimate that, compared with 2006, statistically more agriculture specialists and supervisors at CBP in 2012 believe they always receive information on urgent alerts, pest alerts, and updated pages for the agriculture regulatory manual in a timely manner. (See table 2.) We estimate that 57 percent of agriculture specialists and supervisors at CBP in 2012 believe the timeliness of information provided to agriculture specialists is either not a challenge or is a minor challenge to conducting agriculture duties at their port. We did not ask this question in 2006. According to our analysis of the responses to our 2012 survey, some of the concerns agriculture specialists and supervisors at CBP reported in 2006 persist. In particular, concerns remain about CBP’s chain of command, the agriculture mission, and working relationships among co- workers. CBP’s chain of command. Our analysis indicates that respondents remain concerned about CBP’s chain of command—including concerns about poor communication related to internal policies, supervisors lacking agriculture experience, and the need for an agriculture chain of command that is separate from CBP. In 2006, CBP’s chain of command was the third most frequent response to our open-ended question, “What would you like to see changed or improved with respect to your work as an agriculture specialist?” Similarly, in 2012, it was the category noted most often as something to be changed or improved. Furthermore, based on our analysis of closed-ended questions in 2012, we estimate that 30 percent of agriculture specialists and supervisors at CBP believe the CBP chain of command is a very major challenge to conducting agriculture duties at their port, and another 23 percent believe it is a major challenge. (See appendix II for a summary of responses to the open- ended question, “What would you like to see changed or improved with respect to your work as an agriculture specialist?” in 2006 compared to 2012.) We did not ask about CBP’s chain of command in our closed- ended questions in 2006. Agriculture mission. As with the results of our 2006 survey, 2012 survey respondents identified the priority given to the agriculture mission among the top four aspects of the AQI program they would like to see changed or improved. Further, we estimate that 39 percent of agriculture specialists and supervisors at CBP believe the priority given to the agriculture mission is a very major challenge to conducting agriculture duties at their port, and another 23 percent believe it is a major challenge based on our Out of 406 analysis of responses to closed-ended questions in 2012. survey respondents, 86 respondents identified the priority given to the agriculture mission as something they would like to see changed or improved in response to our open-ended question. Respondents noted that competing priorities sometimes prevented them from performing their missions and that agriculture specialists do not have enough time to complete their tasks, such as looking for pests in agriculture materials intercepted from passengers. Not having enough time to complete agriculture-mission related tasks is a concern for about the same percentage of agriculture specialists and supervisors at CBP in 2012 as it was in 2006. (See table 3.) The 95 percent confidence interval surrounding the estimate of 39 percent of agriculture specialists and supervisors at CBP identifying the priority given to the agriculture mission is a very major challenge ranges from 34.0 percent to 44.9 percent, and the 95 percent confidence interval surrounding the estimate of 23 percent ranges from 18.5 percent to 28.0 percent. Concern for the priority given to the agriculture mission persists, but 91 out of 406 respondents indicated in their response to the open-ended question about what is going well that they believe some aspects of the AQI mission are going well, such as inspections and interceptions. Working relationships. Working relationships among co-workers is still a concern for agriculture specialists and supervisors, according to our analysis of the 2006 and 2012 survey data. Specifically, we estimate a similar percentage of agriculture specialists and supervisors at CBP in 2006 and 2012 believe their work is definitely not respected by CBP management—42 percent in 2006 and 43 percent in 2012—and by CBP officers—35 percent in 2006 and 28 percent in 2012.Respondents identified working relationships in both 2006 and 2012 as one of the most frequent responses to the open-ended question asking respondents what they would like to see changed or improved. In particular, some respondents stated that CBP officers and management do not respect their work or mission, and others noted that agriculture specialists are not treated as part of the team. However, in both 2006 and 2012, respondents also identified working relationships among co- workers as one of the most frequent responses to our open-ended question of what is going well, suggesting that while some aspects of working relationships continue to be a concern, other aspects of working relationships are going well. In particular, some respondents noted that their fellow agriculture specialists were dedicated, highly-qualified, or hard working. (See table 4). The AQI program is a key component of U.S. efforts to protect agriculture from the unintentional or deliberate introduction of pests and disease, and effective management of the AQI program requires a coordinated effort by DHS and USDA. Since we reported in 2006, both DHS and USDA have made progress in implementing our recommendations and overcoming some of the management challenges we identified, including ensuring that user fees are transferred to CBP and that important agriculture information is shared with agriculture specialists in a timely manner. However, the AQI program continues to wrestle with fundamental problems that undermine the management of the program and risks wasting resources in a fiscally constrained environment. Specifically, in the absence of a strategic plan that lays out the program’s joint mission and goals, APHIS and CBP do not have a framework for defining the program’s mission, setting goals to achieve the desired results, and identifying performance measures for gauging progress towards those goals. Furthermore, the agencies may not have sufficient information on which to base key decisions to support the AQI program because the data the two agencies are collecting and using for managing the program may not be reliable. Without ensuring that the data on arrivals, inspections, and interceptions across ports are entered accurately, the AQI program may not have sufficiently reliable data for supporting critical efforts for managing the program. When discrepancies exist between data in WADS and data recorded on daily logs at about half of the ports reviewed by the 2010 to 2011 joint CBP-APHIS quality assurance reviews, it could be an indicator of more widespread data quality issues related to failures with the supervisory review policy and procedures in ensuring that data are entered accurately. In addition, the data supporting the agriculture canine program are hindered by the absence of a timely and consistent data review process at CBP field offices, resulting in incomplete and inaccurate data. Moreover, the agriculture canine program continues to collect some data that may not be meaningful or relevant to the program, further straining the program’s resources. Without sufficiently reliable data, the AQI program cannot assess the effectiveness of the canine program. Furthermore, by collecting data that are not meaningful or useful for assessing the effectiveness of its canine handlers, the AQI program may be using resources to collect data it does not need. Finally, the agencies may not be using their resources effectively. Having devoted 6 years and hundreds of thousands of dollars in contracts to develop a staffing model, CBP still does not have a risk-based staffing model that provides assurance that those ports of highest vulnerability for the entry of pests and disease are adequately staffed. Furthermore, DHS has not assessed the risk that insufficient resources may pose to implementing the staffing model once it is completed. Without a plan or strategy for how it will implement this staffing model that considers the fiscal resources that may realistically be available, the agency risks investing in a staffing model that it cannot execute. CBP also risks increasing the vulnerability of the agriculture sector to foreign pests and disease or disrupting international trade if agriculture specialists cannot keep up with demand for agriculture inspections. In addition, well-trained supervisory staff are a crucial resource for supporting the agriculture canine teams, but the results of our survey and the joint CBP-APHIS quality assurance reviews indicate that some supervisory staff may not have canine training or experience because of barriers such as a lack of resources at ports and the voluntary nature of supervisory canine training. As a result, supervisors in the AQI program may not have the skills necessary to manage issues unique to the canine program, such as the health and training of the canine. By overcoming these challenges, the United States would be in a better position to protect agriculture from the economic harm posed by foreign pests and disease. We are making the following six recommendations. To help ensure the CBP and APHIS agricultural quarantine inspection program protects U.S. agriculture from accidental or deliberate introduction of foreign pests and disease, we recommend that the Secretaries of Agriculture and of Homeland Security work together to take the following three actions: Develop a strategic plan for the AQI program that lays out its joint mission and program goals. Once the strategic plan is completed, as part of a coordinated strategic planning effort, identify corresponding meaningful performance measures for monitoring progress towards those goals. Continue taking steps to improve the reliability of AQI data on arrivals, inspections, and interceptions across ports, including reviewing the supervisory review policy and procedures to ensure the data are entered accurately. In addition, we recommend the Secretary of the Department of Homeland Security, in consultation with USDA where appropriate, take the following three actions: Take steps to ensure the agriculture canine program has reliable and meaningful data, including instituting a timely and consistent review process at CBP field offices, and evaluate the relevance of data collected for the agriculture canine program. Develop a plan or strategy for implementing the forthcoming AQI staffing model that assesses the risk of potential fiscal constraints and determines what actions should be taken to mitigate that risk by considering the fiscal resources that may realistically be available to ensure that agriculture staffing levels at each port are sufficient. Identify any agriculture canine supervisors who do not have canine training or experience and work with port directors to overcome any barriers to providing formal training. We provided USDA and DHS with a draft of this report for their review and comment. In their written comments, both agencies agreed with our recommendations, and DHS provided technical comments, which we incorporated as appropriate. USDA’s comments appear in appendix III. DHS’s comments appear in appendix IV. 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 of this report to the Secretaries of Agriculture and Homeland Security, the appropriate congressional committees, and other interested parties. 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) 512-3841 or [email protected]. 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 major contributions to this report are listed in appendix V. Our objectives were to examine the extent to which (1) U.S. Department of Agriculture (USDA) and the Department of Homeland Security (DHS) have implemented recommendations we made in 2006 to improve the Agricultural Quarantine Inspection (AQI) program; (2) data on arrivals, inspections, and interceptions are used for managing the program; and (3) the views of agriculture specialists at Customs and Border Protection (CBP) regarding their work environment have changed, if at all, since our 2006 reports. To address all of these objectives, we visited or spoke with officials at a nonprobability sample of five CBP ports of entry to observe agriculture work activities and discuss challenges related to conducting agriculture inspections and interceptions. These ports of entry were Austin, Texas; Baltimore, Maryland; Dallas, Texas; Miami, Florida; and San Ysidro, California. We selected these ports of entry based on size; the presence of agriculture specialists, supervisors, and canine handlers; and entry pathways, such as air, sea, and land. Because we used a nonprobability sample, the information we obtained from these visits cannot be generalized to other CBP ports of entry. The visits instead provided us with more in-depth information on the perspectives of various agriculture specialists in these ports of entry about the management of the AQI program. To examine the extent to which GAO’s May 2006 recommendations have been implemented, we interviewed DHS and USDA officials and reviewed documentation related to (1) improving information-sharing, (2) undertaking a full review of DHS’s financial management system for the AQI program, (3) removing barriers to timely and accurate AQI user fee transfers from USDA to DHS, (4) adopting meaningful performance measures, (5) establishing a national risk-based staffing model, (6) improving the agriculture canine program, and (7) revising user fees to cover AQI program costs. Specifically: To determine the extent to which USDA’s Animal and Plant Health Inspection Service (APHIS) and DHS’s CBP improved information- sharing, we obtained and reviewed CBP’s agriculture information sharing policies and protocols regarding agriculture alerts and policy updates, among other things, to evaluate changes since our 2006 report. We discussed these policies with agriculture specialists and supervisors during our site visits. We also interviewed the Deputy Executive Director for Agriculture Operational Oversight to discuss changes in information-sharing policies and protocols since 2006. We conducted a nationally representative survey of agriculture specialists and supervisors at CBP, details of which are discussed below, and analyzed the results to determine the extent to which agriculture specialists and supervisors believe that information-sharing is a challenge. To determine the extent to which DHS reviewed its financial management system, we reviewed guidance on procedures for accounting for CBP work activities related to agriculture and interviewed officials with CBP’s Budget Group and APHIS’s Financial Management Division to discuss how the changes have affected the financial accountability for funds allocated for agriculture quarantine inspections. To review how USDA and DHS have removed barriers to user fee transfers, we obtained the updated Memorandum of Agreement signed by the Secretaries of Agriculture and Homeland Security that modified the user fee fund transfer schedule. We also received AQI user fee fund transfer records from APHIS to compare the timing and amount of transfers to the agreed upon amount. We interviewed officials from CBP’s Budget Group and APHIS’s Financial Management Division regarding the transfers to evaluate whether the steps taken by USDA have resulted in timely and accurate transfers to DHS. To evaluate APHIS’s and CBP’s progress in developing meaningful performance measures for the AQI program, we reviewed strategic planning documents, such as the Plant Protection and Quarantine (PPQ) strategic plan and selected sections of the Office of Field Operations’ draft strategic plan, for how AQI activities are incorporated into these plans. We interviewed AQI officials, including PPQ officials with strategic planning responsibilities, CBP officials with the Office of Field Operations Strategic Planning Division, and an official with the APHIS-CBP joint agency task force to discuss the existing AQI performance measures, including how they are used to assess performance, their limitations for measuring key AQI activities, and the extent to which APHIS and CBP are developing additional performance measures for managing the AQI program. We also discussed the extent to which the AQI program has developed a strategic plan with a joint mission and program goals, and we compared this to leading practices we have previously reported on for federal strategic planning at lower levels within federal agencies, such as planning for individual divisions, programs, or initiatives. To evaluate the extent to which CBP has established a national risk- based staffing model, we reviewed CBP contracting documents related to CBP’s efforts to develop a model and interviewed officials from CBP’s Office of Field Operations and the Deputy Executive Director for Agriculture Operational Oversight regarding their progress towards, and their implementation plan and strategy for, a model. As part of evaluating the potential impact of the AQI program not having a risk-based staffing model, we reviewed standards for internal control in the federal government. To assess the effectiveness of the canine program, we analyzed and reviewed agriculture canine units’ quarterly proficiency scores from fiscal years 2006 through 2011, the agriculture canine training manual, agriculture canine units’ leash time data from fiscal years 2006 through 2011, and CBP’s agriculture canine daily statistics template. We discussed these with the CBP agriculture canine program manager to determine the extent to which the data can be used for assessing the agriculture canine program. To determine the extent to which the proficiency data have missing values, we compared the number of active agriculture canine teams for each quarter provided by the agriculture canine program manager to the number of canine teams that reported a proficiency score for that quarter and discussed the limitations of this approach with the agriculture canine program manager. We also reviewed the results of APHIS-CBP joint quality assurance reviews from 2010 through 2011, the most recent years for which complete data are available, for those ports that had canine handlers to determine the number of reviews that found canine handlers did not have supervisors with canine training. We also analyzed the results of our survey, discussed below, to determine the extent to which canine handlers believe their supervisor has adequate experience. We interviewed the agriculture canine program manager on training policy and procedures for canine handlers and supervisors, steps CBP has taken to address staffing issues raised in our 2006 report, and data quality issues with the agriculture canine program. To evaluate how DHS and USDA have revised user fees since 2006, we reviewed Federal Register documents relating to APHIS’s attempts to revise AQI user fees. We interviewed APHIS officials on their plans for future revisions to the user fee structure. GAO is conducting a separate evaluation of the AQI user fee structure and options of setting and distributing them. To examine the extent to which data on agriculture arrivals, inspections, and interceptions are used for managing the AQI program, we reviewed DHS and USDA inspection and interception data, related summary reports, and policies. Specifically, we obtained and analyzed data from USDA APHIS’s Work Accomplishment Data System for fiscal years 2001 through 2011 and reviewed data collection and entry procedures and definitions of required data elements that may impact the use of the data for managing the program. We reviewed DHS and USDA joint Quality Assurance Reviews— joint agency reports on port compliance with agricultural inspection policy— from 2010 through 2011, the most recent years for which data were available. We reviewed documents related to contractor-led efforts for key aspects of the AQI program to determine how those efforts were impacted by data quality issues. Additionally, we interviewed key program officials at USDA and DHS to discuss the reliability of the data and whether there were limitations in the data that may affect the extent to which these data on agricultural quarantine inspections and interceptions are used to make AQI program decisions. To assess the reliability of arrival, inspection and interception data, we observed data collection and data entry procedures at selected ports of entry; reviewed the finding of CBP-APHIS joint quality assurance reviews from 2010 and 2011; and interviewed agriculture inspectors, supervisors and program managers. We concluded that inspection and interception data in APHIS’s Work Accomplishment Data System (WADS) may hinder managers’ ability to definitively determine whether patterns observed in inspection and interception data are attributable to real changes in the number of inspections and interceptions, or to errors in the data collection and entry processes. We found that potential weaknesses exist at several places in the data collection process. The process for recording inspections and interceptions varies significantly from port to port. At some ports, inspectors record inspection information on a paper clipboard and then proceed to enter that information into an electronic system following the inspection. However, at other locations, paper records of inspections and interceptions are compiled and entered into electronic form as much as one month after the inspection took place. The multiple steps involved in data entry increase the likelihood of errors; and at some ports, the amount of time that elapses between inspection and interception activities and data entry reduces the usefulness of inspector recall to correct any ambiguities or errors found in paper records. To determine the extent to which the views of agriculture specialists regarding their work environment have changed, if at all, since GAO last reported, we conducted a nationally representative survey of agriculture specialists and supervisors at CBP regarding their work environment. The survey consisted of closed-ended and open-ended questions. Specifically, we drew a stratified random probability sample of 556 agriculture specialists and supervisors from the universe of 2,311 specialists in the DHS’s CBP who were engaged in agricultural inspection duty as of October 2011 and still engaged in this duty as of February 2012. We excluded 10 respondents from our sample of 556 as out-of- scope because these individuals performed management duties outside of CBP ports. All agriculture canine handlers were placed in one stratum; other strata were defined by the number of specialists at the respective ports. Each sample was subsequently weighted in the analysis to account statistically for all specialists in the population. We received an unweighted response rate of 74 percent. The survey results for the closed-ended questions are generalizable to all agriculture specialists and supervisors at CBP. Because we followed a probability procedure based on random selections, our sample is only one of a large number of samples we might have drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as 95 percent confidence intervals. This is the interval that would contain the actual population values for 95 percent of the samples we could have drawn. In developing the survey, we met with CBP and APHIS officials to gain a thorough understanding of the AQI program. We also shared a draft copy of the questionnaire with CBP officials who provided us with comments, including technical corrections, to ensure that the questions were clear and unambiguous, terminology was used correctly, the questionnaire did not place an undue burden on agency officials, the information could feasibly be obtained, and the survey was comprehensive and unbiased. On the basis of the feedback we received, we made changes to the content of the survey. We posted the questionnaire on GAO’s survey website. When the survey was activated, the agriculture specialists who had been selected to participate were informed of its availability by an e-mail message that contained a unique user name and password. This allowed respondents to log on and fill out a questionnaire but did not allow respondents access to the questionnaires of others. We sent reminder and follow-up e-mails to agriculture specialists who had not completed their surveys in a specific time period to increase our response rate. Since this was a Web-based survey, respondents entered their answers directly into the electronic questionnaire, eliminating the need to key data into a database, thus minimizing error. The survey was available from February 6, 2012, until March 9, 2012. Results of the survey are summarized in GAO-12-884SP. To facilitate comparison with the findings from our prior report, we used a questionnaire for this survey similar to the one we used in 2006. The 2006 questionnaire focused on the transition from agriculture specialists and supervisors in USDA to CBP, and we recognize that there may be demographic shifts in these agriculture specialists and supervisors that we did not calculate. However, we do not believe this affected the results of our analysis. The 2012 survey contained 25 closed-ended questions that asked for opinions and assessments of (1) agricultural inspection training, (2) agricultural inspection duties, (3) agricultural inspection supplies and equipment, (4) communication and information-sharing within CBP and between other agencies, and (5) challenges related to conducting agricultural work activities. Some of those questions were specifically for agriculture canine handlers. In addition, the survey contained two open-ended questions asking for opinions and assessments of what is going well and what could be improved in regards to the work of agriculture specialists. We conducted a content analysis on the responses to the open-ended questions using all of the same categories that were used in 2006, adding new categories as appropriate. We categorized the responses based on the descriptions of the categories from 2006. The responses were placed into as many categories as appropriate; however, each response was placed no more than once in any category. We conducted an independent review of the results and resolved any disagreement. We conducted this performance audit from August 2011 to September 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 audit objectives. In addition to the individual named above, Mary Denigan-Macauley (Assistant Director), Adam Anguiano, Carl Barden, Michelle Cooper, N’Kenge Gibson, Amanda Harris, Stuart Kaufman, Kirsten Lauber, Alison O’Neill, and Kiki Theodoropoulos made key contributions to this report. Important contributions were also made by Kevin Bray, Joyce Evans, and Jena Sinkfield. | According to DHS, invasive species cause an estimated $136 billion in lost agricultural revenue annually, and since September 11, 2001, concerns have persisted about the vulnerability of agriculture to deliberate introduction of foreign pests and disease. DHS and USDA manage the AQI program, which places agriculture inspectors at U.S. ports of entry to inspect imported agriculture products and intercept foreign pests. GAO reported in 2006 on management challenges in the program and made seven recommendations to improve it. GAO was asked to examine the extent to which (1) DHS and USDA implemented GAO's recommendations; (2) data on arrivals, inspections, and interceptions are used for managing the program; and (3) the views of AQI agriculture specialists on their work environment have changed since 2006. GAO surveyed a representative sample of agriculture specialists and supervisors; reviewed key documents and inspection procedures; visited five selected ports of entry based on size and entry pathways, such as air or sea; interviewed DHS and USDA officials; and reviewed AQI data. The survey instrument and most results can be viewed at GAO-12-884SP . The Department of Homeland Security (DHS) and the U.S. Department of Agriculture (USDA) have taken steps to implement all seven of the recommendations GAO made in 2006 to improve the Agriculture Quarantine Inspection (AQI) program, but they face challenges in fully implementing four of them. Specifically, DHS and USDA have implemented GAO's recommendations to improve information sharing, review DHS's financial management system for the AQI program, and remove barriers to timely and accurate transfers of AQI user fees--collected for AQI services provided in connection with the arrival of international air passengers and conveyances at U.S. ports. However, DHS and USDA face challenges in fully implementing GAO's recommendations to adopt meaningful performance measures, establish a national risk-based staffing model, improve the agriculture canine program, and revise user fees to cover program costs. For example, in 2006, GAO recommended that DHS and USDA adopt meaningful performance measures for assessing the AQI program's effectiveness at intercepting foreign pests and disease. DHS and USDA have expanded the use of one type of performance measure but have not developed measures for all aspects of the AQI program that are important for its management. In addition, the AQI program does not have a strategic plan--a leading practice that would provide DHS and USDA with a framework for defining the mission of what the program seeks to accomplish, setting goals to achieve desired results, and identifying performance measures for gauging progress toward those goals. Furthermore, DHS has undertaken efforts to respond to GAO's recommendation to develop a national, risk-based staffing model but does not yet have one, and DHS anticipates that the model will recommend significant staffing increases. DHS officials told GAO they do not have the resources to increase staff, but the agency has not developed a plan that assesses the risk of potential fiscal constraints on its ability to implement the staffing model. Without a plan or strategy to address potential resource constraints on staffing by considering the fiscal resources that may realistically be available, DHS risks increasing the vulnerability of the agriculture sector to foreign pests and disease. The AQI program uses data on arrivals, inspections, and interceptions at U.S. ports of entry to determine how well agriculture inspections identify prohibited materials and to review ports' performance, but data quality issues may prevent AQI program officials from making full use of the data. For example, the data may not be reliable. DHS and USDA recognize that data quality is an ongoing issue and in 2004 created an interagency group to address this issue. However, from 2010 to 2011, joint DHS-USDA reviews of 22 selected ports found discrepancies in the data at about half of the ports reviewed (10 out of 22). Data reliability has the potential to affect other key efforts that are currently under way, such as the program's staffing model. Without reliable data, AQI program officials do not have assurance that they have the information needed to manage the program. GAO also presents analysis of survey data from 2006 and 2012 on agriculture specialists' and supervisors' views about their work environment. GAO recommends, among other things, that (1) DHS and USDA develop a joint strategic plan for the AQI program, (2) DHS develop a plan for implementing a staffing model, and (3) DHS and USDA take steps to improve the reliability of certain data. DHS and USDA agreed with the recommendations. |
RCRA requires EPA to establish regulations governing the treatment, storage, transportation, and disposal of hazardous waste. Facilities that blend fuels derived from hazardous waste are subject to RCRA’s treatment, storage, and disposal regulations. Furthermore, because EPA classifies cement production facilities as industrial furnaces, such facilities that burn hazardous waste fuels must comply with special regulations—known as the boiler and industrial furnace rule—developed under RCRA in 1991 to regulate the combustion of hazardous waste. Both sets of regulations require facilities to meet standards for emissions and other environmental requirements. The principal regulations applying to the fuel blending and cement production facilities that burn hazardous waste fuels are discussed in greater detail in appendixes I and II, respectively. EPA is primarily responsible for inspecting hazardous waste management facilities and taking enforcement actions as necessary against the owners and operators of facilities that are not complying with RCRA’s requirements. Under RCRA, however, EPA may authorize a state to administer its own hazardous waste program if its program is consistent with the federal program established by EPA and other authorized state programs. An authorized state assumes the primary responsibility for implementing and enforcing RCRA’s hazardous waste regulations while EPA oversees the state’s activities. EPA has authorized the five states included in our review to implement their own treatment, storage, and disposal program in lieu of the federal RCRA program, but it has authorized only one of the five states—Texas—to implement the boiler and industrial furnace program. RCRA requires that hazardous waste management facilities requiring a permit, including fuel blenders and cement production facilities burning hazardous waste fuels, be inspected periodically. In conducting their inspections, EPA and the five authorized states do not classify violations as minor or significant. However, these officials told us that, generally, they consider a violation to be minor if it does not pose a serious threat to human health or the environment and the facility agrees to correct it promptly. An action or deficiency that poses a serious threat to human health or the environment or a persistent minor violation is considered to be significant. Although RCRA’s regulations establish general operating practices and procedures with which fuel blending facilities must comply, they place few restrictions on the types of hazardous waste that can be blended. According to EPA officials, facilities can blend wastes that are not reactive providing safety standards are met. In addition, some states prohibit the blending of certain wastes, such as those containing pesticides and polychlorinated biphenyls (PCB) into fuel. Beyond these restrictions, the specifications for the hazardous wastes that are blended into fuels are primarily determined by the cement producers, whose operations must meet the regulations’ standards for emissions and other requirements. RCRA’s boiler and industrial furnace rule places limits on cement kilns’ emissions. These limits are implemented by restricting the types of hazardous waste that are blended into fuels. Cement producers can burn only waste blends that allow them to meet the established limits on the amounts of regulated constituents—such as metals—that can be fed into the kiln. Furthermore, EPA does not permit the burning of certain inorganic hazardous wastes that contain metals and have a low heating value. In addition, under the Toxic Substances Control Act, a cement producer must obtain EPA’s approval to burn fuel containing PCBs. As of early 1996, nationwide 142 fuel blenders were processing fuels derived from hazardous waste and 22 cement production facilities were burning such fuels in their kilns. Collectively, the five states included in our review account nationwide for about a quarter of the fuel blenders and about half of the cement producers that burn hazardous waste fuels. To verify that fuel blenders are complying with RCRA’s treatment, storage, and disposal requirements, state hazardous waste management officials inspect these facilities regularly. Although RCRA requires that these facilities be inspected at least every 2 years, the five states we reviewed conducted more frequent inspections. While Missouri inspected these facilities quarterly, Kansas, Ohio, Pennsylvania, and Texas inspected them at least once a year. Officials inspected the 34 fuel blending facilities in the five states included in our review most recently between April 1995 and May 1996. (App. III summarizes the results of these inspections for each of the five states.) As table 1 shows, the most recent RCRA inspections of fuel blending facilities in the five states identified at least one minor violation of treatment, storage, and disposal regulations at 23 of the 34 facilities. Minor violations were found at facilities in each state. These violations included, among others, inadequately labeling hazardous waste storage containers, having incomplete records for training and equipment inspections, and failing to submit estimates of the costs of closing facilities and maintaining sites. According to state officials, these types of violations generally are corrected at the time of the inspection or shortly thereafter. The following examples illustrate the types of minor treatment, storage, and disposal violations identified and their resolution: Kansas officials inspected the state’s two fuel blending facilities most recently between October 1995 and April 1996. These inspections identified minor violations at both facilities, including inadequately labeling hazardous waste storage containers and having an inaccurate emergency coordination list. The facilities’ operators have corrected most of these violations and are working with state officials to resolve the remaining problems. Pennsylvania officials last inspected the state’s two fuel blending facilities in early 1996. These inspections identified no violations at one facility and only minor violations at the other, including inadequately labeling hazardous waste storage containers. The facility’s operator has corrected these violations. In addition, the most recent RCRA inspections of these fuel blending facilities identified significant violations of treatment, storage, and disposal regulations at 11 facilities in Kansas, Missouri, Ohio, and Texas. The significant violations included having waste containers in poor condition, storing waste that was not approved under the facility’s operating permit, and having inadequate backup systems for containing leaks of hazardous waste. According to hazardous waste management officials in these states, some violations, which would normally be considered minor, would be classified as significant because they either recurred at the same facility or had not been corrected since the previous inspection. State officials told us that the facilities’ operators have corrected some of the identified problems, are addressing others, and are negotiating settlements with the state on still other violations. The following examples illustrate the types of significant treatment, storage, and disposal violations identified at fuel blending facilities in the five states and their resolution: Ohio officials inspected the state’s 12 fuel blending facilities most recently between May 1995 and May 1996. They identified significant violations at 4 of the 12 facilities, including not minimizing the possibility of a fire, explosion, or release of hazardous waste at the site and not evaluating the waste as required. State officials are working with the facilities’ operators to resolve the identified problems. Missouri officials inspected the state’s eight fuel blending facilities most recently between November 1995 and March 1996. The significant violations they identified included using storage containers in poor condition, storing hazardous waste in excess of approved capacity, and inadequately analyzing waste. State officials also considered recurring minor violations identified at one facility to be significant. State officials are working with the facilities’ operators to resolve the identified problems. State officials identified no violations of RCRA’s treatment, storage, and disposal regulations at eight fuel blending facilities in Ohio, Pennsylvania, and Texas. EPA officials inspect each cement production facility burning hazardous waste fuels in Kansas, Missouri, Ohio, and Pennsylvania about once a year to ensure compliance with RCRA’s boiler and industrial furnace requirements. However, according to EPA officials, facilities with a poor compliance record are inspected more often. Texas, the only one of the five states that EPA has authorized to implement the boiler and industrial furnace program, also inspects cement production facilities annually. The 11 cement production facilities that burn hazardous waste fuels in the five states we reviewed were most recently inspected between May 1995 and June 1996. However, information on only three of these facilities is available because EPA officials are still reviewing data from the inspections of the remaining eight. (App. IV summarizes the results of these inspections, as available, for each of the five states we reviewed.) As table 2 shows, the inspections of the 11 cement production facilities identified no violations at 2 facilities in Missouri and Texas. However, violations were identified at one facility in Kansas, including not conducting several audits of emission control equipment as required. Without classifying these violations as minor or significant, EPA officials sent the facility a notice of violation. We provided copies of a draft of this report to EPA for its review and comment. We met with EPA officials, including the Chief, Permits Branch, Office of Solid Waste, to obtain the agency’s comments. These officials agreed with the information presented in the report but made a number of suggestions for clarifying our discussion. We have incorporated these suggestions into the appropriate sections of the report. To provide information on the extent to which fuel blending and cement production facilities have been complying with EPA’s and the states’ principal regulations governing the blending and burning of fuel derived from hazardous waste, we obtained inspection and compliance data for facilities in five judgmentally selected states: Kansas, Missouri, Ohio, Pennsylvania, and Texas. We selected these states for our review because they collectively account for about half of the nation’s cement production facilities that burn hazardous waste fuels and almost a quarter of the nation’s fuel blenders. Furthermore, these five states are included in 4 of EPA’s 10 regions. To provide information on whether fuel blenders in the five states have been complying with RCRA’s treatment, storage, and disposal regulations, we obtained inspection data from state hazardous waste officials responsible for implementing the regulations. To provide information on whether cement producers have been complying with RCRA’s boiler and industrial furnace regulations, we reviewed compliance documents and interviewed officials in EPA’s Office of Enforcement and Compliance Assurance, Waste Management Division, as well as officials in EPA regions III, V, and VII. We also interviewed state officials in Kansas, Missouri, Ohio, Pennsylvania, and Texas who are responsible for issuing permits to and inspecting cement production facilities, and we reviewed pertinent compliance and enforcement documents. To provide information on the nature and severity of the violations of RCRA’s treatment, storage, and disposal and boiler and industrial furnace regulations by fuel blenders and cement producers, we asked state and EPA regional officials to (1) describe or provide examples of any violations that were identified during the most recent inspections of the fuel blending and cement production facilities and (2) characterize these violations as either minor or significant on the basis of each state’s or EPA region’s criteria for making such determinations or, in lieu of such criteria, their professional judgment. In conducting our review, we visited two fuel blending facilities in Texas and three cement production facilities in Kansas and Texas, and we interviewed officials at these facilities. We conducted our review from September 1995 through August 1996 in accordance with generally accepted government auditing standards. As arranged with your offices, unless you announce its contents earlier, we plan no further distribution of this report until 10 days after the date of this report. At that time, we will send copies to the Administrator, EPA, and the Director, Office of Management and Budget. We will also make copies available to others upon request. Please call me at (202) 512-6111 if you or your staff have any questions. Other major contributors to this report are included in appendix V. As facilities that store and treat hazardous waste, fuel blenders are subject to the Resource Conservation and Recovery Act’s (RCRA) hazardous waste regulations and, therefore, are required to obtain an operating permit, must be inspected to ensure that they are complying with these regulations, and are subject to enforcement action if they violate the regulations. RCRA established two categories of facilities that treat, store, and/or dispose of hazardous waste: “interim status” facilities, which have not yet obtained an operating permit, and facilities with a permit. Of the 34 fuel blending facilities in the five states included in our review, 11 are operating under interim status requirements and 23 have a final operating permit. Table I.1 shows the number of fuel blending facilities in the five selected states, by the status of their operations. The Environmental Protection Agency (EPA) developed separate sets of regulations for facilities operating in interim status and with a final operating permit. The standards for facilities operating in interim statusconsist primarily of practices that owners and operators must follow to properly manage hazardous waste before they obtain an operating permit. The interim status standards include general administrative and nontechnical requirements for securing a site, training personnel, ensuring construction quality, testing and maintaining equipment, and keeping records. In addition, the interim status standards include certain technical requirements that are intended to minimize the potential for threats to the environment and public health. These technical requirements include general standards that apply to several types of facilities, including those for (1) monitoring groundwater, (2) closing a facility and managing the site after the facility is closed, and (3) providing financial assurance. The requirements also include specific standards that apply to each waste management method, including requirements for waste analysis, monitoring and inspection and general operating requirements. The standards for facilities with an operating permit consist of performance standards and design and operating criteria that are included in the permit for each facility. These standards include administrative and nontechnical requirements. In addition, facilities with a permit must comply with detailed technical requirements. Each permit must include conditions that are necessary for the facility to comply with RCRA and its regulations. The facility’s compliance with RCRA is measured against the conditions included in the permit. The permit may incorporate these requirements by referring to RCRA and EPA’s implementing regulations, or it may include specific requirements based on the act and regulations. For example, each facility’s permit specifies the hazardous substances that must be monitored in the groundwater near the facility. Groundwater-monitoring requirements are included in the regulations, but many aspects of the monitoring program depend on the site and, therefore, are developed for each facility’s permit. To ensure compliance with their requirements for operating in interim status or with a permit, RCRA requires treatment, storage, and disposal facilities to be inspected at least once every 2 years. EPA classifies cement production facilities that burn hazardous waste fuel as industrial furnaces. As such, they are subject to the agency’s boiler and industrial furnace regulations under RCRA, which took effect on August 21, 1991. These regulations control emissions of hazardous organic compounds, toxic metals, hydrogen chloride, chlorine gas, and particulate matter from boilers and industrial furnaces burning hazardous waste. In addition, the rule subjects the owners and operators of these facilities to the standards that govern hazardous waste treatment, storage, and disposal facilities in general. Facilities that were using or had committed themselves to using hazardous waste as a supplemental fuel before the effective date of the rule were allowed to obtain “interim status.” This status allows them to continue burning hazardous waste fuels while obtaining the permit required under the rule. In addition to applying for a permit, the owners and operators of interim status facilities were required to submit (1) by August 21, 1991, a report (certification of precompliance) providing information and certifying that emissions of individual metals, hydrogen chloride, chlorine gas, and particulate matter were not likely to exceed allowable levels and (2) by August 21, 1992, a report (certification of compliance) certifying, on the basis of testing, that emissions of individual metals; hydrogen chloride, chlorine gas, and particulate matter; carbon monoxide; and where applicable, hydrocarbons, dioxins, and certain other chemicals did not exceed allowable levels. During interim status, limits on a facility’s operating parameters are established and, after submitting the required certifications, the owner or operator must comply with these limits. To demonstrate compliance, the owner or operator must monitor specified operating parameters of the combustion unit and the nature of the hazardous waste burned, as well as maintain records. Cement production facilities must repeat this testing every 3 years or until they receive their permit. Of the 11 cement production facilities burning hazardous waste fuels in the five states included in our review, 10 are operating under interim status requirements and only 1 has received its final operating permit. Table II.1 shows the operating status of the cement production facilities burning hazardous waste fuels in the five states included in our review. In addition to meeting emission standards, facilities operating both in interim status and with a permit must meet general standards and requirements for preparedness for and prevention of releases of hazardous substances, contingency planning and developing contingency procedures, recordkeeping and reporting, facility closure and postclosure care, and financial assurance. Facilities with a permit must also meet corrective action requirements and demonstrate that they can destroy and remove at least 99.99 percent of the principal organic hazardous constituents in the waste stream. This means that out of 1 ton of such elements put into the system, less than 4 ounces can actually be emitted in the stack gas. EPA makes information from compliance tests by facilities operating both in interim status and with a permit available to the public. Public notification is not required for compliance testing conducted by interim status facilities as part of their periodic certification of compliance with emission standards. However, an EPA regulation that became effective on June 11, 1996, generally requires that the public be notified of a new or interim status facility’s trial burn. A trial burn is a test conducted as part of the permitting process to determine the limits on a facility’s operating parameters. Because a cement production facility typically recycles cement kiln dust and feeds it back into the kiln, the concentration of toxic metals in the dust and the total amounts of toxic metals entering the kiln could increase over time. Therefore, the rule requires that the facility take steps, either by monitoring stack emissions or by other means, to ensure that the metals’ concentration during certification testing does not change over time and is representative of the highest concentration of metals being fed into the kiln at any time. In addition, a cement production facility in interim status must feed hazardous waste directly into the kiln to ensure the complete destruction of the waste. Cement kiln dust produced by a kiln burning hazardous waste as fuel may be considered hazardous waste unless the kiln owner or operator demonstrates that the levels of hazardous constituents in the dust are either (1) similar to those found in the dust from kilns that burn conventional fuels or (2) within specified health-based limits. To ensure compliance with its requirements for operating in interim status or with a permit, RCRA requires hazardous waste treatment, storage, and disposal facilities—including cement production facilities burning hazardous waste fuels—to be inspected periodically. According to EPA officials, one of the primary deficiencies that the agency noted during nationwide inspections of cement production facilities burning hazardous waste fuels from 1991 through 1995 was the facilities’ inadequate analysis of hazardous waste. To assist the facilities in analyzing their waste, EPA is preparing guidance for incinerators, boilers, and industrial furnaces, which explains in more detail sampling techniques that the facilities can use to analyze their hazardous waste. In early August 1996, EPA was internally reviewing the draft guidance, and EPA officials expected to make the final guidance available to the public by the end of the month. On April 19, 1996, EPA published a proposed rule in the Federal Register that would set more stringent emission limits for hazardous waste incinerators, lightweight aggregate kilns, and cement production facilities burning hazardous waste fuels. According to EPA, the new standards are designed to reduce dioxin and furan emissions from these sources by 98 percent, mercury emissions by 80 percent, and lead and cadmium emissions by 95 percent. The proposed rule would also place stringent limits on the amounts of hydrochloric acid, chlorine, certain toxic metals, particulate matter, carbon monoxide, and hydrocarbons that facilities burning hazardous waste fuels can emit. The proposal would exempt cement kilns from the new emission standards if their hazardous waste fuels are similar in composition to fossil fuels and pose no greater risks. It would also require the monitoring of emissions. The proposed rule had a 60-day comment period. In May 1996, EPA extended the comment period another 60 days, until August 19, 1996. Kansas officials inspected the state’s two fuel blending facilities most recently between October 1995 and April 1996. These inspections identified minor RCRA violations at both facilities, including inadequately labeling waste storage containers and having an inaccurate emergency coordination list. The inspections also identified significant violations at one of the facilities. The facilities’ operators have corrected most of these violations and are negotiating with state officials to resolve the remaining issues. Missouri officials inspected the state’s eight fuel blending facilities most recently between November 1995 and March 1996. These inspections identified a number of minor RCRA violations at six facilities, including inadequately labeling waste storage containers and documenting inspections. According to state officials, the facilities’ operators have corrected many of the identified problems. State inspections also identified significant violations at five facilities, including using storage containers in poor condition, storing hazardous waste in excess of allowed capacity, and inadequately analyzing waste. State officials are working with the facilities’ operators to resolve these problems. Ohio officials inspected the state’s 12 fuel blending facilities most recently between May 1995 and May 1996. They identified minor violations of RCRA’s regulations at eight facilities, including, among others, inadequately labeling waste storage containers and documenting inspections and failing to submit cost estimates for closing facilities and maintaining sites after closure. In addition, they identified significant violations at four facilities, including failing to minimize the possibility of a fire, explosion, or release of waste and not evaluating waste as required. State officials are working with the facilities’ operators to resolve the identified problems. Pennsylvania officials last inspected the state’s two fuel blending facilities in early 1996. These inspections identified no violations of RCRA’s treatment, storage, and disposal regulations at one fuel blending facility and only minor violations at the second facility, including the inadequate labeling of waste storage containers. The facility’s operator has corrected these violations. Texas officials last inspected the state’s 10 fuel blending facilities between April 1995 and May 1996. While no violations were detected at four of these facilities, the inspectors identified minor RCRA violations at the remaining six facilities, including not submitting all required copies of contingency plans and not conducting all required daily inspections of equipment. These violations have been corrected or are being corrected. The inspections also identified significant violations at one facility, including having deteriorating backup systems for containing hazardous waste leaks. State officials are working with the facilities’ operators to resolve these issues. The state’s three cement production facilities burning hazardous waste fuels were most recently inspected by EPA regional officials between October 1995 and April 1996. Potential violations of the boiler and industrial furnace regulations identified at two of the facilities are under review by EPA regional officials. At the third facility, EPA found that several daily and quarterly audits of emission control equipment had not been conducted as required. EPA sent a notice of violation to this facility. Inspections completed between May 1995 and June 1996 identified potential violations at three of the state’s four cement production facilities that burn hazardous waste fuels. EPA officials are reviewing the results of these inspections and related information to determine whether violations occurred. An inspection of the remaining facility in the state identified no violations. The report on the April 1996 inspection of the one cement production facility in Ohio that burns hazardous waste fuels has not yet been finalized; therefore, an EPA official told us that the agency could not provide us with information on the inspection’s results. According to this official, the report of EPA’s inspection of this facility in 1995 is under review by EPA regional staff. EPA officials are currently reviewing information from a December 1995 inspection of one of Pennsylvania’s two cement production facilities that burn hazardous waste fuels. The results of a May 1996 inspection of the state’s other facility were not available as of July 1996. However, a July 1995 inspection of this facility identified a number of violations, including (1) not conducting required tests of the system that automatically shuts off the flow of hazardous waste fuels into the kiln, (2) not properly operating a system that is to continuously monitor emissions while burning hazardous wastes, and (3) not controlling escaping emissions. EPA has issued a notice of violation to this facility and is negotiating with the facility’s operator to resolve these issues. Texas officials’ most recent inspection in April 1996 of the state’s only cement production facility burning hazardous waste fuels identified no violations of the boiler and industrial furnace regulations. Richard P. Johnson, Attorney 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. 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 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. | Pursuant to a congressional request, GAO provided information on five states' cement production facility inspections, focusing on their compliance with various Resource Conservation and Recovery Act regulations for processing hazardous waste fuels. GAO found that: (1) there was at least one minor violation of treatment, storage, and disposal regulations at 23 of the cement production facilities reviewed; (2) these violations included the inadequate labeling of hazardous waste storage containers, incomplete records of training and equipment inspections, and failure to submit cost estimates for facility maintenance and operation; (3) these violations were generally corrected at the time of inspection or shortly thereafter; (4) significant violations occurred at 11 hazardous waste fuel burning facilities; (5) these facilities had storage containers in poor condition, stored waste in excess of allowed capacity, and used inadequate backup systems for hazardous waste leaks; (6) one of the facilities reviewed had violated boiler and industrial furnace regulations; and (7) the results of these inspections are incomplete, since the Environmental Protection Agency is still reviewing relevant data from the most recent inspections. |
The objective of the landmark Government Performance and Results Act of 1993 (GPRA) is to shift the focus of federal management and accountability from what federal agencies are doing to what they are accomplishing. To achieve this shift, GPRA requires federal agencies and programs to implement results-oriented management reforms, such as strategic planning, performance planning, and performance measurement and reporting. GPRA also allows agencies to propose waivers from nonstatutory budgeting and spending requirements with the intent of achieving measurable performance improvements. For a more detailed description of GPRA’s requirements, see appendix I. Some foreign and state governments implemented results-oriented management reforms similar to the requirements of GPRA. The countries we selected to review for this report—Australia, Canada, New Zealand, and the United Kingdom—implemented their reforms over the past decade or more and have learned from their experiences. A report we issued in December 1994 discussed the results-oriented management reforms of selected state governments. Federal agencies may wish to consider the experiences of these other governments with results-oriented management reforms as they implement similar reforms required under GPRA. The results-oriented management reforms introduced in the four countries we selected were closely related to the requirements of GPRA. The four countries—Australia, Canada, New Zealand, and the United Kingdom—introduced results-oriented management reforms designed to increase the accountability of their government organizations and officials for results. These reforms were also designed to create incentives for line management to maximize the effective and efficient delivery of government programs. According to government officials and reports, during the 1980s, the four countries we selected experienced serious economic challenges, such as rising global competitiveness, economies dominated by government spending, and high budget deficits. Furthermore, each of the four countries completed studies assessing the management of its government and reported that government organizations lacked accountability for achieving program results. These studies reported that the countries faced constraints to increasing the accountability of government organizations for results and proposed results-oriented management reforms similar to those required under GPRA. For example, in 1983, Canada’s Auditor General identified the following three major constraints to effective government management:• Political priorities had a major adverse impact on productive management. • Managers felt unduly constrained by administrative procedures and conflicting accountability requirements. • There were too few incentives for productive management but many disincentives. Similarly, a special study commissioned by Prime Minister Margaret Thatcher of Great Britain described the following constraints:• Because of a strong emphasis on policy development, focus on the delivery of government services was insufficient. • There was a shortage of management skills and experience among senior civil servants in service delivery functions. • Short-term political priorities squeezed out long-term planning. • There was too much emphasis on spending money and not enough on getting results. • The civil service was too large and diverse to manage as a single organization. • Central rules took away the flexibility managers needed to manage for results. • An overly cautious civil service culture resulted in too much review and worked against personal responsibility. In New Zealand and Australia, reports described similar constraints to improving the accountability of government organizations for results. During the past 10 to 15 years, each of the countries implemented results-oriented management reforms, such as requiring departments and agencies to define their program mission and goals, measure the progress they made in achieving their goals, and report on their actual progress made compared to goals. To support these reforms, the countries also sought to simplify central government regulations and reduce central government controls over spending so that government managers would have greater flexibility in the way they used resources to achieve desired program results. In 1983, Australia began a comprehensive management improvement effort that centered on changing public service culture; creating the structures, standards, and practices conducive to good management; and developing management skills in the public service. To do this, Australia implemented results-oriented management reforms called Program Management and Budgeting and the Financial Management Improvement Program. Program Management and Budgeting required departments to define the program goals they sought to achieve, plan how they would achieve those goals, measure program effectiveness and efficiency, report on program performance, and adjust the operations of their programs on the basis of that performance information. The Financial Management Improvement Program provided departments with greater spending flexibility, stabilized the departments’ funding levels over 3-year periods to enable the departments to do better medium-term planning, and required departments to achieve annual savings in their operating expenses. Since the early 1980s, Canada has implemented numerous results-oriented management reforms. To increase accountability and clarify responsibility for program performance, Canada instituted performance agreements between upper and lower departmental management and reduced the number of management levels within departments. To support the achievement of program performance goals, the government provided departments with greater authority over spending and the size of their staffs and simplified human resource regulations. Canada’s most recent management reforms, Public Service 2000 and the Service Standards Initiative, focused on improving the quality of government services to citizens. New Zealand also implemented management reforms designed to increase the accountability of government managers for achieving desired program results. Beginning in 1984, New Zealand’s management reforms initially focused on transferring government enterprises to the private sector or running the government’s enterprises in a more businesslike manner. Later, New Zealand passed two key laws—the State Sector Act of 1988 and the Public Finance Act of 1989—designed to create a business orientation in as many other government functions as possible. New Zealand sought to increase accountability for achieving desired program results by implementing performance agreements between departmental chief executives and their ministers and by requiring departments to report on performance against targets. In addition, the government provided departments greater flexibility over spending and human resource management to achieve the specific results for which they were responsible. The United Kingdom implemented the Financial Management Initiative in 1982 to provide managers at all levels of departments with the information they needed about program goals, performance, and costs to plan and manage their programs. A 1988 government report on the implementation of this reform found that progress had been made. However, because the civil service was seen as too large to manage as a single entity with uniform sets of rules, the government needed to take additional steps. As a result of this report, the government implemented the Next Steps Initiative, which shifted the focus of management reform from departments as a whole to the “executive” or service-providing functions within departments. These functions were reorganized as separate “executive agencies” within departments. The relationship between the executive agencies and their parent departments was defined in contracts between department heads and agency chief executives that defined the performance goals to be achieved by the agency and provided enhanced discretion over spending and human resource management. At the time of our review, executive agencies were the predominant form of government organization covering about 60 percent of the civil service. The United Kingdom’s reforms also focused on improved service to citizens and increased competition from the private sector for the provision of government services. Compared to systems in the United States, the significantly smaller size and the different government systems of the four countries suggest that while the countries’ experiences can provide general insights for the United States, direct comparisons to systems in the United States should be made with caution. Some comparative statistics on the size of the four countries’ economies and public sectors are provided in table 1.1. In terms of the size of their economies, the countries we studied compare with some of our state governments. For example, in 1990 California had a gross state product of $745 billion; New York, $467 billion; Illinois, $272 billion; and Mississippi, $40 billion. Unlike the United States, all four countries have parliamentary systems of government. In a parliamentary system, a prime minister and cabinet ministers, each of whom leads a major department or group of departments, are drawn from the ranks of the leading party of parliament. Also, unlike the United States, the United Kingdom and New Zealand have unitary political systems in which the national government also provides local services, such as education, much as state and local governments do in the United States. Like the United States, Canada and Australia have federal government systems in which the federal government provides grants to provincial or state governments to provide some local services. Among the four countries, Australia, Canada, and the United Kingdom have two-house parliaments, and New Zealand has a one-house parliament. The United States shares a strong civil service employment tradition with the four countries, except for political appointments to top department management positions in the United States. In departments in the four countries, top management positions below the minister generally are filled through nonpolitical civil service appointments either from within the career civil service or, increasingly, from outside of government. We have noted that maintaining a clear and continuing commitment to performance improvement can be extremely difficult in the U.S. government due to turnover among political appointees. Experience has shown that obtaining and sustaining a commitment to improvements will be a continuing challenge in the federal government because improvement efforts must be maintained well beyond the tenure of the average political appointee. Our work has shown that the average tenure of top political appointees in large agencies is about 2 years, and that some positions are vacant longer than they are filled. The Chairman and Ranking Minority Member of the Senate Committee on Governmental Affairs, the Chairman of the House Committee on Government Oversight and Reform, and the former Chairman of the House Committee on Government Operations asked us to identify state and foreign governments’ approaches to and experiences with implementing results-oriented management reforms that may assist federal agencies in implementing GPRA. As part of that request, this report presents some of the approaches taken to implement results-oriented management reforms in Australia, Canada, New Zealand, and the United Kingdom. Also as part of that request, our December 1994 report discussed the results-oriented management reforms of six U.S. states. To select the countries, we reviewed OECD’s surveys on public management, which report on management innovations in member countries. We also reviewed a 1990 article on performance budgeting in other countries by Allen Schick, who is an authority on budget systems and policies, public management, and government finance. On the basis of those surveys and the article, we judgmentally selected Australia, Canada, New Zealand, and the United Kingdom as among the countries that were particularly advanced in implementing results-oriented management reforms. We visited Australia, Canada, New Zealand, and the United Kingdom between December 1991 and May 1992 to interview officials from each country’s government. To obtain a variety of perspectives, we met with officials from the countries’ central management departments; national audit offices; departments and agencies with different functions, such as policy development, regulation, service delivery, and research and development; consultants for these governments; and academics. These officials, consultants, and academics provided us with documents, including government-sponsored evaluations of their countries’ management reforms and department and agency strategic plans, operational plans, and performance reports. In this report, we discuss the findings of those government-sponsored evaluations and some of our own observations concerning the plans and reports prepared by departments and agencies in the four countries. The major documents we relied on are listed in appendix II. Our review focused on aspects of ongoing public sector reforms in the four countries that were similar to the requirements of GPRA—strategic planning, performance planning, performance measurement, performance reporting, managerial flexibility, and performance budgeting. We did not independently evaluate the effectiveness of their reforms, and we did not attempt to compare their approaches or the relative successes or failures among the countries. The emphasis we place on a particular country’s experiences in implementing reforms reflects the documents and comments that were provided to us at the time of our review and does not necessarily reflect the absence of those experiences in the other countries. We did our work from December 1991 to December 1993 in Washington, D.C., and the four countries in accordance with generally accepted government auditing standards. Because we did not evaluate the policies or operations of any federal agency to develop the information presented in this report, we did not seek comments from any agency. The four countries attempted to instill a focus on results in government management by requiring departments to plan strategically, set goals and objectives for operations, and measure performance against goals and objectives. Table 2.1 describes the approaches the four countries took to strategic planning, operational planning, and performance measurement. A key element of strategic planning suggested by Australian and United Kingdom officials was that the involvement of staff in the planning process helped communicate organization goals. Operational plans by departments in the four countries translated how strategic goals would be met through everyday activities and how progress would be measured. The focus of goal-setting and performance measurement in Australia and Canada was on the outcomes, or the final impacts of programs, while the focus in New Zealand and the United Kingdom was on outputs, or the number and quality of services produced. The countries reported a number of lessons they learned for measuring program performance that focused on enhancing the usefulness of the performance information for intended audiences. Departments and agencies in the four countries used a variety of approaches to strategic planning that had common aims. According to the planning documents and government reports we reviewed, these approaches included the identification and communication of missions and goals and the description of activities designed to achieve those missions and goals. Australian departments engaged in strategic planning to identify their mission and goals and described the strategies needed to achieve those goals. New Zealand departments annually prepared strategic plans that included performance targets for the next year. The plans described a department’s mission; desired outcomes; significant issues affecting performance; the outputs to be produced at an agreed cost, quantity, and quality; management goals; and financial goals. Strategic planning in United Kingdom departments—called “top management systems”—involved annual exercises in which the management of operating divisions within departments provided key information about performance results to the department’s top management. The department’s top management used this information to review the results against previously set goals and to set new goals for and allocate resources to the operating divisions. In Canada, departments described their goals and objectives in documents called Operational Plan Frameworks. In Australia, Canada, and the United Kingdom, some agencies or divisions within departments published their own multiyear strategic plans. “The aim is to ensure everybody has a clear idea of the objectives which their Division is pursuing, and has an opportunity to get involved in developing these objectives, in planning how they are going to be met, and in looking back to see how far they have been achieved. Information systems alone do not lead to good management. But they can help all of us by providing a framework to see how our own Division’s work contributes to the Department’s policies, and to measure how well we are doing.” “the consensus amongst managers is that the process plays a significant role in focusing the attention of staff at all levels on the direction, aims and goals of the organisation. It is also regarded as a significant factor in the cultivation of a greater outcomes/performance orientation among [Department of Employment, Education, and Training] staff.” Australian Department of Finance officials we interviewed stressed the importance of involving all levels of the organization in the planning process. One of the officials contrasted an early strategic planning effort that was developed primarily by top management to later efforts that involved a large number of staff. The official said the early effort was a good start but did little to change the culture of the department. In contrast, the later efforts involved staff from all levels of the organization in working through strategic issues and defining the department’s customers. The official said that this wide participation helped to change the culture of the department from one that was control-oriented to one that was more customer-oriented. The four countries we reviewed supported their strategic plans with operational plans that translated overall goals into more detailed objectives for everyday activities and included targets for performance. Progress in achieving objectives could be determined by comparing actual measures of performance with the targets contained in the plans. Reports on progress made toward achieving objectives were to provide feedback to managers at all levels and enable them to identify operations or strategies that needed adjustment. United Kingdom and Australian government evaluations described operational plans and performance reports as management tools that were effective only to the extent that they were useful to and used by line managers and upper management to improve an organization’s performance. Certain departments in these countries emphasized the need to create operational plans and reports that provided managers at all levels with the information they needed, when they needed it, to meet their performance goals. In the United Kingdom, according to a 1986 National Audit Office report, departments recognized the need for managers at successive levels down the line to establish performance targets for the objectives that were contained in the departments’ strategic plans. The strategic and operational planning systems developed by United Kingdom departments in the mid-1980s were based on the same data to a large extent but at different levels of aggregation and detail. Top management used performance information reported by successive management levels to set overall department goals and objectives. Successive management levels then developed new objectives and performance indicators that were tied to the achievement of the overall goals and objectives. The report concluded that the availability of consistent information for decisionmaking throughout an organization was one of the main benefits of such an integrated approach. In 1991, the United Kingdom National Audit Office reviewed the development of management information systems for operational planning and monitoring in three departments with very different missions. The audit office found that each department had established a hierarchy of objectives from top management down to line staff and that these departments had made good progress in measuring and monitoring performance. Although the frequency with which performance information was produced for comparison to objectives varied, managers reported that they were receiving more useful performance information for managing resources than under previous management information arrangements. Australian departments also linked their day-to-day activities to the achievement of the goals in their strategic plans by developing separate operational plans, according to several Australian government reports. Line managers were responsible for planning to meet departmental goals by devising strategies and operational plans to implement the strategies. For example, the Department of Education, Employment, and Training linked its overall strategic plan to individual program strategic plans and annual operational plans that defined specific objectives and targets. The Department of Health, Housing, and Community Services developed operational plans for each work area within its programs. The operational plans consisted of strategies that were broken down into measurable targets and specific tasks. Table 2.2 illustrates how an Australian program, the Australian Customs Service’s Barrier Control, linked its overall purpose, or mission, to objectives, strategies, actions to be taken, and desired results. We reviewed performance reports prepared by departments and agencies in each of the four countries and observed that the way results were measured varied both within each and among all the governments we studied. In many cases, results were measured in terms of the quantity; quality, such as timeliness, accuracy, or lack of defects; and/or efficiency of services provided. The countries also measured financial results, such as the recovery of full economic costs through user-charging. Table 2.3 provides examples of quantity, quality, efficiency, and financial performance measures. Results were also expressed as outputs relative to planned program objectives and strategies to achieve those objectives. In Australia, these outputs were often described as “outcomes” of the strategies employed. For example, the Australian Customs Service, the details of whose Barrier Control Action plan are depicted in table 2.2, described the desired result of the Customs Service’s strategy to further develop air cargo automation in terms of an output—the implementation of automation systems at specific airports by a specific date. The assumption that underlies this example is that implementing such systems would help achieve the Customs Service’s subobjective of facilitating the movement of people and things through Customs barriers in airports. However, without an evaluation of the impact of the automation systems on the speed with which people and things were processed, the final outcome of the automation systems would not be known. This type of outcome-oriented performance information was the least evident in the performance reports we reviewed. In New Zealand and the United Kingdom, the lack of outcome-oriented performance information was the result of government policy to focus primarily on output-oriented performance information. New Zealand and United Kingdom government policies called for departments and agencies to be accountable for effective and efficient delivery of specific services. Therefore, these governments called for departments and agencies to develop input- and output-oriented performance measures, such as the quantity, quality, efficiency, and cost of the services provided. In contrast, Australian and Canadian government policies called for departments to evaluate and report on the effectiveness of government programs in achieving desired outcomes for program target groups. Therefore, these governments called for departments to measure program outcomes, in addition to inputs and outputs. However, despite their focus on outcomes, Australian and Canadian government studies of the progress departments made in measuring program outcomes indicated that while some outcome-oriented performance measurement was occurring, more was needed. A common challenge discussed by government officials and the studies we reviewed was that program outcomes were difficult to measure because of the difficulty of determining the effect program activities had on outcomes versus the effects of nonprogram factors, such as changes in the economy.For example, an official from Canada’s National Sciences and Engineering Research Council, an organization whose programs provide grants to universities, said that one challenge the Council faced was measuring the contribution its grants made to the programs’ desired outcomes versus the contributions of other activities in the research community, such as grants provided by the universities themselves. “Problems continue to be encountered in verifying that stated long-term objectives have been met through day to day program management and operational activities; that is, adequate assessment of outcomes by analysis of performance indicators has been difficult to achieve.” The Australian and Canadian governments used program evaluation and client surveys to help assess program effectiveness in achieving desired outcomes. Australian and Canadian reports and guidance stressed that tracking the progress programs made in achieving desired outcomes required—in addition to ongoing input, output, and efficiency measures—periodic program evaluations and client surveys. In Australia, program evaluation, along with performance measurement, was considered an integral part of program management, and departments were required to evaluate the effectiveness of each of their programs every 3 to 5 years. For example, according to a 1993 Department of Finance study, the Australian Health, Housing, and Community Services department evaluated the effectiveness of its aged care assessment program. The objective of the program was to ensure that aged people in need of a substantial level of care and support gained access to the available residential and community care services appropriate to their needs. An evaluation of the program provided information on the extent to which access to residential and community care services enabled elderly people to stay in their homes. According to Canadian policies established in 1976 and 1977, departments were to have in place the ability to measure effectiveness and report the results in both an ongoing and periodic way. The two types of activities were to differ in their focus and use. Ongoing effectiveness measurement represented the compilation of information on program outputs and outcomes gathered on a regular basis, allowing program management to monitor the operations of the program. Periodic studies of program effectiveness involved a more in-depth review of whether program objectives were being met. For example, according to the 1993 report of the Auditor General of Canada, the objective of the government’s Cape Breton Investment Tax Credit program was to promote durable employment in Cape Breton by encouraging new investment in the region. The program provided a 60-percent tax credit to new investors in the region. The Department of Finance evaluated the program using such measures of effectiveness as the additional number of jobs created in the region as a result of the tax credit, the cost per job created versus the cost of other regional development measures, • value of new investment by private industry as a result of the program, and the reduction in regional unemployment disparities. With regard to the value of new investment generated by the program, the Department of Finance determined that only 19 percent of the total new investment in Cape Breton could be attributed to the program and that the remaining investment would have occurred whether or not the tax credit was offered. On the basis of this evaluation, the tax credit was discontinued. In addition to program evaluations, certain departments in each of the countries we reviewed relied on surveys of program recipients to measure program effectiveness. For example, Canada’s Natural Sciences and Engineering Research Council used surveys to assess the effectiveness of one of its grant programs: “More than 90% of Canadian University administrators surveyed stated that the Operating Grants [Research Grants] program played an important role in retaining good researchers in Canada.” The Australian Department of Finance study cited the Aged Care Assessment program within the Australian Health, Housing, and Community Services department, which used client satisfaction with the types of services recommended for them as one of its outcome measures.According to New Zealand’s fiscal year 1993 to 1994 budget, the Department of Labor’s Promoting Excellence in Safety and Health Management program was to measure its own effectiveness by randomly surveying selected clients to confirm the perception that the products or publications provided are accurate, relevant, useful, and well presented.In the United Kingdom, National Health Service Estates, the agency responsible for managing real estate for the national health service, held workshops with a cross-section of customers to review three major product areas. As a result of these workshops, the three product areas were to be produced, delivered, and paid for differently to match customer needs. The government studies and performance reports we reviewed suggested a variety of performance measurement lessons learned for departments in the four countries. These lessons, discussed in detail below, focused on enhancing the usefulness of performance measurement systems to the recipients of the performance information for improving program performance and decisionmaking. We reviewed performance reports prepared by departments and agencies in each of the four countries and observed that the type of performance measures chosen—whether output- or outcome-related—varied depending on the nature of a program’s goals and objectives. Programs with service-oriented goals developed measures of the quantity, quality, cost, and efficiency of their service delivery. For example, the stated objectives of the United Kingdom’s Social Security Contributions Agency, which administered the collection of revenue for the National Insurance system similar to Social Security in the United States, included the following: • ensure compliance with the law relating to National Insurance • provide an information and advisory service to the business community and members of the public. To address these objectives, the agency developed measures that included the following: increase aggregate yield by increasing collection of contributions arrears by £13.3 million over 1991-92, • clear 99 percent of benefit enquiries handled clerically in 3 working days • provide a level of public service considered satisfactory by at least 75 percent of customers surveyed. We observed that programs attempting to achieve a social impact developed outcome-oriented measures of program performance. For example, the main objective of one Australian employment program was to provide financial support to unemployed people who were actively seeking work and to encourage their reentry into the workforce. A subobjective of the program was to provide incentives for self-help and financial independence. One outcome measure that addressed this subobjective was “the proportion of allowees who not rely on payments under this program as their sole means of support.” “all but one were found to have been worthwhile and useful to program managers. The information was used in modifying program management, in Cabinet submissions, Ministerial reports to Parliament and in advising Ministers.” A 1991 study by Canada’s Comptroller General suggested that in order for performance measurement and reporting systems to be useful, they need to be “owned” by line managers and others who would use the performance information. The study suggested that such ownership could be achieved by involving those who would directly use the performance information in designing the measures. According to a 1985 United Kingdom Treasury study of strategic planning in 16 departments, one of the benefits of planning was that line managers used the resulting plans for their own management purposes and not just to provide required information to higher management. According to government studies and officials, some United Kingdom and Canadian departments made special efforts to involve their line managers and staffs in developing performance measurement systems for their own use. For example, according to a 1986 study by the National Audit Office, the United Kingdom Department of Environment, after initially encountering skepticism by lower level managers toward operational planning, began involving line managers in the definition of objectives, targets, and tasks. An internal review found encouraging results from this approach. Lower level managers were setting objectives and measuring performance. These managers reported they welcomed the new approach because they and their staffs were more involved in management issues. Similarly, some Canadian officials commented on the importance of line staff participation in developing performance measurement systems. For example, one department worked with its enforcement staff to develop a performance measurement system that would help line managers with operational issues and allow top managers to focus on strategic issues. The 1991 study by Canada’s Office of the Comptroller General also recommended that, among other things, performance measurement systems should be selective and balanced. The study stated that a performance report needs to focus on a small number of measures critical to a program’s performance. The study also suggested that to provide a balanced perspective on program performance, it is useful to have a variety of performance measures, such as quantity, quality, and efficiency. Such a variety of measures is important because they “pull” program performance in different directions and preclude an overreliance on one measure at the expense of the others. We reviewed performance reports prepared by executive agencies in the United Kingdom and observed examples of selective and balanced performance measurement systems. The United Kingdom publishes an annual report that includes a one-page performance report for each executive agency that describes the agency’s performance for the current year and plans for the next year in terms of quality, quantity, efficiency, and finance. In 1993, the average number of performance measures reported by an agency was eight. The Social Security Resettlement Agency, charged with providing housing to the homeless, either directly or through grants to nonprofit providers, reported seven key measures of quantity, quality, and finance. Table 2.4 shows how this agency used a balanced and selective set of measures. The Canadian Comptroller General’s 1991 study also recommended that performance measurement systems include qualitative performance information in addition to quantitative measures. According to the study, program performance can rarely be adequately captured through quantitative measures alone. Qualitative information on performance can help clarify aspects of performance that are difficult to quantify or provide needed explanatory information. The Australian Department of Finance 1993 study of performance reports prepared by departments recommended that all performance reports should include qualitative in addition to quantitative performance information and interpretations and explanations of results regardless of whether results were above or below expectations. This qualitative information is critical to identifying and understanding the factors that contributed to a particular result. The study also suggested providing qualitative information, such as the robustness of the measures used, factors that were within the control of the program, and factors that were outside the control of the program. A 1991 case study on using performance information for management decisionmaking prepared by the Programs Division of the Australian Department of Employment, Education, and Training described sources of qualitative performance information, such as periodic program evaluations; research projects; and feedback from field staff, clients, and interest groups. The department used such qualitative information to provide insights on how its program’s outcomes were achieved. For example, the department used qualitative data to identify why the performance of its JOBSTART program was superior to its other employment programs. A 1985 United Kingdom government study emphasized that performance measurement and reporting systems should contain performance measures that are most appropriate for the intended audience, such as line or top management. The study described the performance measurement system intended for top management as the tip of a pyramid of information systems that was drawn from the same data, but at higher levels of aggregation than at the line management level. For example, according to the study, in the Customs and Excise Department, top management’s performance measurement systems became increasingly a strategic framework that lower level units could use to prepare more detailed plans. Reports to top management were restricted to overall aims and objectives in terms of final outputs achieved. The four countries took a variety of approaches to using performance information to increase the accountability of government organizations for delivering quality services to the public and for achieving the government’s desired goals. One approach employed by the United Kingdom and Canada was to publish performance standards for departments and agencies that directly served the public and measure and report to the public on performance against those standards. Another approach employed by the four countries was to introduce performance agreements between higher and lower management levels of departments and agencies. These agreements specified management’s responsibility for meeting annual performance targets that contributed to a department or agency’s overall goals. Finally, results-oriented management reforms in the four countries also called for increased accountability for performance to parliament through performance reporting. Although the parliaments initially made limited use of performance reporting, studies and officials suggested that the use of performance reports by the countries’ parliaments was increasing. Table 3.1 summarizes the approaches the four countries’ used to increase the government organizations’ accountability for performance. The United Kingdom’s Citizen’s Charter and Canada’s Service Standards reforms called for agencies to publish service standards, measure performance against those standards, and solicit citizen feedback on performance. Other service principles to be implemented through the Citizen’s Charter reform included providing citizens with service choices, consultation, courtesy, complaint mechanisms, and value for money.Australia and New Zealand included many quality of service measures in their performance measurement systems, but with less emphasis on soliciting customer views of performance and providing customers with performance information. According to the 1994 Citizen’s Charter report, the United Kingdom had published 38 Citizen’s Charter documents covering major public services and setting out the specific service standards that citizens could expect and what citizens could do if the standards were not met. For example, according to the report, the Social Security Benefits Agency committed to taking no more than 4 days on average to pay income support benefits in 1992-93. The agency reported that it achieved an average payment time of 3.5 days during that period. Also according to the 1994 report, agencies’ charters were to specify remedies for performance problems when they occurred. For example, the Post Office was to compensate customers for late arrival of a special delivery item by refunding twice the fee paid or a book of first-class stamps, whichever was greater. The Social Security Benefits Agency committed to staffing each office with a customer service manager, whose name and telephone number would be displayed and who was to respond to complaints within 7 days. The 1994 Citizen’s Charter report provided information on the performance commitments public service organizations made, how these organizations performed against the standards, and performance commitments for the future. Table 3.2 provides an excerpt from the report for the Post Office. According to the government’s 1994 Citizen’s Charter report, public service organizations that demonstrated excellence and innovation in delivering services in line with Charter principles could win a service quality award called the “Charter Mark.” In 1993, the Prime Minister awarded Charter Marks to 93 organizations. According to the report, many public service organizations used the criteria for the Charter Mark award to assess how well they applied Charter principles, regardless of whether they applied for the award. To retain the Charter Mark award, organizations were to demonstrate that their performance had continued to improve. The four countries introduced top-down performance agreements between the political leaders of departments and their top civil service managers to introduce a sense of personal responsibility for performance and to reinforce the connection between individual performance and organization mission and goals. These performance agreements focused on the program performance factors that were within the control of program managers. Along these lines, the NPR recommended that the President develop performance agreements with politically appointed agency heads and that agency heads should also use performance agreements within their agencies to forge an effective team committed to achieving organizational goals and objectives. Eight U.S. agency heads had signed such performance agreements as of September 1994. In the United Kingdom, government policy called for performance agreements to be negotiated between the political heads of departments—ministers—and the nonpolitical chief executives of operating divisions, called executive agencies, within departments. Executive agencies were established in 1988 as the service delivery—as opposed to the policy development—arms of the government. For example, within the Department of Trade and Industry, the Accounts Service Agency provided financial and management accounting services to its parent department and to other United Kingdom departments and agencies on a fee-for-service basis. According to government reports, accountability between the executive agencies and their parent departments was to be achieved through an annual performance agreement. The performance agreement was negotiated between the department minister and agency chief executives. The annual performance agreement outlined specific performance targets to be achieved in a given year. The agency chief executive was personally responsible for the agency’s performance in relation to those targets. The accountability of chief executives was reinforced in three ways. First, the details of an agency’s targets and its performance against them were published in its parent department’s annual report. According to a government review of the executive agency reforms, chief executives were acutely aware of their visible personal responsibility and accountability for the success of their agencies. The review suggested that these chief executives said that publicly stated targets were the most effective guarantee to bring about their best possible performance. Second, increasingly, chief executive pay was being tied to performance through bonuses paid for achieving annual targets. Third, chief executives were hired on limited term contracts that would not have to be renewed if performance was deemed poor. New Zealand’s Public Finance Act of 1989, as amended, established that department chief executives were to be accountable for the quality, quantity, and cost of outputs produced by the department that would help the government achieve its desired outcomes. Accountability between department chief executives and department ministers was to be achieved through a performance agreement. According to government guidelines, performance agreements were to outline (1) key management objectives requiring the chief executive’s personal attention; (2) the chief executive’s responsibility for the delivery of the department’s outputs according to targets agreed upon by the department’s minister; and (3) the chief executive’s obligation to support the collective interests of the government and to manage human resources, finances, information resources, purchasing, and energy in a manner consistent with government policies and statutes. Similar to arrangements for chief executives in the United Kingdom, the pay and tenure of New Zealand Chief Executives was linked to the achievement of the objectives in the performance agreement. The Canadian government sought to increase the accountability of its deputy ministers—the top civil service managers in a department—through a program initiated in 1991 called Shared Management Agenda. A shared management agenda was a set of key management priorities and objectives identified and agreed upon by the Secretary of the Treasury Board and the deputy minister of a department. The agenda was to contain a very limited number of management issues of highest mutual priority to the Secretary of the Treasury Board and the deputy minister. The agenda was intended to provide a simple and flexible means for two-way communication between the Secretary of the Treasury Board and a deputy minister and a basis on which to assess the performance of the deputy minister. Performance on these management issues was to be included in the annual performance assessments of deputy ministers. These assessments, conducted by a committee of senior government officials, determine a deputy minister’s performance rating and bonus. In addition to these high-level performance agreements, departments in the four countries had begun introducing performance agreements between lower levels of management and staff. Australian, New Zealand, and United Kingdom reviews suggested that such performance agreements increasingly were used to link individual performance standards to the achievement of a department’s overall objectives. For example, according to a government evaluation of Australia’s management reforms, the performance of Australian senior managers was appraised on the basis of agreements that related individual performance to the goals of the strategic plan. According to the evaluation, among the benefits achieved through these agreements was “heightened staff attention to corporate values and organizational goals and objectives.” We observed that performance agreements in the four countries were designed to hold managers accountable primarily for those results over which they were able to exercise control. According to government reports and officials we spoke to in the four countries, this focus on controllable results stemmed from the limited control managers had over all the factors outside the scope of their programs that affected outcomes. In the United Kingdom and New Zealand, this view was manifested in the structure of government, which separated responsibility for service delivery from the development and evaluation of government policies. In the United Kingdom, according to guidance prepared by the Treasury for executive agencies, executive agencies were responsible for the effective and efficient delivery of government services, such as finding jobs for the unemployed. In contrast, the agencies’ parent departments were responsible for determining whether their agencies’ services were effective in meeting the government’s social policy goals. Executive agencies’ performance agreements laid out their service delivery responsibilities in the form of specific, quantitative, service delivery targets that agencies were to achieve. Such targets were thought to be under the control of an agency’s management. For example, according to the Employment Service’s 1991-92 performance agreement with its parent department, the Employment Service was responsible for meeting the target of “1,300,000 placings of unemployed people into jobs.” Other measures focused on targets for various subgroups of unemployed clients, such as the long-term unemployed, and the amount of time it took for agency staff to meet with clients at various stages of the process. In contrast, department policy analysts were responsible for evaluating the effectiveness of such services in meeting the government’s policy goals. However, the Treasury guidance suggested the need for agencies to work closely with department staff to provide the data they would need to do such an evaluation. Similar to executive agencies in the United Kingdom, New Zealand departments were responsible for achieving performance targets for the outputs they delivered. According to a New Zealand Treasury official, the government did not choose to rely on outcome measures for accountability purposes because a manager could always point to other, noncontrollable, environmental factors—such as a downturn in the economy—that caused her or him to fail to meet an outcome-oriented performance target. With the passage of the State Sector and Public Finance Acts of 1988 and 1989, respectively, the New Zealand government was restructured to be the purchaser of outputs—goods and services—from government departments led by competitively appointed chief executives. The performance agreement between New Zealand Ministers and their chief executives contained specific output targets, including quantity, timeliness, cost, and quality for which the chief executive was accountable. Examples of outputs purchased by the government from the Department of Labor included employment placement services, occupational health and safety prevention and compliance services, and immigration visa and permit processing. Government ministers—not their chief executives—were responsible for selecting the program outputs to pursue to achieve the government’s desired outcomes. The government also purchased “policy advice” from departments that pertained to whether or not the particular outputs the government had “purchased” were having the desired effect on outcomes. For example, the government purchased employment policy advice, occupational health and safety policy advice, and immigration policy advice from the Department of Labor. Canadian and Australian government studies also suggested that managers do not control all the factors that contribute to program outcomes. Nevertheless, these studies maintained that part of a program manager’s responsibility was to assess the effectiveness of his or her programs in achieving outcomes and report on both controllable factors, such as the manner in which program staff interact with clients, as well as noncontrollable factors, such as economic conditions, that affect outcomes. According to an evaluation of Australia’s reforms, this view of program management’s responsibility “recognizes the reality that public servants make policy decisions in everyday program implementation, and that ongoing, effective services to citizens depend to a great extent upon a sense of responsibility for the impacts of programs on people.” Similarly, according to a 1991 report by the Canadian Comptroller, managers increasingly were being asked to evaluate the continued relevance, success, and cost-effectiveness of their programs. The four countries sought to increase the accountability of government departments and agencies to parliament for the results of their programs by requiring them to report publicly on the outputs and outcomes they produced. However, the parliaments of the four countries initially made limited use of results-oriented performance information to hold departments and agencies accountable for their performance, according to government officials we spoke to and studies we reviewed. Although the four countries were seeking to relate program performance and costs, we did not find that they were seeking to demonstrate how program performance would vary according to different funding scenarios, as will be tested under GPRA in fiscal years 1998 to 1999 in the United States. Departments in each of the four countries were required to report performance information annually to their parliaments along with budget and expenditure information. Generally, the goal of each country was to provide more information about program results being achieved for the funds being spent. Despite the improved availability of performance information in reports to parliament, studies by the four countries suggested that performance reports were not always used extensively by parliaments for scrutinizing the performance of departments. For example, in the United Kingdom, a 1990 report by the House of Commons Procedure Committee described select committee interest in recent departmental reports as “patchy at best.” However, others observed increased interest in the performance information provided by departments. A New Zealand Treasury official commented that the quality of questions being asked by parliament during the fiscal year 1992 budget process had noticeably improved. The official credited this improvement to the new budget format that included a department’s output-oriented performance information. Officials from the New Zealand Audit Office suggested that the successful use of performance information by parliament should be viewed in terms of incremental shifts away from parliament asking questions primarily about the costs of departments’ inputs and toward asking questions about the quantity and quality of the departments’ outputs. Other New Zealand, Australian, and United Kingdom studies indicated that such incremental improvements in the use of performance information by their parliaments had occurred. Canadian and New Zealand studies indicated some parliamentary dissatisfaction with the quantity and quality of performance information reported to them. According to a 1992 Auditor General report, Canadian ministers of parliament found that department performance reports did not provide the right amount of information; did not always help them understand what the department was doing, or how much things cost; and did not provide a reasonable perspective on performance. New Zealand’s 1991 review reported on the views of department ministers rather than of parliament as a whole. Those ministers found performance reports to be adequate, but some had difficulty wading through the quantity of information provided or finding information on efficiency. Several studies by the countries suggested that institutional constraints, such as the lack of staff, expertise, and time to evaluate all the performance information that was being provided, precluded the effective use of performance reports by parliaments. Use of information by the countries’ parliaments could be improved by enhancing the quality and presentation of the information. For example, New Zealand and Canadian studies found that ministers of parliament would value simpler reports that highlighted significant concerns. United Kingdom and New Zealand studies suggested the need for more feedback from their parliaments on the format and content of performance reports to ensure that departmental reporting is meeting their parliaments’ information needs. In addition to results-oriented management reforms designed to increase the accountability of line management for achieving desired results, the four countries we selected implemented reforms that were intended to provide line management with flexibility over resources and incentives to manage their programs more effectively and efficiently. Table 4.1 summarizes the four countries’ approaches to increasing managerial flexibility and providing incentives for more effective and efficient management. To provide flexibility and incentives to line management, central management departments and central management within line departments sought to (1) simplify management rules and regulations; (2) devolve greater decisionmaking authority over financial and human resources; and (3) provide incentives in the form of shared productivity gains and market-type mechanisms, such as increased competition and user-charging. Although evaluations of these reforms by the four countries suggested that a substantial degree of implementation had occurred, the evaluations also suggested that some departments were slow to devolve authority within their organizations, which resulted in fewer incentives to increase efficiency. Moreover, although evaluations suggested that the four countries were satisfied with the progress they had made, they continued to grapple with issues, such as acceptable levels of risk and the desirable scope and degree of devolution that should occur in departments. Results-oriented management reforms in the four countries called for line managers to have authority over spending decisions within overall funding constraints in order to effectively and efficiently manage their programs. Central management controls over line-item expenditures were replaced by tighter controls over aggregate expenditures, and detailed regulations were replaced with general principles and greater individual responsibility for decisions. The following sections contain descriptions of the approaches to flexibility and incentives the four countries took. Although the four countries did not uniformly evaluate the costs and benefits of these approaches, in some cases, evaluations by the countries described improved operations as a result of the spending flexibility and incentives. In each of the four countries, reviews of government performance recommended significant reforms to the operating budgets of departments. These reforms were aimed at providing departments with more flexibility to allocate resources and to adapt to changing priorities while controlling the growth of expenditures. An Australian government official described the government’s budgeting problem as central budget and department officials spending 95 percent of their time micromanaging the details of departments’ operating expenditures, which accounted for only 10 percent of overall government expenditures. In the four countries, operating budgets detailed how much departments could spend on such expenses as travel, office equipment, and salaries. Those budgets also allowed departments little flexibility to shift funds from one category to another to meet operating needs. In addition, Australian, Canadian, and United Kingdom departments were still constrained by staff ceilings that could not be exceeded. According to officials from the four countries, this detailed central control over departmental operating funds and staff levels was in itself costly, ineffective in containing costs, and led to inefficient resource decisions by departments. For example, a United Kingdom Treasury official noted that attempts to control costs by reducing staff numbers produced perverse incentives to contract work out, even if the tasks could be performed for less by the government. To address this problem, each of the four countries implemented operating budgets in which departments were given a lump sum of funds to spend on their operations. Operating budgets generally included salaries, office space, contracts for services, utility bills, other related administrative spending, and minor capital. We observed that although the specific terms of flexibility varied among the four countries, departments were generally free to decide how to allocate funds across these categories. Operating budget flexibility in the four countries did not apply to the nonoperating costs of departments, such as grants, aid to individuals, or major capital expenditures, which were budgeted separately. In addition to flexibility in how funds were spent, the four countries eliminated staff ceilings so that departments could decide how to staff their programs to achieve program goals and objectives within the limits of their operating budgets. In Australia, Canada, and the United Kingdom, government policy explicitly called for departments to devolve operating budgets from the centers of departments to line mangers to give line managers more flexibility over their operations. For example in the United Kingdom, the Department of the Environment divided its overall operating budgets into individual program operating budgets over which line managers exercised control. In New Zealand, the focus of reform was to devolve responsibility for operating budgets to the chief executives of departments. Several New Zealand officials we spoke to said that some devolution had occurred or was to occur in their departments. According to Australian and United Kingdom reviews of their reforms and interviews with government officials, operating budget reforms such as spending flexibility within overall funding constraints, the elimination of staff ceilings, and forward year budget projections have improved effectiveness and efficiency. For example, according to a 1988 United Kingdom review, in some cases, budget reform enabled budget holders to save money or make better use of money and encouraged forward planning of activities and spending and setting priorities. A United Kingdom Treasury official said that because departments were allowed to choose the mix of resources to be purchased within overall annual limits, departments could allocate any efficiency savings to address operating priorities, such as improving the appearance of public offices. Australian departments, such as the Department of Immigration, Local Government and Ethnic Affairs, made similar observations: “The reforms have enabled the agency to achieve outyear savings from applying innovative approaches to issues. These savings were not available to the agency prior to the reforms.” United Kingdom and Australian officials also noted improved control of the growth of operating budgets. A United Kingdom Treasury official said that operating budget controls were more effective than other types of controls in reducing the rate of expenditure growth. Exclusive use of staff controls resulted in costs growing 2 percent faster than inflation during the early 1980s. Under operating budget control, despite pay increases that exceeded inflation, operating budget growth slowed. An Australian review described reduced growth in operating budgets since the implementation of its reforms and attributed the improved control to the requirement that departments estimate the costs of decisions for 3 years forward and justify any changes to those estimates. To control overall program costs, departments in the four countries were responsible for running their operations within their operating budgets. As an additional inducement to control costs, Australian and United Kingdom departments were required to return an efficiency dividend to the government. Efficiency dividends represented an annual across-the-board reduction of operating budgets arising from general efficiency improvements that government departments were expected to achieve as a result of their country’s governmentwide management reforms with no decrease in the quantity or quality of outputs. Australia and the United Kingdom projected their budgets 3 years in advance and included the efficiency dividend in their projections. Departments were generally expected to live within these projected budgeted amounts. According to a review of Australia’s reforms, senior managers surveyed responded that the 3-year forward budget projections improved the predictability of the forward year budgets. In the four countries, government reviews found some instances in which departments said their inability to carry forward unspent budgeted funds from one year to the next created incentives for inefficient year-end spending. To address this problem, Australia and Canada allowed their departments to carry forward 6 percent and 2 percent of unspent budgeted funds, respectively. The United Kingdom allowed its departments to carry forward an unlimited amount of unspent funds into the next year. According to a United Kingdom Treasury official, this changed from 0.5 percent in 1994 in order to promote more responsible funds management. The United Kingdom Treasury limited participation in the carry-forward program to departments that were willing to negotiate a 3-year running cost agreement and to arrange for satisfactory management planning and control. According to United Kingdom and Australian reviews of their carry-forward programs, departments that were surveyed reported benefits. The United Kingdom review found that almost all departments responding to a survey reported lowering their year-end spending on low-priority items and identified specific instances of how they used the authority to fund ongoing operations. Common uses identified were ongoing funding for information technology strategies, consultants, surveys, and training. In addition, users of the carry-forward provision reported benefits such as less rush to process invoices for payment within the financial year, flexibility to withhold payments to contractors pending specific performance, freedom to make more businesslike expenditure decisions, and ability to make longer term planning. According to the Australian review, departments that used the carry-forward program reported improvements to operational effectiveness and efficiency. One Australian department commented that the carry-forward program created incentives for line managers to be prudent and helped end the ‘spend it or lose it’ attitude; another said it allowed for better planning at the end of the year. However, the Australian review also suggested that year-end spending was not always inefficient. Rather, some staff commented that managers could prudently delay the purchase of lower priority items until the end of the year to be able to fund the purchase of unanticipated, higher priority items. Other staff commented that the carry-forward provision would not deter year-end spending in divisions if a year-end surplus of funds in one division was taken away and given to another division with a year-end shortage. According to the government reports we reviewed, the four countries also sought to create incentives for more effective and efficient management by introducing market-type mechanisms to the provision of some centralized government services, such as accommodation, procurement, information services, and training, to other departments. Market-type mechanisms included charging for services and allowing departments to retain the revenues, opening up government-provided services to competition, and allowing agencies to choose between government and private sector service providers. For example, we reported in a September 1994 report that the introduction of market-type mechanisms to government buildings—or real property—management in Australia, Canada, Sweden, and the United Kingdom contributed to more effective and efficient provision of real property services to client agencies and improved customer satisfaction. In these countries, real property organizations (1) faced competition from the private sector, (2) began managing their real property assets more strategically to maximize return on investment and better meet customers’ mission needs, and (3) separated their policy oversight and development roles from their roles as providers of building services to government agencies. The four countries implemented user-charging for internal government services to improve the allocation of these services. According to reports prepared by the four countries, services for which departments charged other departments fees were commercially oriented, such as real property management, audit services, legal services, training, publications, and technical advice. Another form of flexibility adopted by the four countries for commercially oriented departments and agencies was the authority to fund their operations from revenues collected, such as user fees or asset sales or rentals. This replaced systems in which fee-collecting departments and agencies were funded entirely through annual appropriations and all revenues collected were turned over to the Treasury. Along with user-charging and revenue retention, the four countries demonopolized the provision of certain central government services, such as real estate, purchasing, accounting, and transportation, and subjected the government service providers to competition from the private sector or other government providers on the basis of cost and quality. According to a New Zealand Treasury official, centralized departments no longer provided services such as real estate, supplies, or pensions. Rather, departments were to obtain these services on their own within their operating cost budgets. Australia, Canada, and the United Kingdom were gradually allowing departments to purchase services from providers other than central government service providers. Under its “market testing” reform, the United Kingdom implemented multiyear plans to subject a large number of government services to competition. Direct comparisons between the four countries’ management reforms and current U.S. management provisions were outside the scope of this report. Nevertheless, some of the countries’ reforms resemble current U.S. budgetary provisions, such as those described below. Operating Budgets. The United States has generally moved away from appropriations for items of expense, such as salaries, equipment, and travel, and toward appropriations for organizations and programs. However, agencies may be asked by congressional committees to account for deviations from their budget requests, which typically are expressed in terms of items of expense. Budgetary Flexibility. Appropriations acts or other statutes may specify an amount or percentage of funds that an agency may transfer between appropriations accounts without requiring further congressional action. Similarly, within an appropriations account, agencies generally may reprogram a percentage or amount of funds from one item of expense, such as salaries, to another, such as computer equipment, without obtaining congressional approval. Carry-Forward of Unspent Budgeted Funds. Very few discretionary appropriations accounts—budget accounts that receive budgetary resources through appropriations acts—contain annual funding only. To better meet the needs of program managers, most discretionary accounts contain some multiyear or no-year funding authority, thus allowing carry-over of budgetary resources across fiscal years, and subsequent obligation, without further congressional action. Market-Type Mechanisms. All executive departments are authorized to charge user fees to provide a wide variety of common administrative services and retain those fees in revolving funds to pay for operating expenses. These funds are allowed to charge for the direct costs of service provision and to also collect certain indirect costs, such as equipment depreciation. All fund receipts are typically available until spent and do not expire at the end of a fiscal year. Also, OMB Circular A-76 seeks to promote efficiency by encouraging competition between the federal workforce and the private sector for providing commercial services needed by government agencies. In light of the four countries’ experiences with similar reforms, U.S. agencies may wish to reexamine these existing U.S. provisions as they consider proposals for waivers from administrative requirements as provided for under GPRA. The four countries sought to give line management greater flexibility to recruit, assign, and pay staff. To accomplish this, the countries simplified personnel rules and devolved personnel authority from central personnel agencies to departments and from central personnel functions within departments to line managers. This devolution was accompanied by a shift in the role of central personnel agencies away from regulating and controlling all personnel actions and toward promulgating simplified human resource management principles and monitoring adherence to those principles. Also, within departments, the function of central personnel managers shifted from controlling personnel decisions to providing human resource management services to line managers. To improve line management’s control over human resources, the four countries simplified their civil service systems and replaced elaborate, uniform personnel rules with simpler, broader personnel principles. For example, according to a 1991 government paper on Canada’s Public Service 2000 reforms, Canada’s human resource reforms emphasized creating a simpler personnel system that provided managers with greater flexibility. Canada sought to simplify its human resource system through government reform legislation passed in 1992 that significantly reduced the number of job classifications throughout the public service and reduced the number of executive management levels below the deputy minister from six to three. In addition, the reform legislation gave managers greater authority to reassign their employees to other jobs and introduced simpler procedures for firing poor performers. According to government reports, the United Kingdom replaced mandatory personnel rules with less detailed guiding principles to serve as the basis for departments’ and agencies’ own staff handbooks. The new role of the central personnel function in the United Kingdom was to develop individual arrangements for organizations that fit within a unified, rather than uniform, system. Along with simplification of civil service rules, each of the four countries began devolving responsibility for many personnel functions, such as hiring, firing, and setting pay, from central personnel agencies to line departments and agencies. Both New Zealand and Australia transferred responsibility for most of their personnel functions from their central personnel management agencies to departments. In both countries, the central personnel management agencies’ new role was to oversee the performance of departments in carrying out the personnel functions according to central guidelines. In the United Kingdom, functions such as recruitment, setting pay based on performance, training, and promotion were gradually transferred to selected departments and agencies. For example, the government gave agencies with greater than 20,000 employees authority to establish their own pay grade systems. Within the Canadian Public Service, some organizations negotiated “separate employer status,” which enabled them to establish their own job classification systems and negotiate with unions. “enabled departments to respond to specific skill shortages, increased the pool of potential employees, enabled better targeting of resources through performance contracts, and allowed departments to develop specific human resource policies to better suit their needs.” According to a 1992 government evaluation of Australia’s public sector management reforms, Australian staff reported that of the major public service reforms implemented, those related to human resource management had the greatest positive effect on their own work. While progress had been made in devolving authority over resources from central management agencies to departments and in simplifying complex central personnel regulations, the countries each reported that more effort was needed to achieve similar progress within the departments themselves. A common theme in the countries we selected was that some departments failed to simplify or eliminate self-imposed rules or were slow to devolve authority because they feared the risks associated with devolved decisionmaking. Also, devolved decisionmaking by itself could be ineffective if line units were not given incentives to find efficiencies in the form of shared savings. Officials in or reviews by the four countries noted hesitancy by departments to devolve decisionmaking authority to line management or the existence of internal department rules that worked against devolution. A Canadian official noted that once authority had been given to a department, department officials were sometimes hesitant to use it or to delegate it to other levels of management. In the United Kingdom, a 1988 review of the Financial Management Initiative found that much progress had been made with devolution of budget authority—more than 7,000 line managers had their own budgets, which accounted for about three quarters of the civil service’s running costs. However, the reviewers found some departments created their own restrictions that prevented managers from moving money from one item to another within their budgets. New Zealand and Australian reviews noted similar uneven devolution of authority within departments. Australian, New Zealand, and United Kingdom evaluations of their reforms suggested that another problem departments faced in devolving authority to line management was the tendency to respond to initial implementation difficulties by taking back the authority. An example of this problem was provided by a New Zealand official. According to the official, the government gave department chief executives the flexibility to purchase real estate services from the private sector at the same time that downsizing had resulted in significant vacant government office space. Some members of parliament were concerned that departments were not making enough effort to use the vacant government space and temporarily recentralized the real estate function. Eventually, the government decided to return authority for real estate functions to department chief executives but added responsibility for coordinating real estate decisions to their performance agreements. The official emphasized that it was the New Zealand government’s view that holding individuals responsible for their decisions was more effective than centralizing control or creating detailed rules, which could result in inefficient decisionmaking. The Australian Department of Finance promoted risk management as the means to improve purchasing effectiveness and efficiency in a devolved decisionmaking environment. According to government reports, risk management involves the evaluation of purchasing controls in terms of their costs and benefits and determines an acceptable level of risk. The government considered the more common practice of risk avoidance—treating all risks as equally unacceptable—as not cost-effective. Recognizing that occasional abuses would occur with the implementation of risk management, Australian authorities increased the penalties for misuse of funds. The effectiveness of devolution was also tempered by a lack of incentives for line managers with operating budgets to save funds if they did not benefit from the savings. Australian managers suggested that departments created disincentives to save funds when unexpended year-end funds were taken away from one program and used to fund another program. The United Kingdom’s assessment of its provision allowing departments to carry forward unspent end-of-year funds found that although departments centrally managed unspent funds in some cases, passing the funds down to the line management that generated the under-spending was the approach most likely to maximize efficiency. Nine out of the 16 departments surveyed that commented on their use of the carry-forward provision passed the funds down to the line unit that generated them. One department requested bids for how line units would use such funds and awarded the funds to the unit that would provide the best financial return. According to government studies in the four countries, managers generally welcomed the increased authority to make decisions about spending, personnel, and program operations that were formerly made by central authorities. However, an Australian study found some problems. The study found that in some cases, for centralized “corporate services” functions such as budgeting, procurement, and personnel, departments misunderstood the devolution concept and decentralized the performance of these functions to line management instead of maintaining the centralized function and devolving the authority to make decisions. This misunderstanding led some to question the efficiency of the devolution concept. An Australian review made the following distinction between devolution and decentralization. “Devolution is the transfer of decision-making capacity from higher levels in the organisation to lower levels, i.e. it is about who is best placed in an organisation to make decisions. Decentralisation is the redistribution of functions or tasks from central units in the organisation to more widely dispersed units, i.e. it is about where in an organisation functions are best carried out.” “inappropriate decentralisation can result in loss of career paths and specialised skills, loss of critical mass and economies of scale. Put simply, great devolution of responsibility can occur without any decentralisation of functions.” Also according to the review, the Department of Prime Minister and Cabinet experienced such confusion. This department decentralized many of its administrative functions, such as personnel, along with devolution of authority for those functions. The department found that decentralization of administrative functions led to inefficiencies and a loss of expertise in these functions by central management. Subsequently, the department shifted its approach to devolving authority over personnel decisions to line management, while retaining personnel administration as a centralized function. “he first phase of devolution was characterized by decentralisation of administration (e.g. of corporate services functions) as well as devolution of decision-making. Following the diseconomies and other dysfunctions to which this gave rise, the balance shifted away from decentalisation and towards devolution proper.” On the basis of case studies, the review reported key factors that were critical to the successful devolution of authority within departments. (See table 4.2.) The experiences of Australia, Canada, New Zealand, and the United Kingdom in attempting to bring about a results-oriented management culture provide insights about investment approaches that U.S. agencies may wish to consider as they implement results-oriented management under GPRA. First, the countries had to invest significantly in accounting and performance information systems and training. Second, the four countries invested in time, allowing a decade or more for their results-oriented management reforms and their incremental implementation. In addition, the countries’ central management departments or other high-level management groups studied the implementation of the reforms and provided guidance and training to line managers implementing the reforms. Each of the countries we reviewed took steps to equip managers to operate in an environment of devolved decisionmaking. The countries invested in accounting and performance information systems to support management in collecting and reporting performance information and exercising their authority over resources. The management reforms also required significant human investments, such as skills training for managers to equip them to meet their performance objectives and exercise new authority. To implement commercial reforms, such as user-charging, revenue retention, and competition, and to provide managers and oversight groups with better cost information for decisionmaking, Australia, New Zealand, and the United Kingdom introduced accrual accounting systems to supplement existing cash accounting systems. In Australia and the United Kingdom, accrual accounting was being implemented incrementally, starting with commercially oriented agencies that charged for their services, such as government printing offices, real property agencies, and consulting services, according to government officials and reviews. In contrast, New Zealand introduced accrual accounting governmentwide and produced commercial-style accounts based on generally accepted accounting principles for each department and for the government as a whole. According to Australian, New Zealand, and United Kingdom reviews, the introduction of accrual accounting supported more accurate pricing of government services for commercially oriented agencies and provided a tool for improved measurement of financial performance. Government policy called for all United Kingdom executive agencies to produce accrual accounts within 2 years of becoming agencies. A 1993 review of executive agencies reported that the development of accrual accounts encouraged a more businesslike approach and provided better information for agencies to achieve and demonstrate efficiency improvements. For example, using accrual accounting, Companies House, the executive agency charged with handling incorporations and dissolutions, set businesslike financial performance targets, such as achieving a 6 percent annual rate of return on average net assets employed. Australia and the United Kingdom highlighted the need to develop information systems that supported results-oriented management reforms. According to an evaluation of Australia’s reforms, most Australian departments had made progress in the development and use of financial management information systems. However, many Australian departments commented on the need to shift their management information systems from their current focus on inputs, administrative activity, and outputs to a greater focus on outcomes and qualitative performance information. Australian officials also noted the need to use information technology to disseminate program performance information from headquarters to field offices. Under the Financial Management Initiative, all United Kingdom departments were directed to develop management information systems that could inform managers of the cost of the resources allocated to them and inform them of their performance in terms of outputs produced against targets. Government evaluations of reforms in Australia and the United Kingdom pointed out that commercial reforms, such as user-charging and competition, required the development of new information systems capable of determining the full costs of operations, including all depreciation and overhead. For example, United Kingdom agencies that sought to fund their operations through the collection of user fees instead of appropriations found the process difficult and time-consuming, partly because they lacked the needed financial and management information systems to manage their revenues and expenses. The need for investments in information systems in the four countries was accompanied by the need for investment in the training of staff. The four countries identified the need to recruit and train staff in such areas as performance measurement and monitoring, program evaluation and budgeting, contracting, human resource management, customer service, and other commercial skills associated with greater managerial discretion over inputs. Various evaluations pointed to managers’ lack of experience and skills in the development and use of performance measures and in program evaluation. Two Australian evaluations of its reforms cited the skills deficit as a barrier to the evaluation of program and the development of performance measures—particularly measures of effectiveness. Some United Kingdom officials suggested that despite wide use of performance measures in executive agencies, the government was concerned about the lack of expertise in setting and scrutinizing performance targets because there were no absolute or independent standards against which to set performance targets and assess achievement. A New Zealand academic expressed a related concern that both civil servants and politicians needed to develop the analytical skills to assess the new performance information. Canadian and Australian evaluations discussed the importance of training in the management of operating budgets, contracting for services, managing human resources, improving customer service, and other commercial skills. According to a government background paper on Canada’s Public Service 2000 reforms, line managers would require substantial training as central managers devolved responsibility for personnel, financial, and administrative systems to line managers. Australian staff surveyed cited training as one of the factors that most contributed to the successful implementation of reforms in their work areas, according to a government evaluation. To address management skills, Australia developed the Middle Management Development Program, which emphasized improving skills in managing human resources and took account of the impact of public sector reforms ranging from the introduction of program management to extensive devolution of financial and human resource management functions. Better customer service was a central element to the United Kingdom’s and Canada’s reforms. A United Kingdom government consultant commented that for customer service reforms to work, government organizations would need to inculcate service values and quality practices through the recruitment, training, and development of staff. A survey of United Kingdom Executive Agency chief executives by Price Waterhouse, a major accounting firm, suggested that the lack of staff experience with customer service was one of the key obstacles to providing better customer service. Under Canada’s Public Service 2000 initiative, some departments had begun to provide customer service training. For example, one department offered client-service training to 8,000 front-line staff. As described in chapter 1, each of the four countries invested a decade or more in results-oriented management reforms designed to shift the managerial culture of the public service away from a focus on inputs toward a focus on results. Although their strategies for change shifted over time, the four countries maintained a long-term goal of instilling a results-oriented managerial culture in their civil service. The four countries’ experiences in attempting to bring about cultural change corresponded closely to our recent work on private sector efforts. We found that changing organizational culture in the private sector was a long-term process that could take 5 to 10 years to accomplish. In Australia, Canada, and the United Kingdom, we observed that the implementation of managerial flexibility progressed incrementally because some departments and agencies were in a better position to devolve authority over resources and decision-making to line managers than were others. By comparison, implementation of results-oriented management reforms in New Zealand proceeded rapidly, with most departments issuing required performance and financial reports and operating with greater managerial flexibility within about 3 years. Government officials said New Zealand’s public service is currently digesting and assimilating the major wave of innovation and change from the past few years. In Australia, because of the unique characteristics of departments, devolution occurred more rapidly in some departments than in others. The United Kingdom and Canada gave greater authority and responsibility to specific functions within departments that could operate in a semiautonomous manner within the parent department. Australian survey evidence suggested that devolution had progressed to varying degrees within departments. Departmental views suggested that this variation was appropriate from their perspective given the unique characteristics of departments. For example the Social Security Department remarked “there has been very little that the Department has found cannot be devolved to the operational level.” In contrast, the Defense Department commented that devolution needed to proceed gradually to accommodate the unique operating characteristics of the different units within the department. According to United Kingdom and Canadian descriptions of their reforms, implementation of results-oriented management reforms proceeded incrementally, beginning with departmentwide reforms and followed by a narrower focus on functions within departments. The Financial Management Initiative reform in the United Kingdom and Increased Ministerial Accountability and Authority reform in Canada introduced greater management flexibility and responsibility for performance to departments as a whole. In both countries, these reforms were followed by the introduction of results-oriented management reforms to selected “executive” functions within departments. These functions were restructured as executive agencies in the United Kingdom and special operating agencies in Canada. Executive agencies had become the dominant form of organization in the United Kingdom, growing from 5 agencies with 6,050 civil servants as of May 1989, to 92 agencies with 343,480 civil servants—62 percent of the civil service—as of 1993. According to a 1993 government report, executive agencies may eventually cover as much as 81 percent of the civil service. Between 1990 and 1993, Canada had established 14 special operating agencies, and 4 additional agencies were pending approval. According to government guidance to departments, in selecting candidates within departments for executive agency status, the United Kingdom government looked first for discrete entities that operated independently within their departments and whose performance would clearly benefit from greater managerial flexibility. Before designating an agency, the government first determined whether the function should have been privatized, contracted out, or abolished. If none of these options were chosen, the function was set up as an executive agency. The first executive agencies were small and homogeneous, with their tasks and clients already well-defined, and with services run in a semi-independent manner within their departments. At the time of our review, the functions of the United Kingdom’s executive agencies and Canada’s special operating agencies ran the gamut from direct services provided to citizens, to services provided to a parent department, to services provided on a competitive basis to government departments, to regulation. We observed that the common element among these agencies was that they were service operations with well-defined clients that could be set up on a semicontractual basis within their parent departments. Executive agencies in the United Kingdom and special operating agencies in Canada individually developed with their parent and central management departments the specific results-oriented management framework for providing greater accountability for results along with managerial flexibility. In the United Kingdom, the “Framework Document” for an agency typically set out its mission, goals, objectives, performance measurement and reporting requirements, and flexibility in areas such as human resource management and procurement. Framework documents for Canadian special operating agencies set out similar terms. According to Canadian and United Kingdom government reports on establishing these agencies, the terms contained in agency framework documents were unique for each agency. As agencies established a track record for performance, departments were to provide them with greater managerial flexibility. We observed that central management departments in the four countries facilitated the guidance and training of line department managers to implement their results-oriented management reforms. Central management departments in each of the countries issued guidance for line managers on various aspects of their reforms, including strategic and operational planning, measuring performance against objectives, assessing client satisfaction, and using operating budgets. In addition to issuing guidance, Australian Department of Finance officials took on marketing and training roles. The Department published a management reform circular that provided updates on reform implementation, training opportunities, recent publications on management subjects, and other management news. Finance department officials also visited departments to explain the flexibility available to line managers and facilitate the strategic planning, objective-setting, and performance measurement processes. In each of the countries, central management departments or other high-level management groups evaluated their management reforms from the line manager’s perspective and provided meaningful feedback on best practices and areas of weakness. In Australia, evaluations by the Department of Finance, the Parliament’s Standing Committee on Finance and Public Administration, and the Management Improvement Advisory Committee provided feedback from line managers and from the departments as a whole on implementation of all aspects of their management reforms and published case studies of best practices. The United Kingdom, Canada, and New Zealand conducted similar high-level assessments drawing heavily from the line managers’ experiences with implementing the reforms. | Pursuant to a congressional request, GAO reviewed the experiences of Australia, Canada, New Zealand, and the United Kingdom in implementing management reforms that U.S. federal agencies may wish to consider during their implementation of the Government Performance and Results Act. GAO found that: (1) the four countries' reform approaches included establishing and communicating a clear direction by defining agency missions and goals through strategic planning, linking annual objectives to missions and goals through operating plans, measuring output-oriented results, and reporting progress; (2) program outcomes were difficult to measure accurately because conditions beyond managers' control affected the outcomes; (3) key lessons learned focused on enhancing the usefulness of performance measures, making performance measures selective and balanced, including qualitative and quantitative information in performance measurement systems, and providing aggregate detailed information to upper management and program managers; (4) the countries held managers accountable for program results through published performance standards and public surveys, performance goal agreements, and reports to their parliaments; (5) to give managers more flexibility to achieve reforms, the countries eliminated central control of departments' operating expenditures and staffing levels and provided departments with more authority and incentives to manage resources within overall budget ceilings; and (6) changing the government culture in the four countries required that agencies be held accountable for program results. |
With virtually billions of records, the federal government is the largest single producer, collector, and user of information in the United States. In order to carry out the various missions of the federal government, federal agencies collect and maintain personal information such as name, date of birth, address, and SSNs to distinguish among individuals and ensure that people receive the services or benefits they are entitled to under the law. SSA is responsible for issuing SSNs as part of its responsibility for administering three major income support programs for the elderly, disabled, and their dependents: the Old-Age and Survivors Insurance; Disability Insurance; and Supplemental Security Income. SSA is also the repository of information on individuals’ wages and earnings. This information is used in tax administration and is reported by individuals on their federal income tax returns. Tax return information may only be disclosed as permitted by the IRC. Information transmitted to SSA has been protected from disclosure by statute and regulation since the inception of the Social Security program. To maintain the confidentiality of the personal information the agency collects to carry out its mission, in June 1937, SSA adopted its first regulation, known as “Regulation No. 1,” to protect the privacy of individuals’ records and to include a pledge of confidentiality. The regulation was reinforced by amendments to the Social Security Act in 1939, which became the statutory basis for maintaining the confidentiality of SSA’s records. For decades, the act, along with Regulation No. 1, formed the basis for SSA’s disclosure policy. However, the enactment of subsequent legislation—the Freedom of Information Act (FOIA) in 1966 and Government in the Sunshine Act in 1976—caused SSA to reexamine its disclosure and confidentiality policy. This legislation placed the burden on SSA, as well as other federal agencies, to justify withholding information requested. Still, SSA’s policy is designed to protect the privacy rights of individuals to the fullest extent possible while permitting the exchange of records required to fulfill its administrative and program responsibilities. Over the years, SSA’s disclosure policy has been revised to comply with about 25 statutes, including the Privacy Act. The Privacy Act of 1974 is the primary law governing the protection of personal privacy by agencies of the federal government. The Privacy Act regulates the collection, maintenance, use, and disclosure of personal information that federal agencies maintain in a system of records. The act requires that, at the time the information is collected, agencies inform an individual of the following: (1) authority for the collection and whether it is mandatory or voluntary, (2) the principal purpose for the collection of information, (3) what the routine uses for the information may be, and (4) what the consequences are of not providing the information. The act applies to systems of records maintained by federal agencies, and with certain exceptions, prohibits agencies from disclosing such records without the consent of the individual whose records are being sought. The act authorizes 12 exceptions under which a federal agency may disclose information in its records without consent, as shown in table 1. The Privacy Act requires that the Office of Management and Budget (OMB) issue guidance and oversee agency implementation of the act. The act does not generally apply to state and local government records; state laws vary widely regarding disclosure of personal information in state government agencies’ control. The Privacy Act, under the law enforcement exception, outlines the minimum criteria that must be met by a law enforcement agency to obtain personal information without an individual’s consent. The act requires that the request specify the information being sought and the law enforcement activity being carried out. The request must be in writing, and signed by the agency head. In addition, OMB guidance permits agencies to disclose a personal record covered by the Privacy Act to law enforcement at the agencies’ own initiative, when a violation of law is suspected; provided that such disclosure has been established in advance as a “routine use” and misconduct is related to the purposes for which the records are maintained. The routine use exception of the Privacy Act permits disclosure of individuals’ personal information if the requested use is compatible with the purpose for which the information was initially collected. Under the act, agencies are required to keep an accurate accounting regarding each disclosure of a record to any person or to another agency and to retain the accounting for at least 5 years or the life of the record, whichever is longer. Under OMB guidance, an agency need not keep track of every disclosure at the time it is made, but the agency must be able to reconstruct an accurate and complete accounting of disclosures. While SSA’s policy permits the sharing of nontax information with law enforcement, it does so only under certain conditions and is more restrictive than both the law enforcement exception specified under the Privacy Act and the disclosure policies of most federal agencies. Before allowing the disclosure of information, SSA’s disclosure policy requires SSA officials to consider several factors such as the nature of the alleged criminal activity, what information has been requested, and which agency has made the request. Such considerations are above and beyond what is included in the law enforcement exception to the Privacy Act. SSA maintains that it must have a restrictive disclosure policy because much of the information the agency collects is especially personal. In addition, SSA officials believe that the agency must uphold the pledge it made to the public to keep this information confidential when SSA first began collecting it. Unlike SSA, the policies of most major federal agencies allow the disclosure of information to law enforcement if the requests for information meet the requirements outlined in the Privacy Act. However, like SSA’s disclosure policy, the disclosure policies of the IRS and the Bureau of the Census, which have disclosure requirements prescribed in their statutes, are more restrictive than the Privacy Act and the disclosure policies of most federal agencies. While SSA has a long history of protecting individuals’ privacy, the agency’s disclosure policy allows the disclosure of information to law enforcement under certain conditions. These conditions require that SSA officials consider several factors before they release individuals’ personal information. For example, they must examine the nature of the alleged criminal activity, what information has been requested, and which agency has made the request. SSA will share information if the criminal activity involves one of the following: Fraud or other criminal activity in Social Security programs. SSA will provide information necessary to investigate or prosecute fraud or other criminal activity in Social Security programs. Nonviolent crimes and criminal activity in other government programs that are similar to Social Security programs. SSA may also disclose information to investigate and prosecute fraud and other criminal activity in similar benefit programs, including state welfare/social services programs such as Medicare or Medicaid, unemployment compensation, food stamps, and general assistance and federal entitlement programs administered by the Department of Veterans Affairs, Office of Personnel Management, and the Railroad Retirement Board. Violent and serious crimes. SSA may disclose information when a violent crime has been committed and the individual who is the subject of the information requested has been (1) indicted or convicted of the crime and (2) the penalty for conviction is incarceration for at least 1 year and a day regardless of the sentence imposed. SSA might also disclose information when a person violates parole and the violent crime provisions of the original conviction have been met. SSA defines violent and serious crimes as those characterized by the use of physical force or by the threat of physical force causing actual injury, or coercing the victim to act for fear of suffering serious bodily harm. Such crimes include but are not limited to: murder; rape; kidnapping; armed robbery; burglary of a dwelling; arson; drug trafficking or drug possession with intent to manufacture, import, export, distribute or dispense; hijacking; car-jacking; and terrorism. Provisions of other federal statutes that require that SSA disclose its records such as in connection with civil or criminal violations involving federal income tax or the location of aliens. SSA will disclose information when another federal statute requires disclosure, such as the IRS statute for tax purposes or the Immigration and Naturalization statute for locating aliens. The jeopardy or potential jeopardy of the security and safety of SSA’s clients, personnel, or facilities. SSA will disclose information about an individual if that individual is involved in an activity that places the health, safety or security of SSA clients, personnel, or facilities in jeopardy or potential jeopardy. After the disclosure, SSA must send a notice of the disclosure to the individual whose record was disclosed. SSA’s disclosure policy is contained in 20 C.F.R. Part 401 and is promulgated through regulations outlined in its “Program Operations Manual System” (POMS) and Emergency Messages. POMS is the primary tool the field offices use to assist them in making appropriate disclosure decisions when they receive requests from law enforcement agencies. POMS provides detailed guidance and incorporates references to disclosures covered by 25 different statutes, which are located in at least 15 different sections of the POMS. SSA uses Emergency Messages, usually limited to a one-time only emergency situation, to provide implementing guidance in emergency situations. For example, on September 19, 2001, SSA issued an emergency message to field offices instructing them to direct all law enforcement requests related to the terrorists’ attacks of September 11, 2001, to SSA’s OIG’s Office. SSA’s regulations are designed for implementation at all levels of the agency, including SSA’s field offices, regions, and headquarters offices. SSA can make disclosures through its headquarters, 1,336 field offices, or 10 regional offices. Disclosures can also be made through SSA’s OIG, the law enforcement component of SSA that is responsible for conducting audits and investigations of agency programs and activities. The OIG is authorized to handle disclosures through a memorandum of understanding (MOU) with SSA. The OIG investigations staff conducts and coordinates activity related to fraud, waste, abuse, and mismanagement of SSA programs and operations. The OIG investigations staff also conducts joint investigations with other federal, state, and local law enforcement agencies. The OIG investigations staff is located in 60 locations that comprise 31 field offices and 10 field divisions. SSA’s OIG is authorized to disclose individuals’ personal information to law enforcement agencies as agreed with SSA under a MOU. In July 2000, SSA’s OIG and the Commissioner of SSA signed an MOU, which outlines the conditions under which the OIG can disclose to law enforcement agencies certain limited information from SSA’s records in cases involving fraud of a Social Security program or misuse of an SSN. Under the MOU, the OIG can disclose whether a given name and SSN match the name and SSN in records at SSA, referred to as SSN verification. The MOU delegates authority to OIG employees at all levels. SSA requires that the OIG ensure that law enforcement requests meet the same requirements outlined in the Privacy Act as well as those outlined in SSA’s POMS and other guidance. In addition, law enforcement requests must include the name and SSN to be reviewed and a certification that the individual about whom information is sought is suspected of misusing an SSN or of committing another crime against a Social Security program. Under the MOU, the OIG is permitted to open an investigation and participate in joint investigations with law enforcement officials, if the OIG determines that further investigation is warranted. SSA requires that the OIG submit an annual report to the Commissioner of SSA, no later than 30 days after the end of the fiscal year. The annual report must reflect the total number of SSN verification requests received and responses made, if the number is different, broken down by OIG field division. SSA also requires that the OIG maintain records from each fiscal year for 1 year. The Commissioner of SSA can revoke the delegation of authority to the OIG described in the MOU at any time by providing a 30-day notice. While any SSA office can make disclosures, the Privacy Officer within SSA’s Office of Disclosure Policy, located in the Office of General Counsel, has overall responsibility for overseeing the agency’s implementation of the disclosure policy. Except for requests involving national security issues, which are referred to the Privacy Officer at SSA headquarters and ultimately to the Commissioner of SSA, field locations handle requests for disclosing information because the offices are at the local level where information is frequently needed. Privacy Coordinators are located in the regional offices and are available to assist the field offices on questions about disclosures. The Privacy Coordinators report to the Privacy Officer. When SSA receives a request from law enforcement agencies, SSA officials must first determine whether the request is valid, that is, in writing on the agency’s letterhead, specifies the records being requested, and is signed by an official of the requesting office. SSA field office officials are instructed to rely on their knowledge of local law enforcement agencies to determine whether a request is from the proper person. For valid requests, SSA officials must also determine whether the agency requesting the information has jurisdiction in the particular case. Other specific criteria considered in determining whether SSA will disclose individuals’ personal information to law enforcement agencies are outlined in figure 1. Tax information is disclosed consistent with IRC 6103. SSA officials told us that in all cases, the agency’s practice is to provide only the minimum amount of information necessary to assist law enforcement. For law enforcement requests that do not fit neatly in the categories described or do not meet the specific criteria outlined in SSA’s policy, SSA’s Commissioner decides whether or not the agency will share the requested information using the Commissioner’s ad hoc authority. The Commissioner’s ad hoc authority is generally reserved for exceptional cases approved on a case-by-case basis. For example, following the September 11th, 2001, terrorist attacks, the Commissioner’s ad hoc authority was invoked to disclose to the FBI and other law enforcement agencies information in SSA’s files concerning suspects or other persons who may have had information on the attacks and to help identify and locate victims and members of their families. Certain requirements must be met in order to invoke the Commissioner’s ad hoc authority. The request must be deemed appropriate and necessary, SSA’s regulations cannot specify what is to be done in the circumstance in question, and no provision of law can specifically prohibit the disclosure. SSA policy prohibits the disclosure of tax return information under the Commissioner’s ad hoc authority. SSA officials told us that the Commissioner invokes this authority infrequently and had rendered decisions to disclose information to law enforcement agencies 35 times between April 1981 and October 2002. Unlike SSA’s disclosure policy, the Privacy Act requires that fewer criteria be met before a disclosure is made. However, SSA officials state that the agency must protect tax information and maintain the pledge of confidentiality that the agency made long before the Privacy Act was enacted. Therefore, SSA’s policy imposes additional requirements as a condition for disclosure. Over the years, SSA has modified its disclosure policy to incorporate legislative requirements, but where it had discretion, SSA has continued to focus its policy on protecting individuals’ privacy and upholding the pledge of confidentiality. The law enforcement exception of the Privacy Act permits disclosure of individuals’ personal information when a law enforcement agency (1) requests the information for an authorized law enforcement activity, (2) makes the request through the agency head, (3) submits the request in writing, and (4) specifies the information requested and the law enforcement activity involved. Under the Privacy Act, a law enforcement agency investigating a person suspected of embezzlement or shoplifting could submit a request to most federal agencies, including SSA, for information seeking or verifying the person’s name, SSN, date of birth, last known address, and other data. Most federal agencies would probably provide that information from their records covered by the Privacy Act. However, under SSA’s policy, no information would be given to the law enforcement agency because SSA has determined that these are not crimes that warrant any disclosure of individuals’ personal information. Additionally, the Privacy Act includes a routine use exception, which allows personal information to be disclosed on the initiative of the custodian agency. To qualify for a routine use, the proposed use of the information must be compatible with the purpose for which the information was obtained. Agencies must publish their routine uses in the Federal Register. SSA relies on the routine use exception to disclose information to law enforcement when fraud or other violations are suspected in SSA’s programs and other similar federal income or health maintenance programs. SSA’s disclosure policy is more restrictive than the disclosure policies of most major federal agencies, with IRS and the Census Bureau, being exceptions. However, unlike SSA’s disclosure policy, the policies of the IRS and Census are specifically provided in statute. Most major federal agencies’ policies allow for disclosures to law enforcement agencies under the law enforcement or the routine use exceptions of the Privacy Act. The law enforcement exception of the Privacy Act permits all federal agencies to disclose personal information to law enforcement agencies upon written request from the law enforcement agency. Twenty of the 24 major federal agencies have issued regulations that reference that disclosure authority. In addition, OMB guidance permits agencies to disclose personal information covered by the Privacy Act to law enforcement agencies under the routine use exception of the Privacy Act. The routine use exception permits federal agencies, at their own initiative, to disclose personal information without consent if the use is compatible with the purpose for which the information was collected. OMB guidance permits such a disclosure to a law enforcement agency when a violation of law is suspected, provided that such disclosure has been established in advance as a “routine use” and the misconduct is related to the purposes for which the information is collected and maintained. Fourteen of the 24 major federal agencies have established law enforcement routine use exceptions that are generally applicable to their systems of records. Some agencies alternatively only apply the law enforcement routine use exception to specific systems of records. Accordingly, under the Privacy Act, disclosure of personal information to law enforcement agencies may be permitted, depending on the agency and the circumstances, either by the law enforcement exception or the routine use exception. SSA, however, does not permit such disclosures from SSA program records under either exception. As already discussed, SSA requires considerations above and beyond the requirements in the Privacy Act. (See app. II for a list of federal agencies’ rules referencing the Privacy Act law enforcement disclosure authority and those authorizing a general law enforcement routine use exception.) Although SSA’s disclosure policy for law enforcement is restrictive relative to most other federal agencies, IRS and Census also have restrictive disclosure requirements, which are outlined in these agencies’ statutes. IRS’s disclosures of tax returns and return information are governed by Internal Revenue Code Section 6103, which prohibits disclosures unless specifically authorized in statute. This statutory restriction serves to protect the confidentiality of personal and financial information in IRS’s possession and ensure compliance with tax laws. A court order is generally required to open tax returns or other tax information to federal law enforcement officials investigating a federal nontax crime or preparing for a grand jury or other judicial proceeding, without the knowledge or consent of the taxpayer involved. The Attorney General, the Deputy Attorney General, and other Justice Department officials specifically named in the statute, are permitted to seek a court order. To obtain a court order, the requester has to demonstrate that: reasonable cause exists to believe that a specific criminal act has been committed and tax return information is or may be relevant to a matter relating to the commission of the criminal act; the information being sought will be used exclusively in a federal criminal investigation concerning the criminal act; and cannot be reasonably obtained, under the circumstances, from another source. Information federal law enforcement obtains from IRS generally cannot be shared with state and local law enforcement. However, the Victims of Terrorism Tax Relief Act of 2001 permits federal law enforcement agencies involved in terrorist investigations/intelligence gathering to redisclose this information to officers and employees of state and local law enforcement who are directly engaged in investigating or analyzing intelligence concerning the terrorist incidents, threats, or activities. The disclosure authority for Census is spelled out in statute under Title 13 of the United States Code. The Census statute prohibits the disclosure of any individual’s Census data other than for use by the Census, making information that the Bureau of the Census collects and maintains immune from the legal process. Unlike IRS, a court order will not permit the Census Bureau to disclose information to law enforcement agencies or any other entities that may request an individual’s personal information. Regulations provide that a person’s individual census information may not be disclosed to the public for 72 years from the decennial census for which the information was collected and the fine for wrongful disclosure of confidential census information is imprisonment of up to 5 years or a fine up to $250,000, or both. The statute further restricts the use of individuals’ Census data to the Secretary of Commerce, or bureau and agency employees. Additionally, Census data for individuals may only be (1) used for statistical purposes for which it was supplied; (2) published in a manner so that an individual’s information cannot be identified; and (3) examined by persons who have been sworn as officers or employees of the Department of Commerce, or the Bureau of the Census. The statute even protects from compulsory disclosure, copies of Census information that an individual may have retained for their own personal use. Accordingly, “no department, bureau, agency, officer, or employee of the government, except the Secretary of Commerce in carrying out the statutory duties of the agency, shall require copies of information an individual may have retained.” An individual’s personal retained copies of census forms are immune from the legal process and cannot be admitted as evidence in any action, suit, or other judicial or administrative proceeding without the individual’s consent. SSA maintains that it must have a restrictive disclosure policy to protect individuals’ personal information, even from law enforcement requests, because much of the information the agency collects is especially personal and was initially obtained under the pledge of confidentiality. SSA officials told us that they try to limit disclosure because the agency has no control over the extent to which information will be safeguarded once disclosed. In addition, Social Security has universal coverage and an individual cannot refuse to be assigned an SSN. The Social Security Act requires that SSA compile wage and employment data for each individual. According to an SSA official, individuals cannot receive Social Security benefits without having an SSN. In SSA’s disclosure policy, the agency recognizes that its rules for disclosure are more restrictive than the Privacy Act and cites several reasons why. According to SSA, it seldom has records that are useful to law enforcement agencies and information from tax returns— such as addresses or employment information—cannot be disclosed. Also, SSA contends that its resources should not be diverted for nonprogram purposes. Finally, SSA says that it has a long-standing pledge to the public to maintain the confidentiality of its records. Although SSA’s policy supports sharing limited information with law enforcement under certain conditions, we found evidence that some SSA field office staff are confused about the policy that could result in staff applying it inconsistently. Information provided to law enforcement is generally limited to the verification of a name and SSN, though more information may be provided under certain circumstances. Information obtained through our selected site visits and survey results indicated that SSA field offices might have denied law enforcement requests when they could have provided information and instances in which offices might have provided more information than was permitted under SSA’s policy. Because SSA is not required to and therefore, does not maintain aggregated data showing what requests were made, whether they were approved, and what information was given to fulfill them, we could not determine the extent to which these inconsistencies occurred. Information provided to law enforcement is routinely limited to the verification of a name and SSN, though more information may be provided under certain circumstances. When law enforcement provides SSA with the name and SSN of an indicted or convicted criminal, SSA can conduct a search on the SSN to determine if it is valid and if it matches the name provided by law enforcement. If the name and the SSN do not match, SSA will not usually identify to whom the SSN actually belongs, though they will tell law enforcement that there was no match. Except to identify and locate illegal aliens, SSA generally will not provide any information if law enforcement only provides an SSN and wants to know to whom it is assigned. Under certain circumstances, such as when SSA’s OIG conducts a joint investigation with other law enforcement agencies involving fraud against one of SSA’s programs, the OIG is allowed to provide any information available in SSA’s data system, short of IRS data. SSA tries to ensure that its disclosure policy is consistently implemented in all field offices. SSA takes various steps to ensure the consistent applications of its disclosure policy. For example, SSA has taken steps to educate its staff about its disclosure policy. SSA managers indicated that SSA staff is given disclosure policy training when they start employment and such training is refreshed as needed. Additionally, SSA posts the policy on its internal Web site and on Compact Disc-Read-Only Memory (CD-ROM) for staff reference. Furthermore, a regional “privacy coordinator” is available to answer staff questions about proper disclosure procedures. One SSA regional office provided a chart to all SSA field offices within its “program circle” that briefly summarizes SSA’s policy on access and disclosure without consent. Although this chart had not been updated since July 1996, it was viewed by the manager we talked with as a handy guide for what could be disclosed and also provided references to the location of a more thorough explanation of SSA’s policy in their POMS. In addition, to ensure that disclosure procedures are followed, field office managers told us that they usually handle information requests from law enforcement officials rather than leaving this duty to staff. However, we noted in our survey and during selected site visits, a limited number of instances where SSA’s disclosure policy appears to have been inconsistently applied. In some instances, law enforcement might have received more information than permitted under SSA’s policy. For example, one SSA OIG office we visited provided a law enforcement agency with the name, SSN, date of birth, place of birth, and parents’ name when it seemed that only the name and SSN verification results should have been provided. In another case, an SSA official reported that a state law enforcement officer stopped an individual and telephoned SSA requesting information to verify the SSN, date of birth, place of birth, and sex and was provided the results over the telephone. Although SSA’s policy permits the verification of the name and SSN, such requests are required to be in writing. In other instances, requests that should have been approved might have been turned down. For example, one SSA field office manager told us that nothing could be disclosed to law enforcement if the request for information pertained to an individual suspected of misusing an SSN because the individual had not been indicted or convicted of this crime. However, SSA’s policy would appear to permit disclosure in this situation. Another SSA field office manager told us that office would not disclose any information without consent from the individual for whom the information is being requested. Several possible reasons exist for the inconsistent application of SSA’s disclosure policy. Although our survey showed that most SSA field offices receive requests for information from law enforcement, SSA field officials we spoke with said that they do not receive requests frequently. For example, several officials told us that they received fewer than 10 requests in 2002. Because requests are infrequent, staff must often consult the policy to help them to respond properly. However, many staff members consider the policy confusing. For example, one field office manager said that, “We have doubts as to what information should be provided to U.S. Border Patrol.” Similarly, a manager in another field office said, “SSA disclosure policy should be written in “Plain English” to make it easy to understand by all readers.” A different field office manager commented, “ Disclosure policy is still frequently confusing for much of our staff.” This lack of clarity leads to confusion about what should be disclosed. For example, one manager said, “ is quite confusing. It’s hard to know what you can disclose.” Another manager commented, “I think the policy should be clearer than it is. There’s too much…’if this, then that, but not this and so on.’” In addition, SSA’s responsibilities to both assist law enforcement and protect individuals’ privacy may be exacerbating the confusion and inconsistent application of the agency’s policy. For example, officials at SSA headquarters said that they want to help law enforcement as much as possible, but they believed they must also protect the privacy of the information in their systems of records in order to perform SSA’s primary mission. Some managers in SSA field offices believed that the agency should provide information to law enforcement. However, several field office managers expressed their concerns and reluctance about sharing information with law enforcement agencies. Employees who provide information to an individual inappropriately could be subject to a penalty, including suspension or termination from SSA. Therefore, rather than risk disclosing information inappropriately, some officials might err on the side of caution and not disclose information even when it is permitted under the agency’s disclosure policy. Consistent application of SSA’s disclosure policy cannot be assessed because, according to OMB guidelines, SSA is not required to maintain aggregated data showing what requests were made, whether they were approved, and what information was given to fulfill them. According to SSA, disclosures of individuals’ personal information are kept in individuals’ files. While SSA policy does not stipulate that field offices must keep track of requests made by a law enforcement agency, our survey revealed some information about these requests. For example, we estimate that 82 percent of SSA field offices indicated that they had received requests for personal information from law enforcement agencies. However, 71 percent of SSA’s field offices do not maintain a record of requests made by law enforcement agencies. While the majority of SSA field offices do not maintain records of law enforcement requests, results from our survey showed that 90 percent of the SSA OIG offices maintain these data for disclosures the OIG made. The SSA OIG is required to report to the SSA Commissioner aggregated data annually on disclosures made. According to the OIG, it also keeps a hard copy of requests made by law enforcement agencies for at least 1 year. On the basis of these aggregated data, between fiscal years 2000 and 2002, SSA OIG regional divisions fulfilled almost 30,000 requests from law enforcement agencies for name and SSN verification. Table 2 shows the number of verifications fulfilled by SSA OIG regional divisions and headquarters. However, no numbers are kept on denied law enforcement requests. According to SSA OIG officials, in most cases, law enforcement officers contact OIG offices by telephone before submitting a request so no written record exists if the OIG does not grant the request for information. While some law enforcement officials we spoke with were unfamiliar with SSA’s disclosure policies, most were generally satisfied with the information provided by SSA, though most would like more. Some law enforcement agencies at the state and local level were unfamiliar with the process for obtaining information and expressed frustration with their attempts to obtain information from SSA. Law enforcement officials indicated that the SSN and name verification SSA provided was often helpful to their investigations. However, most wanted SSA to provide additional information such as address, date of birth, and employer or family information. SSA officials have several concerns about expanding SSA’s disclosure policy. Findings from site visits indicated that some law enforcement officers at the state and local level, who generally request information from SSA field offices, are unfamiliar with the process for obtaining information from SSA offices. Because SSA does not have written procedures on its disclosure policy available to law enforcement, some officers find out how to obtain information virtually by trial and error. For example, one officer told us that after having his initial request for information, which was not in writing turned down because he had not followed proper procedures, he obtained a search warrant to obtain the information from SSA. The officer said that no one at SSA explained to him the procedures for obtaining information until he got the search warrant. It is unclear when or if SSA officials let law enforcement officers know what procedures need to be followed to get information. Federal law enforcement agencies, on the other hand, more often understood the Privacy Act’s procedures. Further, most federal law enforcement agencies we spoke with submitted their requests to SSA’s OIG—itself, a federal law enforcement agency. Our survey results indicated that on average in 2002, 46 percent of the requests made to OIG offices came from federal law enforcement agencies while 27 percent of the requests made to SSA field offices on average came from federal law enforcement agencies. While details on SSA’s disclosure policy are available in their POMS and other SSA documents that summarize this information, it is not readily available to law enforcement. A summary of the policy can be found on SSA’s Web site under the caption “Code of Federal Regulations for Social Security.” However, it is not easy to find and provides little detail on what SSA will provide to law enforcement. Further, the Web site does not provide law enforcement with instructions on what they need to do to get the information. Officials from federal, state, and local law enforcement agencies we spoke with were generally satisfied with the information provided by SSA although most would like more information on individuals. Law enforcement officials indicated that, although in most cases SSA only verified a name and SSN, the information received was useful to their investigations and, in some cases, was enough to help convict an individual of a crime. The information received from SSA was considered by law enforcement as the most accurate and up-to-date information available to help in their investigations. Law enforcement was also satisfied with the time in which SSA provided the information. In many cases, law enforcement officers we spoke with indicated that SSA provided the information very quickly. In addition, one SSA OIG official told us that when procedures are followed correctly, the OIG can reply back in 24 hours or less, depending on the information requested. SSA confirmed the timeliness of its responses to law enforcement requests. We estimate that over 90 percent of both SSA field office and OIG respondents reported that it took 24 hours or less to fulfill a request. Our survey results showed that 40 percent of SSA field offices and 21 percent of SSA OIG offices reported that it took less than an hour to fulfill a request from a law enforcement agency. Although most of the law enforcement officials we spoke with were satisfied with information provided by SSA, several believed the information provided was insufficient. Several of these law enforcement officials believed that the name and SSN verification was not enough to help with their investigations. These individuals generally wanted additional information such as the suspect’s wage information, address, employer, and date of birth. In documents provided to us, SSA’s OIG listed the following situations in which the OIG could not provide information to law enforcement. provides the SSN and wants to know to whom it is assigned; wants information to locate witnesses or suspects in high profile cases or wants information on individuals with Alzheimer’s disease who are lost, wants information on next of kin; wants information to locate a fugitive who may be receiving benefits under SSA’s Old-Age and Survivors Insurance program and its Disability Insurance program; wants information to make identifications in child pornography cases; wants information to determine if there has been any activity on a Social Security account in a custodial interference case; and wants information on SSNs related to non-SSA-related fraud cases or counterfeit cases. Some law enforcement officials were unhappy with SSA’s refusal to provide such information, especially because they believed that SSA could easily provide it in a short period of time. For example, one federal officer who investigates nonviolent felony crimes said that SSA seems more concerned about someone committing fraud against one of its programs than about identity theft involving the use of someone’s SSN. He also said that SSA would not provide him with any information on the person whose identity was being stolen. Another officer said that because he could not get necessary information from SSA, he had resorted to other means of gathering the information needed. The officer said that depending on resources available, it could take up to 3 weeks to get someone’s SSN through other sources. Furthermore, the officer said that while he could make the case without the SSA information, the information SSA can provide would be invaluable to helping fully prosecute a case. Many SSA officials in the field and OIG offices agreed that SSA’s disclosure policy is too restrictive. Many believed that, for legitimate investigations, the policy should allow for disclosures to law enforcement officials of whatever information they need. One SSA OIG official said that, as a law enforcement officer, he believed that he should be able to provide information to another law enforcement officer especially when he knew that doing so would help with a case and also because law enforcement officers would be more willing to share information with the OIG. While the SSA Commissioner can invoke ad hoc authority for certain specific cases to disclose information, as was done in response to the disclosure requests related to the September 11 terrorist attacks, SSA officials said that the use of this authority must be limited. SSA headquarters officials believe that expanding its disclosure policy would hamper its ability to ensure that individuals’ personal information is protected and that resources are not diverted from administering Social Security benefit programs. Protecting individuals’ privacy and providing information to law enforcement that could be helpful in solving crimes or ensuring national security are two important yet sometimes seemingly conflicting policy objectives. SSA places a high priority on privacy, and its policy for disclosure to law enforcement agencies goes beyond the requirements of the Privacy Act. SSA’s disclosure policy attempts to preserve its pledge to maintain individuals’ privacy while cooperating with law enforcement and complying with applicable statutes. The end result is a complex policy that is more restrictive than the Privacy Act requirements and those of most federal agencies and more like the policies of IRS and Census, agencies that maintain personal information whose requirements are embodied in statute. In addition, some SSA field office staff and local law enforcement officers find SSA’s policy confusing and sometimes frustrating. As a possible consequence of SSA staff and local law enforcement’s confusion about SSA’s policy, law enforcement may be denied requested information even though SSA’s policy permits its disclosure or law enforcement may receive information that SSA’s policy does not permit. Although we could not assess the overall level of consistency in the application of SSA’s policy, we believe eliminating or reducing confusion about the agency’s policy would help ensure consistent application, and that this can be achieved with relatively modest actions on SSA’s part. To help ensure consistent application of SSA’s disclosure policy for law enforcement in all of its offices and to better assist law enforcement agencies making disclosure requests, we recommend that the Commissioner of SSA do the following: Take steps to eliminate confusion about the agency’s disclosure policy. These steps could include clarifying SSA’s policy; providing additional or refresher training to staff; or delegating decision-making authority for law enforcement requests to specified locations such as the OIG, regional privacy coordinators, or other units that SSA determines would have expertise in this area. Provide law enforcement with information on SSA’s disclosure policy and procedures. For example, this information could be provided on its Web site, in informational pamphlets, or some other written format. We obtained written comments on a draft of this report from the Commissioner of SSA. SSA’s comments are reproduced in appendix III. SSA also provided technical comments, which we incorporated in the report as appropriate. We also provided a draft of this report to the Departments of Commerce, Justice, and Treasury for review and comment. These three agencies reported that they had no comments. SSA stated that our draft report accurately reflected the importance of SSA’s disclosure policy to the agency’s mission but it presents an incomplete description of both the statutory basis for and rationale behind the policy. Further, SSA stated that the draft report does not take into account the statutory basis for the nondisclosure of tax information or the statutory support for the agency’s long-standing confidentiality pledge; therefore, SSA believes that our findings and recommendations are “overbroad.” We are aware of SSA’s obligation under the IRC and took this into consideration during our review of SSA’s disclosure policy; however, we have revised the report, where appropriate, to clarify that our observations about SSA’s disclosure policy relative to the Privacy Act do not extend to SSA’s disclosure of tax information. Disclosure of tax information is controlled by section 6103 of the IRC. We also provided additional reference to the statutory basis and rationale behind SSA’s disclosure policy. SSA also commented that 42 U.S.C. 1306 provided an independent basis for nondisclosures, apart from the Privacy Act. The report recognizes that 42 U.S.C. 1306 provides the basis for SSA’s disclosure policy and we have added a citation for this authority. Section 1306 provides SSA authority to regulate the dissemination of information in its custody as otherwise permitted by federal law. Other federal law includes the Privacy Act. Our report merely points out that SSA has used this authority to regulate in a more restrictive fashion than the Privacy Act requires. SSA stated that it believed that our characterizing the agency’s policy as more restrictive than most federal agencies does SSA a disservice because many federal agencies have little interaction with the public at large. SSA states that the only two agencies of SSA’s size and scope with respect to gathering information from the public to accomplish their missions are IRS and Census, which have more restrictive disclosure policies and statutes that prohibit disclosures. We believe that our comparison and characterization of SSA’s disclosure policy is fair. We compared SSA’s disclosure policy to those of the other 23 agencies covered by the Chief Financial Officers’ Act. We decided also to compare SSA’s policy to those of IRS and Census because they are similar in size and scope of data maintained on individuals. All of the agencies we compared are subject to the Privacy Act. As we reported, SSA’s disclosure policy, as well as those of IRS and the Census Bureau is more restrictive than most federal agencies. SSA agreed in part with our recommendation that the Commissioner take steps to eliminate confusion that may cause inconsistent application of the policy. SSA acknowledged that the policy is complex and could lead to occasional inconsistent application. However, SSA stated that it provides extensive instructions in its POMS for employees and the instructions refer staff to experts in regional and central offices for assistance when needed. SSA also stated that its regional offices have provided employees access to Intranet sites that clarify disclosure policy, but the agency will consider providing additional refresher training as appropriate. In addition, SSA stated it is currently reviewing improvements to the POMS sections that address law enforcement disclosures that the agency believes will address our concerns. SSA expressed concern about the option to consider delegating “decision-making authority for law enforcement requests to specified locations such as the OIG...” SSA stated that the Inspectors General Act of 1978 prohibits agencies from transferring programmatic functions to the Inspector General. We acknowledge in our report that SSA provides guidance on its disclosure policy in its POMS. While we found that employees were aware of this guidance, SSA staff told us that they found SSA’s policy confusing. We believe additional training as well as improvements to the POMS that clarify or simplify SSA’s policy should help ensure consistent application. With respect to SSA’s concern about our recommendation to consider delegating decision-making authority for law enforcement requests to specified locations such as the OIG, regional privacy officers, or other units that SSA determines would have expertise in this area, we did not intend to imply that programmatic functions be transferred to the OIG. Our recommendation was aimed at directing disclosure requests to units that currently perform this function and that appear to have expertise in SSA’s disclosure policy. We simply intended to provide options for SSA to better utilize the resources they already have in place to determine whether law enforcement requests are permitted under SSA’s disclosure policy. The OIG, who currently responds to law enforcement requests as authorized under an MOU with SSA, was only one of the units we suggested as an option. We continue to believe that delegating authority to handle disclosure requests to specified units with expertise in SSA’s disclosure policy would be a plausible option for helping to ensure consistent application of SSA’s policy. This option could reduce or eliminate the need for SSA field office officials who receive sporadic requests from law enforcement to relearn SSA’s disclosure policy. SSA agreed with our recommendation that the Commissioner of SSA should provide law enforcement with information on SSA’s disclosure policy and procedures and SSA believes the agency has done so. However, SSA stated it would review its Web site and other public informational materials to see if additional material or formatting changes would be helpful. We acknowledged in our report that SSA’s policy can be found on the Internet, but noted that it is not easily found and does not clearly explain how law enforcement could obtain information. Although SSA officials told us that they provided limited discussion of the agency’s disclosure policy and procedures at law enforcement conferences, these officials did not indicate the number of conferences attended or whether these conferences involved federal, state, or local law enforcement. Some of the local law enforcement officials we spoke with were unfamiliar with how to obtain information from SSA. Therefore, we continue to believe that information that clearly defines SSA’s disclosure policy and procedures would be helpful to law enforcement. Further, we believe that our findings and recommendations are central to many concerns expressed by both SSA and law enforcement officials and we view the steps that SSA indicated that it plans to consider, or already has in process to ensure consistent application of its disclosure policy and law enforcement’s understanding of how to obtain information from SSA as appropriate steps toward correcting the concerns expressed. We are sending copies of this report to the Commissioner of Social Security; the Secretaries of Commerce, Treasury, and Homeland Security; the U.S. Attorney General; appropriate congressional committees; and other interested parties. We will also make copies of this report available to others on request. 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 questions about this report, please call me on (202) 512-7215. Other GAO contacts and staff acknowledgments are listed in appendix IV. To attain our objectives for this assignment, we reviewed and compared the Social Security Administration’s (SSA) disclosure policy for law enforcement and the Privacy Act. We also compared SSA’s disclosure policy with that of the Internal Revenue Service (IRS) and the Bureau of the Census because SSA officials believe that these agencies are comparable with SSA. Additionally, we compared SSA’s disclosure policy with the general law enforcement disclosure policies for the other 23 Chief Financial Officers’ (CFO) Act agencies. To help determine how SSA’s disclosure policy affects information sharing with law enforcement, we conducted site visits and detailed interviews at SSA field offices and SSA’s Office of the Inspector General (OIG), as well as nearby field offices for federal, state, and local law enforcement agencies in Los Angeles, California; Chicago, Illinois; and Dallas, Texas. We also administered an electronic survey to all SSA OIG field offices and a stratified random sample of SSA field offices. We interviewed SSA officials in both headquarters and field offices and law enforcement officials at the federal, state, and local levels of government about their experiences with sharing individuals’ personal information. At the headquarters level, we interviewed SSA officials responsible for disclosure policy in the Office of General Counsel and the SSA OIG, Baltimore, Maryland. We interviewed law enforcement officials from the Departments of Justice and Treasury, including the Federal Bureau of Investigation (FBI); Bureau of Immigration and Customs Enforcement, formerly Immigration and Naturalization Service (INS) and Customs; Executive Office for United States’ Attorneys; Drug Enforcement Agency; United States Marshals Service; Secret Service; Internal Revenue Service (IRS); and Alcohol, Tobacco and Fire Arms, headquartered in Washington, D.C. During the course of our review, several of these law enforcement agencies merged into the Department of Homeland Security, or were otherwise reorganized. We also interviewed OIG officials for investigation at the Departments of Education and Housing and Urban Development in Washington, D.C. Our site visits included interviews with the Bureau of Immigration and Customs Enforcement, at Dallas, Texas, and law enforcement officials of the Arlington Police Department, Arlington, Virginia. We surveyed SSA offices in order to: (1) estimate the type and volume of law enforcement requests for personal information received by SSA; (2) determine the distribution of these requests across federal, state, and local law enforcement agencies; and (3) gain some understanding of the bases for the granting and denial of these requests. Our working definition of a personal information request is an instance for which a law enforcement agency requested the personal information of one or more individuals between fiscal years 1999 and 2002. For example, if a law enforcement agency requested addresses for two people in a single instance, this would count as one personal information request. We were specifically interested in law enforcement agencies’ requests for personal information, such as social security numbers, names, addresses, birth dates, and income. We designed an Internet-based survey and organized it into multiple sections that included the following areas: receipt of law enforcement requests, response time for fulfilling law enforcement requests, and methods for handling law enforcement requests. We selected a stratified random sample of 335 SSA field offices to participate in the survey. This number was based on an expected response rate as well as a precision level. The sample was stratified by 10 regional locations and taken from a listing of 1,286 field offices that SSA provided. The original list contained 1,336 locations. Fifty locations that are not considered field offices and, therefore, do not receive law enforcement agency requests were excluded from the sampling frame. All 31 SSA Inspector General offices were surveyed since these sites routinely accept law enforcement agencies’ requests for personal information. The survey was mailed electronically to the manager in charge at SSA and Inspector General field offices. Both office types received the same on-line survey. Survey data were collected between February 25, 2003, and March 21, 2003. The overall response rate was 90 percent; with 97 percent of the Inspector General’s field offices and 90 percent of SSA’s field offices responding. Regional response rates in the sample ranged from 86 percent to 95 percent across 10 regional locations. To provide some indication of the reliability of the survey results, standard errors were calculated. The sample was weighted in the analysis to statistically account for the sample design and nonresponse. We are 95 percent certain that the survey estimates provided in this report are within plus or minus 10 percentage points of those estimates that would have been obtained had all SSA offices been captured. To minimize some of the potential biases of other errors that could figure into the survey results, we conducted pretests that included both the SSA Inspector General and SSA field offices. Four pretest sites were SSA field offices located in Wheaton, Maryland; Washington, D.C. (Anacostia); Seattle, Washington; and Chicago, Illinois. One pretest site was an SSA Inspector General office located in Washington, D.C. The pretests were conducted either through teleconferences or face-to-face interviews, and were completed between December 2002 and January 2003. We conducted our audit work between August 2002 and July 2003 in accordance with generally accepted government auditing standards. Rule referencing Privacy Act disclosure General routine use exception of Privacy Act permits disclosure to law enforcementauthority 15 CFR 4.30(a)(5)(vii) 46 FR 63501 (12/31/81) 32 CFR 310 App. C 34 CFR 5b.9(b)(7) 34 CFR 5b. App. B 10 CFR 1008.17(b)(7) 45 CFR 5b.9(b)(7) 45 CFR 5b. App. B 24 CFR 16.11(a)(5) 43 CFR 2.56(b)(5) 67 FR 16816 (4/8/02) 49 CFR 10.35(a)(7) 31 CFR 1.24(a)(7) 38 CFR 1.576(b)(7) 67 FR 8246 (2/22/02) 14 CFR 1212.203(f)(7) 22 CFR 215.10(c)(7) 44 CFR 6.20(g) 67 FR 3193 (1/23/02) 41 CFR 105-64.201(g) 10 CFR 9.80(a)(7) 67 FR 63774 (10/15/02) 5 CFR 293.401(g) & 406 60 FR 63075 (12/8/95) Shelia Drake (202) 512-7172 ([email protected]) Jacqueline Harpp (202) 512-8380 ([email protected]) In addition to those named above, Margaret Armen, Richard Burkard, Malcolm Drewery, Kevin Jackson, Corinna Nicolaou, and David Plocher made key contributions to this report. Barbara Hills, Theresa Mechem, and Mimi Nguyen provided assistance with graphics. | Law enforcement agencies' efforts to investigate the events of September 11th increased awareness that federal agencies collect and maintain personal information on individuals such as name, social security number, and date of birth that could be useful to law enforcement. The Social Security Administration (SSA) is one of the country's primary custodians of personal information. Although the Privacy Act protects much of this information, generally, federal agencies can disclose information to law enforcement. However, determining when the need for disclosure takes priority over an individual's privacy is not clear. GAO was asked to describe (1) SSA's disclosure policy for law enforcement and how it compares with the Privacy Act and those of other federal agencies, (2) SSA's experience sharing information with law enforcement, and (3) law enforcement's experience obtaining information under SSA's policy. Although SSA's disclosure policy permits the sharing of information with law enforcement entities, it is more restrictive than the Privacy Act and the disclosure policies of most federal agencies. While the Privacy Act permits disclosures to law enforcement for any type of crime, SSA only allows disclosures under certain conditions. For example, for serious and violent crimes, SSA will disclose information to law enforcement if the individual whose information is sought has been indicted or convicted of that crime. Even when information is disclosed, it might be limited to results obtained from verifying a social security number and name unless the investigation concerns fraud in SSA or other federal benefit programs, then the agency can work with law enforcement officials as part of a task force or joint investigation. However, the disclosure policies for law enforcement of the Internal Revenue Service (IRS) and the Census Bureau, both of which have requirements prescribed in their statutes, are also more restrictive than the Privacy Act and the policies of most federal agencies. SSA officials consider SSA's disclosure policy integral to carrying out the agency's mission. The various restrictions in SSA's disclosure policy create a complex policy that is confusing and could cause inconsistent application across the agency's more than 1,300 field offices. This could result in uneven treatment of law enforcement requests. Because aggregated data were not available, GAO was unable to assess the extent to which SSA does not consistently apply its policy. However, GAO was told of instances in which SSA officials in some field offices did not give law enforcement information that appeared to be permitted under the policy as well as instances in which they gave them more than what appeared to be allowed. Generally, law enforcement officials find the limited information SSA shares useful to their investigation, but many law enforcement officials, particularly state and local law enforcement officials, are not familiar with the policy or the process for requesting information from SSA. Most law enforcement officials expressed a desire for more information than is currently permitted under SSA's policy, but SSA maintains that providing more information would hurt its ability to carry out its primary mission. |
The DTV transition will require citizens to understand the transition and the actions that some might have to take to maintain television service. For those households with subscription video service on all televisions or with all televisions capable of processing a digital signal, no action is required. However, households with analog televisions that rely solely on over-the-air television signals received through rooftop or indoor antennas must take action to be able to view digital broadcast signals after analog broadcasting ceases. The Digital Television Transition and Public Safety Act of 2005 addresses the responsibilities of two federal agencies—FCC and NTIA—related to the DTV transition. The act directs FCC to require full-power television stations to cease analog broadcasting after February 17, 2009. The act also directed NTIA to establish a $1.5 billion subsidy program through which households can obtain coupons towards the purchase of digital-to-analog converter boxes. In August 2007, NTIA selected International Business Machines Corporation (IBM) as the contractor to provide certain services for the program. On January 1, 2008, NTIA, in conjunction with IBM and in accordance with the act, began accepting applications for up to two $40 coupons per household that can apply toward the purchase of eligible digital-to-analog converter boxes and, in mid-February 2008, began mailing the coupons. Initially, during the first phase of the program any household is eligible to request and receive the coupons, but once $890 million worth of coupons has been redeemed, and issued but not expired, NTIA must certify to Congress that the program’s initial allocation of funds is insufficient to fulfill coupon requests. NTIA will then receive $510 million in additional program funds, but households requesting coupons during this second phase must certify that they do not receive cable, satellite, or any other pay television service. As of June 24, 2008, in response to NTIA’s statement certifying that the initial allocation of funds would be insufficient, all appropriated coupon funds were made available to the program. Consumers can request coupons up to March 31, 2009, and coupons can be redeemed through July 9, 2009. As required by law, all coupons expire 90 days after issuance. As unredeemed coupons expire, the funds obligated for those coupons are returned to the converter box subsidy program. Retailer participation in the converter box subsidy program is voluntary, but participating retailers are required to follow specific program rules to ensure the proper use and processing of converter box coupons. Retailers are obligated to, among other things, establish systems capable of electronically processing coupons for redemption and payment and tracking transactions. Retailers must also train their employees on the purpose and operation of the subsidy program. According to NTIA officials, NTIA initially explored the idea of setting requirements for training content, but decided to allow retailers the flexibility of developing their own training programs and provided retailers with sample training materials. Certification requires retailers to have completed an application form by March 31, 2008, and to attest that they have been engaged in the consumer electronics retail business for at least 1 year. Retailers must also register in the government’s Central Contractor Registration database, have systems or procedures that can be easily audited and that can provide adequate data to minimize fraud and abuse, agree to be audited at any time, and provide data tracking each coupon with a corresponding converter box purchase. NTIA may revoke retailers’ certification if they fail to comply with these regulations or if any of their actions are deemed inconsistent with the subsidy program. Converter boxes can also be purchased by telephone or online and be shipped directly to a customer’s home from participating retailers. At the time of our review, 29 online retailers were participating in the converter box subsidy program. Additionally, 13 telephone retailers were listed as participating in the program, 2 of which are associated with national retailers. Private sector stakeholders, such as broadcasters and cable providers, have undertaken various education efforts to increase public awareness about the DTV transition. The NAB and the National Cable and Telecommunications Association initiated DTV transition consumer education campaigns in late 2007 at an estimated value of $1.4 billion combined. NAB has produced six versions of a public service announcement, including 15-second and 30-second versions in both English and Spanish and close-captioned versions. Private sector stakeholders have also produced DTV transition educational programs for broadcast and distribution, developed Web sites that provide information on the transition, and engaged in various other forms of outreach to raise awareness. Additionally, most of the national retailers participating in the NTIA converter box subsidy program are providing materials to help inform their customers of the DTV transition and the subsidy program. Examples of these materials include informational brochures in English and Spanish, educational videos and in-store displays in English and Spanish, informational content on retailer Web sites, and information provided in retailer advertising in Sunday circulars. FCC and NTIA also have ongoing DTV consumer education efforts, which target populations most likely to be affected by the DTV transition. Specifically, they focused their efforts on 45 areas of the country that have at least 1 of the following population groups: (1) more than 150,000 over- the-air households, (2) more than 20 percent of all households relying on over-the-air broadcasts, or (3) a top 10 city of residence for the largest target demographic groups. The target demographic groups include seniors, low-income, minority and non-English speaking, rural households, and persons with disabilities. According to NTIA, its consumer education efforts will specifically target these 45 areas by leveraging partnerships and earned media spots (such as news stories or opinion editorials) to better reach the targeted populations. FCC indicated that while its outreach efforts focus on the targeted hard-to-reach populations, the only effort specifically targeting the 45 locations has been to place billboards in these communities. According to FCC, contracts exist for billboards in 26 of the 45 markets, and it is working to place billboards in the other 19 markets. Furthermore, FCC and NTIA have developed partnerships with some federal, state, and local organizations that serve the targeted hard-to- reach populations. NTIA has processed and issued coupons to millions of consumers, but a sharp increase in demand might affect NTIA’s ability to respond to coupon requests in a timely manner. NTIA and its contractors have implemented systems (1) to process coupon applications, (2) to produce and distribute coupons to consumers, and (3) for retailers to process coupons and receive reimbursement for the coupons from the government. Millions of consumers have requested converter box coupons and most of the requested coupons have been issued. Through August 2008, households had requested approximately 26 million coupons. NTIA had issued over 94 percent of all coupon requests, for more than 24million coupons. Of those coupons issued, about 9.5 million (39 percent) had been redeemed and 31 percent had expired. After an initial spike at the beginning of the program, coupon requests have remained steady and have averaged over 105,000 requests per day. Coupon redemptions, since coupons were first issued in February 2008, have averaged over 48,000 per day. In our consumer survey, we found that 35 percent of U.S. households are at risk of losing some television service because they have at least one television not connected to a subscription service, such as cable or satellite. However, through August 2008, only 13 percent of U.S. households had requested converter box coupons, and less than 5 percent had redeemed these coupons. As the transition date nears, there is the potential that many affected households that have not taken action might begin requesting coupons. Our consumer survey found that of those at risk of losing some television service and intending to purchase a converter box, most will likely request a coupon. In fact, in households relying solely on over-the-air broadcasts (approximately 15 percent), of those who intend to purchase a converter box, 100 percent of survey respondents said they were likely to request a coupon. Consumers have incurred significant wait times in the processing of their coupon requests, but the processing time from receiving requests to issuing coupons is improving. NTIA requires that 98 percent of all coupon requests be issued within 10 days, and the remainder be issued within 15 days. From February 17 through August 31, 2008, our analysis shows that the average duration between coupon request and issuance was over 16 days. In aggregate, 53 percent of all coupon requests had been issued within 10 days, and 39 percent of all coupon requests had been issued more than 15 days after being requested. From May 1 through August 31, 2008, the average processing time from coupon request to issuance was 9 days. Given the processing time required in issuing coupons, NTIA’s preparedness to handle volatility in coupon demand is unclear. Fluctuation in coupon requests, including the potential for a spike in requests as the transition date approaches, could adversely affect consumers. When NTIA faced a deluge of coupon requests in the early days of the converter box subsidy program, it took weeks to bring down the deficit of coupons issued to coupons requested. According to NTIA, it expects a similar increase in requests around the transition date, and such an increase may cause a delay in issuing coupons. As a result, consumers might incur significant wait time before they receive their coupons and might lose television service during the time they are waiting for the coupons. While NTIA and its contractors have demonstrated the capacity to process and issue large numbers of coupon requests over short periods, they have yet to establish specific plans to manage a potential spike or a sustained increase in demand leading up to the transition. We analyzed data to compare areas of the country that comprise predominantly minority and elderly populations with the rest of the U.S. population and found some differences in the coupon request, redemption, and expiration rates for Hispanic, black, and senior households compared with the rest of the U.S. population. For example, zip codes with a high concentration of Latino or Hispanic households had noticeably higher request rates (28 percent) when compared with non-Latino or non- Hispanic zip codes (12 percent). However, households in predominantly black and Latino or Hispanic zip codes were less likely, compared with households outside these areas, to redeem their coupons once they received them. As shown in table 1, the overall rate of redemption for the converter box subsidy program is 39 percent. Approximately 37 percent of coupons have been redeemed in predominantly Latino or Hispanic areas. In predominantly black areas, 32 percent of coupons have been redeemed. We found that in areas of the country with a high concentration of seniors, fewer coupons were requested (9 percent) compared with areas of the country that did not have a high concentration of seniors (13 percent). Redemption rates for the senior population were lower than the redemption rates in the rest of the country. Regarding coupon expirations, we found that the areas comprising Latino or Hispanic households allowed 27 percent of their coupons to expire, while areas with predominantly senior populations allowed 43 percent of their coupons to expire. To determine participation in the converter box subsidy program in the 45 areas of the country receiving targeted outreach by NTIA and FCC, we analyzed NTIA coupon data (including requests, redemptions, and expirations) in the 45 areas compared to the rest of the country not targeted by NTIA and FCC. We found participation levels were about the same in the targeted areas when compared to the rest of the country. For example, we found in the 45 targeted areas, 12.2 percent of households have requested coupons compared with 12.8 percent for the rest of the country not targeted by NTIA and FCC. According to NTIA, similarities in request, redemption, and expiration rates between the 45 targeted areas and the rest of the country is viewed as a success. As the sellers of the converter boxes, retailers play a crucial role in the converter box subsidy program and are counted on to inform consumers about it. At the time of our review, seven national retailers were certified to participate in the subsidy program. Participating retailers are obligated to, among other things, train employees on the purpose and operation of the subsidy program. All of the retailers with whom we spoke told us they were training employees on the DTV transition and the subsidy program, although the retailers varied in which staff must complete training. As part of our work, we conducted a “mystery shopper” study by visiting 132 randomly selected retail locations in 12 cities across the United States that were listed as participating in the converter box subsidy program. We did not alert retailers that we were visiting their stores or identify ourselves as government employees. During our visits, we engaged the retailers in conversation about the DTV transition and the subsidy program to determine whether the information they were providing to customers was accurate and whether individual stores had coupon-eligible converter boxes available. While not required to do so, some stores we visited had informational material available and others had signs describing the DTV transition and the subsidy program. We also determined whether the information that retailers were providing to customers was accurate and whether individual stores had coupon-eligible converter boxes available. At most retailers (118) we visited, a representative was able to correctly identify that the DTV transition would occur in February 2009. Additionally, nearly all (126) retailers identified a coupon-eligible converter box as an option available to consumers to continue watching television after the transition. Besides coupon eligible converter boxes, representatives identified other options to continue viewing television after the transition, including purchasing a digital television (67) or subscribing to cable or satellite service (77). However, in rare instances, we heard erroneous information from the retailers, including one representative who told us that an option for continuing to watch television after the transition was to obtain a “cable converter box” from a cable company and another representative who recommended buying an “HD tuner.” Since participating retailers are obligated to train their employees on the purpose and operation of the subsidy program, we observed whether the representative was able to explain various aspects about the subsidy program. A vast majority of the representatives were able to explain how to receive or apply for a coupon and the value of the coupon. Although we could obtain information from the majority of the stores that we visited and that were listed as participating in the subsidy program, in a few instances, we were not able to ask questions and observe whether the information provided was accurate. In two instances, there was no retailer at the store location listed as a participating retailer on NTIA’s Web site (https://www.dtv2009.gov/VendorSearch.aspx). In another instance, the location listed was under construction and had not yet opened. In two additional instances, the locations listed were private residences—one was an in-home electronics store, and the other was a satellite television installer working from a house. We asked NTIA how it ensured the accuracy of the list of participating retailers on its Web site, and according to NTIA, ensuring the accuracy of the list is the responsibility of the retailers. NTIA said it provides a list of locations to each retailer prior to placing the list on the Web site, and retailers can update addresses or add new listings as warranted. NTIA estimates that it will see a large increase in the number of coupon requests in the first quarter of 2009 and our analysis confirms that, as the transition nears, a spike in coupon requests is likely. However, NTIA has not developed a plan for managing that potential spike or sustained increase in coupon demand. The time required for processing coupons has improved since consumers incurred significant wait times to receive their coupons at the beginning of the program, but until recently NTIA fell short of its requirement for processing coupons within 10 to 15 days. Given the relatively low participation rates to date and the amount of time it took to process the spike in coupon requests in the early days of the program, NTIA’s ability to handle volatility in coupon demand without a plan is uncertain. Consequently, consumers face potential risks that they might not receive their coupons before the transition and might lose their television service. To help NTIA prepare for a potential increase in demand for converter box coupons and so that consumers are not left waiting a lengthy amount of time for requested coupons, the report we issued September 16, 2008, recommended that the Secretary of Commerce direct the Administrator of the NTIA to develop a plan to manage volatility in coupon requests so that coupons will be processed and mailed within 10-15 days from the day the coupon applications are approved, per NTIA’s stated requirement. In reviewing a draft of the report, the Department of Commerce (which contains NTIA) did not state whether it agreed or disagreed with our recommendation, but did say the Department shares our concern about an increase in coupon demand as the transition nears. Further, its letter stated it is committed to doing all that it can within its statutory authority and existing resources to ensure that all Americans are ready for the DTV transition. In its letter, FCC noted consumer outreach efforts it has taken related to the DTV transition. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions you or other Members of the Committee may have at this time. For further information about this testimony, please contact Mark L. Goldstein at (202) 512-2834. Individuals making key contributions to this testimony included Colin Fallon, Simon Galed, Eric Hudson, Bert Japikse, Aaron Kaminsky, Sally Moino, Michael Pose, and Andrew Stavisky. 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. | The Digital Television Transition and Public Safety Act of 2005 requires all full-power television stations in the United States to cease analog broadcasting after February 17, 2009, known as the digital television (DTV) transition. The National Telecommunications and Information Administration (NTIA) is responsible for implementing a subsidy program to provide households with up to two $40 coupons toward the purchase of converter boxes. In this testimony, which is principally based on a recently issued report, GAO examines (1) what consumer education efforts have been undertaken by private and federal stakeholders and (2) how effective NTIA has been in implementing the converter box subsidy program, and to what extent consumers are participating in the program. To address these issues, GAO analyzed data from NTIA and reviewed legal, agency, and industry documents. Also, GAO interviewed a variety of stakeholders involved with the DTV transition. Private sector and federal stakeholders have undertaken various consumer education efforts to raise awareness about the DTV transition. For example, the National Association of Broadcasters and the National Cable and Telecommunications Association have committed over $1.4 billion to educate consumers about the transition. This funding has supported the development of public service announcements, education programs for broadcast, Web sites, and other activities. The Federal Communications Commission (FCC) and NTIA have consumer education plans that target those populations most likely to be affected by the DTV transition. Specifically, they identified 45 areas of the country as high risk that included areas with at least 1 of the following population groups: (1) more than 150,000 over-the-air households, (2) more than 20 percent of all households relying on over-the-air broadcasts, or (3) a top 10 city of residence for the largest target demographic groups. The target demographic groups include seniors, low-income, minority and non-English speaking, rural households, and persons with disabilities. In addition to targeting these 45 areas of the country, FCC and NTIA developed partnerships with organizations that serve these hard-to-reach populations. NTIA is effectively implementing the converter box subsidy program, but its plans to address the likely increase in coupon demand as the transition nears remain unclear. As of August 31, 2008, NTIA had issued almost 24 million coupons and as of that date approximately 13 percent of U.S. households had requested coupons. As found in GAO's recent consumer survey, up to 35 percent of U.S. households could be affected by the transition because they have at least one television not connected to a subscription service, such as cable or satellite. In U.S. households relying solely on over-the-air broadcasts (approximately 15 percent), of those who intend to purchase a converter box, 100 percent of survey respondents said they were likely to request a coupon. With a spike in demand likely as the transition date nears, NTIA has no specific plans to address an increase in demand; therefore, consumers might incur significant wait time to receive their coupons and might lose television service if their wait time lasts beyond February 17, 2009. In terms of participation in the converter box subsidy program, GAO analyzed coupon data in areas of the country comprising predominantly minority and senior populations and found that households in both predominantly black and Hispanic or Latino areas were less likely to redeem their coupons compared with households outside these areas. Additionally, GAO analyzed participation in the converter box subsidy program in the 45 areas of the country on which NTIA and FCC focused their consumer education efforts and found coupon requests to be roughly the same for zip codes within the 45 targeted areas compared with areas that were not targeted. Retailers play an integral role in the converter box subsidy program by selling the converter boxes and helping to inform their customers about the DTV transition. GAO visited 132 randomly selected retail stores in 12 cities. Store representatives at a majority of the retailers GAO visited were able to correctly state that the DTV transition would occur in February 2009 and how to apply for a converter box coupon. |
Ports are critical gateways for the movement of commerce through the international supply chain. The facilities, vessels, and infrastructure within ports, and the cargo containers passing through them, all have vulnerabilities that terrorists could exploit. Containers carrying goods that are shipped in oceangoing vessels are of particular concern because they can be filled overseas at many different locations and are transported through complex logistics networks before reaching U.S. ports. In addition, transporting a shipping container from its international point of origin to its final destination involves many different participants and many points of transfer. The container, or material in it, can be affected not only by the manufacturer or supplier of the material being shipped, but also by carriers who are responsible for getting the material to a port, as well as by personnel who load containers onto the ships. Others who interact with the cargo or have access to the records of the goods being shipped include exporters who make arrangements for shipping and loading, freight consolidators who package disparate cargo into containers, and forwarders who manage and process the information about what is being loaded onto the ship. Figure 1 illustrates many of the key participants and points of transfer involved from the time that a container is loaded for shipping to its arrival at the destination port and ultimately the importer. Several studies of maritime security conducted by federal, academic, nonprofit, and business organizations have concluded that the movement of oceangoing cargo in containers is vulnerable to some form of terrorist action. Every time responsibility for cargo in containers changes hands along the supply chain there is the potential for a security breach. As a result, vulnerabilities exist that terrorists could take advantage of by, for example, placing a WMD into a container for shipment to the United States or elsewhere. U.S. government officials believe that the likelihood of terrorists smuggling WMD into the United States in cargo containers is relatively low. While there have been no known incidents of containers being used to transport WMD, criminals have exploited containers for other illegal purposes, such as smuggling weapons, people, and illicit substances. In the federal government, CBP is responsible for overseeing oceangoing container security and reducing the vulnerabilities associated with the supply chain. While CBP officials at domestic ports continue efforts to identify and examine imports arriving in containers that may pose a risk for terrorism, CBP’s post-9/11 strategy also involves focusing security efforts beyond U.S. borders to target and examine cargo that may pose a risk for terrorism before it enters U.S. ports. CBP’s strategy is based on a layered approach of related initiatives that attempt to focus limited resources on potentially risky cargo shipped in containers bound for the United States while allowing other containers carrying cargo to proceed without unduly disrupting commerce. CBP’s layered strategy to address container security is complimented by DOE’s efforts to prevent the proliferation of nuclear materials. DOE has led U.S. efforts to detect radioactive material in cargo containers originating at foreign ports. A brief description of CBP and DOE initiatives is provided in table 1. CBP has taken a lead role in working with foreign customs administrations on approaches to standardize supply chain security worldwide. In 2004, CBP, along with 11 other member customs administrations of the WCO, formed the High Level Strategic Group to develop international standards for customs security practices. The group developed the WCO Framework of Standards to Secure and Facilitate Global Trade (commonly referred to as the SAFE Framework), the core concepts of which are based on components in CBP’s CSI and C-TPAT programs. For example, just as in the CSI program, the SAFE Framework states that members should use a risk-management system to target and identify cargo that may pose a risk for terrorism. Similar to C-TPAT, the SAFE Framework incorporates the concept of the Authorized Economic Operator (AEO) and provides technical guidance for customs administrations to develop an AEO program that offers incentives to companies that comply with predetermined minimum supply chain security standards. According to data from the WCO, as of July 2009, about 70 countries, including the 27 members states of the European Union, have implemented or have begun developing AEO programs. In the United States, C-TPAT is the designated AEO program and businesses participating in the program are Authorized Economic Operators. In June 2005, the 173-member customs administrations of the WCO adopted the SAFE Framework. Further, as of June 2009, 157 WCO members, including the United States, had signed letters of intent to implement the SAFE Framework (see fig. 2). While CBP has developed cooperative relationships with foreign governments to enhance the security of U.S.-bound cargo containers before they are placed on a vessel, several factors at foreign ports that impact the security of cargo are beyond CBP’s control. For example, while CBP has developed specific standards for the inspection equipment used to scan cargo containers at domestic ports, CBP has potentially limited assurance that this inspection equipment is capable of detecting and identifying potential WMD at foreign ports. Additionally, while CBP can issue a “do not load” order so that a specific cargo container would not be allowed on a U.S.-bound vessel, it has no authority to compel host governments to participate in security programs or to scan cargo containers that it has determined may pose some risk. For example, when CBP determines that cargo in a particular container at a CSI or SFI port poses some risk, it must request that the host government’s customs service conduct a physical examination of the container since CBP has no authority to do so itself. Similarly, unlike domestic ports, CBP cannot compel private sector entities operating at foreign ports to participate in security initiatives. For example, at one port, for a period of approximately 2 months, the terminal operator ceased to provide CBP information on which containers leaving the port were bound for the United States. As a result, CBP had greater difficulty determining which containers were U.S.- bound and, therefore, should be scanned with imaging equipment. Under these circumstances, CBP would still have the option of preventing the cargo containers from being loaded onto U.S. bound vessels, or flagging the containers for further inspection once they arrive in the United States. There are generally two types of cargo container examinations—scanning equipment and physical searches—used as part of the SFI and CSI programs. There are two basic types of scanning equipment currently used to examine cargo containers that do not require the container to be opened: (1) radiation detection equipment, including radiation portal monitors, and (2) non-intrusive imaging equipment (NII), which may use X-rays or gamma rays. Radiation detection equipment, such as radiation portal monitors (RPM) and radiation isotope identification devices (RIID) detect the presence of radioactive material that may be in a container. RIIDs and certain types of RPMs can identify the type of material emitting the radiation and whether the material poses a threat or is a naturally occurring radioactive material, such as that found in certain ceramic tiles. We observed at domestic and foreign ports that if radioactive emissions were detected from a cargo container, customs officials used a handheld RIID to determine whether the radiation being emitted posed a threat. The second type of equipment, referred to as NII, uses X-rays or gamma rays to scan a container and create images of the container’s contents without opening it. Examples of a RPM, handheld RIID, and NII are depicted in figure 3. CBP officials, along with host government officials, review the images produced with the NII to detect anomalies or shielding that could indicate the presence of WMD. The 100 percent scanning provision of the 9/11 Act requires containers to be scanned with both radiation detection and NII equipment; doing so may identify WMD material that is successfully shielded from detection by RPM. The average time at which a container is processed through the scanning system is 3 to 5 minutes. If the use of the RIID is necessary, the average time increases another 5 to 10 minutes. In response to the SAFE Port Act requirement to implement a pilot program to determine the feasibility of scanning 100 percent of U.S.-bound containers with both RPM and NII equipment, CBP, the State Department, and DOE jointly announced the formation of SFI in December 2006 as an effort to build upon existing container security measures by enhancing the U.S. government’s ability to ensure containers are scanned for nuclear and radiological material overseas and better assess the risk of inbound containers. In essence, SFI builds upon the CSI and Megaports programs by combining each program’s scanning technology equipment. To accomplish this, CBP met with terminal operators to identify foreign ports for inclusion in the pilot program to scan 100 percent of U.S.-bound containers. Based on discussions with terminal operators and subsequent discussions with host government officials, three ports were selected to implement the SAFE Port Act pilot program: Qasim, Pakistan; Puerto Cortes, Honduras; and Southampton, United Kingdom. According to CBP officials, while initiating the SFI program at these ports satisfied the SAFE Port Act requirement to implement the program at three ports, CBP also selected the ports of Hong Kong; Busan, South Korea; and Salalah, Oman to more fully demonstrate the capability of the integrated scanning system at larger, more complex ports with higher percentages of transshipment container cargo—cargo containers from one port that are taken off a vessel at another port to be placed on another vessel bound for the United States. For example, port officials told us that at the Ports of Hong Kong, Singapore, and Salalah, transshipment cargo constitutes about 50 percent, 87 percent, and 99 percent of U.S.-bound containers, respectively. CBP officials also stated that with the passage of the 9/11 Act, the focus of the SFI program shifted from determining the feasibility of 100 percent scanning to becoming the first phase of CBP’s phased-in approach to implementing the 100 percent scanning requirement. While CBP and DOE have made progress in integrating new technologies as part of the SFI program, progress in implementing and expanding the scanning of U.S.-bound cargo containers at participating ports has been limited. Some ports that initially agreed to participate in the SFI program did so for a limited time, or on a limited basis. Logistical, technological, and other problems at participating ports, as well as concerns regarding the safety of the NII equipment used for the SFI program, have prevented any of the participating ports from achieving 100 percent scanning, as ultimately required by the 9/11 Act, leaving the feasibility and efficacy of 100 percent scanning largely unproven. Moreover, attempts to implement 100 percent scanning at these foreign ports have confirmed challenges previously identified by CBP and GAO. CBP has been successful in integrating outputs from the various types of scanning equipment used to scan cargo containers at foreign ports participating in the SFI program. CBP and DOE were able to integrate the outputs from RPM and NII equipment with the Automated Targeting System (ATS) so a CBP officer can review all the data and information associated with a container on a single screen. CBP officers can also access scanning information remotely and do not need to be present at an SFI port to analyze the RPM results and NII images of containers. For example, at the National Targeting Center-Cargo (NTCC), we observed that outputs from RPM and NII equipment located at Port Qasim in Pakistan were accessible to CBP officers located in the United States. These officers could observe the scanning equipment outputs in combination with information from ATS to make determinations as to whether to request that the cargo container being scanned be more closely examined by host government personnel. CBP officers could also observe scans of cargo containers being conducted at the port in real time via cameras that can be operated remotely from the United States. Examples of scanning outputs and equipment used at an SFI port are shown in figure 4. This integration of technologies has also allowed CBP to transfer targeting efforts involving the Port of Southampton, United Kingdom, to domestic ports. Currently, CBP officers in Newark, Baltimore, Savannah, and other domestic port locations have been trained to incorporate the scanned data from the Port of Southampton into their targeting methodology and coordinate secondary examinations with the SFI team at the port. Similarly, at Puerto Cortes in Honduras, we observed that scan data from imaging and RPM equipment were available for review by CBP and Honduran Customs officials almost instantly after the images were generated by the inspection equipment. Honduran Customs officials stated that, in addition to CBP’s interest in detecting WMD, having this information available greatly assisted in their efforts to detect and identify contraband, such as narcotics, being shipped in cargo containers through the port. Ports participating in the SFI program have also been able to serve as a testing ground for new inspection technologies. For example, at the Port of Salalah in Oman, we observed the testing of mobile platforms to carry large format radiation detection equipment, known as Mobile Radiation Detection Identification Systems (MRDIS) that Pacific Northwest National Laboratory, in conjunction with DOE, has developed (see fig. 4). The MRDIS units were built to more effectively capture transshipment cargo (cargo taken off of one vessel to be placed on a U.S.-bound vessel) as it is being unloaded from a vessel without creating congestion. However, the effectiveness of the MRDIS, and its impact on the flow of containers, has not been fully tested because the SFI program is not yet operational at the Port of Oman. CBP reached arrangements with foreign governments to implement the SFI program at seven foreign ports. As of June 2009, SFI operations have been conducted at five ports, but in some cases for a limited time or on a limited basis. In addition, one port has withdrawn and another has yet to begin scanning operations. As shown in table 2, the SFI program has operated continuously since October 2007 at Port Qasim, Pakistan; Puerto Cortes, Honduras; and the Port of Southampton, United Kingdom and the majority of U.S.-bound cargo containers from these ports have been scanned. Host government officials at Puerto Cortes have expressed a desire to continue with the SFI program and have allocated personnel to support program operations. At the Port of Southampton, the host government has allowed SFI operations to continue, but withdrew customs personnel originally allocated to support program operations after the 6-month arrangement it had with CBP to participate in the SFI program came to an end. Customs officials in the United Kingdom stated that the costs associated with assigning personnel to assist CBP with SFI program operations were preventing these officials from fulfilling their domestic responsibilities, such as detecting drugs. As a result, the SFI program at the Port of Southampton is now solely supported by CBP officers working directly with the terminal operator. Among ports that participated in the SFI program, the largest port in terms of container volume shipped to the United States, the Port of Hong Kong, participated in the program for about 16 months—scanning containers at one of the nine terminals on a voluntary basis. The program ended as scheduled in April 2009 and was not renewed at the mutual decision of the Hong Kong government and DHS. Discussing their decision not to extend SFI, Hong Kong port officials observed that CBP-provided statistics showed no trade facilitation benefits for containers passing through SFI scanning and noted CBP’s efforts to focus container scanning at those ports where there was greater risk. They also stated that they saw no benefit to participation in the program in terms of their own port security and expressed concerns that equipment and infrastructure costs, as well as costs to port efficiency, would make full implementation of the SFI program at all of its terminals unfeasible. Similarly, according to CBP officials, the government of South Korea agreed to allow the Port of Busan to participate in the SFI program for 6 months at one terminal at the port. CBP officials stated that the South Korean government has agreed to extend the program for another 6 months, but no permanent arrangement has been reached. In addition, two ports that had initially agreed to participate in the program have since withdrawn or postponed their operations. DHS and the government of Singapore mutually agreed to suspend the SFI program at the Port of Singapore before the program began scanning operations, noting concerns about the potential adverse impact on port efficiencies due to the large volume and complexity of operations at the port. In this instance, both DHS and Singapore agreed that the benefits of initiating the program with existing technology were outweighed by the potential impact the operations could have on trade flow through the port. Also, according to CBP officials, Port Salalah in Oman had initially agreed to participate in the SFI program for 6 months. However, according to U.S.- government officials, implementation of the SFI program at Port Salalah has been postponed due to port management concerns regarding the scope, time line, and criteria for success for the program. The officials said that U.S. government personnel are working with Omani Customs to find a path forward, but no firm plans or time line yet exist for initiating SFI operations at the Port of Salalah. Government officials we spoke with in Asia and Europe generally stated that they viewed the implementation and operation of the SFI program to be a pilot—with a definite start and end date—to determine the feasibility and usefulness of further implementation. As such, they stated that they do not view the SFI program as being permanent. While CBP has been able to scan a majority of U.S.-bound cargo containers from three comparatively low-volume ports participating in the SFI program, at two higher volume ports—which constitute approximately 17 percent of containers arriving in the United States—it has been able to scan no more than 5 percent of U.S.-bound cargo containers, on average, most of which were scanned after they were determined to be high risk by CBP officers as part of the CSI program, according to CBP officials. As shown in table 3, at Port Qasim, Puerto Cortes, and the Port of Southampton—which together account for 2.4 percent of U.S.-bound cargo containers with little or no transshipment cargo containers—CBP has been able to scan, on average, 54 percent to 86 percent of the U.S.- bound cargo containers. In contrast, at the Ports of Hong Kong and Busan—which together account for 16.6 percent of U.S.-bound cargo containers and have larger percentages of transshipped cargo—CBP has been able to scan, on average, 3 to 5 percent of the U.S.-bound cargo containers. CBP officials stated that while scanning percentages are low, operations at these ports have been limited to a single terminal or to an area within a single terminal. They added that these larger ports would only agree to participate in the program if SFI operations were limited in scope, and the agency has worked with host governments to expand operations. However, as of yet, CBP has not made arrangements to expand operations at these ports. To date, attempts to implement 100 percent scanning at foreign ports have confirmed challenges, some of which we and CBP have previously reported. For example, challenges associated with the perceived safety of the NII scanning equipment, scanning cargo containers arriving at a port by rail, or scanning transshipment cargo containers, among other things, have prevented CBP from achieving 100 percent scanning at participating ports. Specifically: Safety Concerns: Port officials at five of the seven ports that initially agreed to participate in the SFI program expressed concerns regarding the safety of drivers and port operators who work near NII scanning equipment, which generates radiation in order to generate an image of a container’s contents. CBP provided information or conducted town hall meetings on the safety of the equipment to officials and workers at participating ports. However, to address these concerns and allow for the equipment to be used, port officials required that passage through the NII equipment at the ports of Hong Kong and Busan be voluntary, thus limiting efforts to test the feasibility of using the NII equipment, as well as the SFI program’s overall effectiveness. Logistics: Logistics issues and costs associated with moving cargo containers to scanning areas at the Port of Southampton resulted in the cessation of scans of cargo containers arriving by rail. Initially, CBP and the terminal operator agreed that the terminal operator would absorb the costs to place cargo containers arriving by rail onto trucks so that those containers could pass through SFI scanning systems, at a cost of approximately $60 per container, but this arrangement ended in April 2008. Transshipment: Transshipment cargo containers—those taken off of one vessel to be placed on a U.S.-bound vessel—present significant challenges to scanning because of logistical difficulties associated with transporting these containers. Transshipment cargo containers are only available for scanning for a comparatively short period of time and may be difficult to access. For example, UK customs officials stated that it was not possible to route transshipment containers that arrived by sea through the SFI equipment. As a consequence, the scanning of transshipment containers was delayed at the Port of Southampton, United Kingdom. Further, in April 2009, the Acting Commissioner of CBP testified that there is no proven technology that can scan these containers. Equipment Breakdowns: Scanning and communication equipment breakdowns have occurred at several ports. For example, two of the three seaports fully participating in the SFI pilot program experienced weather-related mechanical breakdowns of scanning equipment. Specifically, at the Port of Southampton, a piece of radiation scanning equipment failed because of rainy conditions and had to be replaced, resulting in 2 weeks of diminished scanning capabilities. Additionally, Port Qasim in Pakistan has experienced difficulties with scanning equipment because of the extreme heat. Because of the range of climates at the more than 600 foreign ports that ship cargo to the United States, these types of technological challenges could be experienced elsewhere. Additionally, while cargo containers may be scanned at SFI ports, the images obtained through these scans may not always be sufficiently clear to determine the potential presence of WMD. For example, we observed that some trucks carrying cargo containers at the Port of Hong Kong passed through imaging equipment too quickly to obtain a clear enough image to verify the contents of the container. This problem is not isolated to scans that were taken at the Port of Hong Kong, as CBP officials at the Port of Long Beach also showed us images taken at other SFI ports that were not clear enough to read because the driver drove through the NII equipment too quickly. The CBP officials also showed us an image in which one-third of the container was not captured. The CBP officials further explained that if the container was determined to pose a risk for terrorism by CBP through targeting activities, it would need to be examined again with imaging equipment upon arrival in the United States because of the inadequacy of the image scan at the SFI port. CBP plans to implement SFI at select ports it believes would help mitigate the greatest risk. CBP officials maintain that this strategy, combined with a plan to gather additional cargo container information, would enhance container security. However, DHS and CBP acknowledge that not all foreign ports will be in a position to scan 100 percent of U.S.-bound cargo containers by July 2012. While CBP has expressed concerns about the feasibility of scanning 100 percent of U.S.-bound cargo containers, it has not conducted a feasibility analysis of expanding 100 percent scanning to nonpilot ports, as required by the SAFE Port Act. Also, because of concerns about the feasibility of the scanning requirement, DHS plans to issue a blanket extension for all ports pursuant to the extension provisions of the 9/11 Act. In April 2009, the Secretary of DHS endorsed the strategic trade corridor strategy as the path forward for implementing the SFI program. The Secretary was presented with three options ranging from implementing SFI at 70 ports that account for shipping over 90 percent of U.S.-bound containers to seeking repeal of the 100 percent scanning requirement. The strategic trade corridor strategy selected by the Secretary focuses cargo container scanning efforts on a limited number of ports where CBP has determined SFI will help mitigate the greatest risk of potential WMD from entering the United States. CBP determined which ports were strategic by working with DOE to develop a joint analysis of the potential risk of cargo containers from all foreign seaports that ship directly and indirectly to the United States. This analysis focused on issues such as known smuggling routes, volume of container traffic, proximity to special nuclear material sources, and known presence of terrorist cells operating in the country and according to CBP, had been validated by the intelligence community. DHS has endorsed the strategic trade corridor concept, recognizing DHS will fund the majority of costs if not all, but has not yet finalized decisions regarding the specific number of strategic ports to be included or developed a time frame for implementation. However, it is unclear whether DHS intends for the strategic trade corridor strategy to be implemented in lieu of the 100 percent scanning requirement or whether it is an initial step towards full implementation at all ports. While DHS is still developing specific details, CBP is working on expanding the SFI program to strategic ports. CBP officials stated that the strategic trade corridor strategy, combined with additional information on U.S.-bound cargo containers it receives through the recently implemented “10+2” program, will enhance container security. The Importer Security Filing and Additional Carrier Requirements (also known as “10+2”) is a regulation issued pursuant to the SAFE Port Act that requires importers and vessel carriers to provide additional data elements for U.S.-bound cargo containers to CBP. As of January 2009, the importer is responsible for supplying CBP with 10 shipping data elements, including shippers’ addresses and cargo destinations, 24 hours prior to lading. Additionally, the vessel carrier is required to provide 2 data elements, the vessel stow plan, which is used to identify the location of containers onboard a vessel, and container status messages, which are used to track the movement of containers through the supply chain. The data supplements the advanced cargo data CBP receives through the 24-hour rule. CBP believes the additional data provided through 10+2 will enhance security by improving the targeting process used to identify containers that may pose a risk for terrorism. While security may be enhanced through the strategic trade corridor strategy and 10+2 program, these efforts will not achieve the 9/11 Act requirement to scan 100 percent of U.S.-bound cargo containers by July 2012. Furthermore, DHS and CBP do not have a plan on how they will work with foreign ports to ensure that 100 percent of U.S.-bound cargo containers are scanned by July 2012 to meet the requirements set forth in the 9/11 Act. According to DHS and CBP officials, they have not developed a plan to achieve 100 percent scanning by July 2012 because challenges encountered thus far in implementing the SFI program indicate that implementation of 100 percent scanning worldwide by the 2012 deadline will be difficult to achieve. While both DHS and CBP question the security value and feasibility of achieving 100 percent scanning by 2012, they have yet to conduct an analysis of the feasibility of scanning all U.S.-bound containers to demonstrate whether the 9/11 Act requirement can be met. The SAFE Port Act requires an analysis of the feasibility of expanding scanning to other foreign ports participating in the Container Security Initiative. Furthermore, standard practices for project management call for the feasibility of programs to be considered early on, which can be done through evaluating alternatives. CBP should determine whether 100 percent scanning is feasible and if so what is the best way to achieve it, or if it is not feasible, what are the other alternatives. The analysis should consider the scope, objectives, time line, and resources needed to achieve 100 percent scanning or the alternatives, if appropriate. Such an analysis would ensure that a complete assessment of feasibility is conducted and the results are communicated so that DHS and Congress could determine key challenges, ways they can be addressed, and potential courses of action for enhancing container security. DHS acknowledged it will not be able to meet the July 2012 deadline for full-scale implementation of the 9/11 Act’s scanning requirement and will need to grant extensions to those foreign ports unable to meet the scanning deadline in order to maintain the flow of trade and comply with the 9/11 Act prohibition on allowing containers that have not been scanned to enter the United States. To grant an extension, the 9/11Act requires DHS to certify that at least two of six conditions exist. The act also requires DHS to report to Congress 60 days before any extension takes effect on the container traffic affected by the extension, the evidence supporting the extension, and the measures DHS is taking to ensure that scanning can be implemented as early as possible at the ports covered by the extension. DHS has the authority to grant extensions to any number of foreign ports for which at least two of the six conditions exist, which could mean granting a blanket extension to all ports where such conditions exist or on a port-by-port basis. Granting extensions on a port-by-port basis could, according to international organizations we spoke with, potentially give a competitive advantage to some ports and lead to trade disruptions. They cited a possible example where one port that invests in scanning equipment would be able to meet the scanning requirement, but another port that does not invest in scanning equipment could not meet the requirement. If the latter port gets an extension, it could have a temporary competitive advantage over the former port because its costs of operations do not include the costs of investments in scanning equipment. Similarly, officials from Industrial Economics, Inc.—a firm contracted by CBP to assess the economic impact of 100 percent scanning—told us that if multiple ports in an area are accessible and one port does not have a scanning system but is temporarily exempt from the 100 percent requirement, it may get a competitive advantage in the region because the private industry would likely choose to ship containers from ports where it believes it will experience the fewest delays. During the course of our review, DHS was developing its approach for granting extensions. CBP program officials told us that DHS had been considering granting extensions on port-by-port basis, which they stated would be a lengthy process. According to these officials, site surveys would be needed to assess each of the ports that ship containers directly to the United States to determine the feasibility of establishing a scanning system. CBP program officials estimated each site survey would take approximately 2 weeks to complete, plus the additional time needed to draft the report to Congress justifying the extension. In September 2009, DHS officials told us that the department had determined that port-by-port site visits were not required to invoke a condition to claim an extension. According to DHS officials, at least some of the conditions listed in the 9/11 Act as a basis for granting extensions can be applied systemically to all ports rather than on a port-by-port basis. At a minimum, DHS believes the last two conditions—use of the equipment to scan all U.S.-bound containers would significantly impact trade capacity and the flow of cargo, and scanning equipment does not adequately provide automatic notification of an anomaly in a container—could apply to all foreign ports and, thus, may warrant the use of a blanket extension. DHS officials acknowledged that their current position could change if there are significant changes (e.g., advancements in scanning technology) before the July 2012 deadline. CBP and DOE have identified costs borne by the U.S. government for implementing SFI—about $100 million to date—but CBP has not developed a cost estimate for future U.S. program costs, or conducted a cost-benefit analysis that compares the costs of the scanning requirement with other alternatives, such as the strategic trade corridor strategy. In addition, CBP has not estimated costs to stakeholders, such as foreign governments and terminal operators; or nonfinancial costs, such as trade disruptions, which could be greater than operating and maintaining the scanning systems. The SAFE Port Act requires CBP to report on U.S. government costs of deploying integrated scanning equipment at foreign ports as part of the SFI program, and CBP and DOE have identified costs borne by the United States of about $100 million for implementing and operating the SFI program at six participating ports through June 2009. While CBP and DOE have purchased cargo container scanning equipment thus far for foreign ports that have participated in the SFI program, it is unclear who will pay for additional resources—including increased staff, equipment, and infrastructure to continue the program—or who will be responsible for operating and maintaining the equipment used for the 100 percent scanning statutory requirement. While DHS has the authority to provide nonintrusive inspection and radiation detection equipment to foreign ports, neither the SAFE Port Act nor the 9/11 Act specifies who is to pay for the scanning of U.S.-bound cargo containers at foreign ports. While the Congressional Budget Office assumed that foreign ports would pay for installing and maintaining the systems at their ports as a means for continuing trade with the United States, the U.S. government has borne a majority of the SFI program costs to date. DHS officials stated that they anticipate that the U.S. government will continue to pay the majority of the costs for implementing the SFI program. Table 4 provides additional details on SFI costs by port and department. Government officials from Europe, Asia, and the Middle East that we spoke with have stated that the SFI program and 100 percent scanning are primarily for the security benefit of the United States and, as such, they are unwilling to pay for this security initiative. However, while the U.S. government has paid a majority of the costs for implementing the SFI program at participating ports, foreign governments have incurred personnel, infrastructure, and other costs to implement the program. For example, the Customs service in the United Kingdom dedicated 12 officers to work on the SFI program for 6 months, and the Hong Kong Customs service dedicated a team of 18 officers to work on the SFI program and pulled officers from other teams, as necessary, to conduct more thorough examinations of container cargo using equipment to determine whether radiation being emitted from a container is dangerous. Terminal operators have also incurred costs for implementing the SFI program. For example, one terminal operator at the Port of Hong Kong set up a control room and an information technology infrastructure to support the SFI program at a cost of approximately $260,000. Additionally, the terminal operator at the Port of Southampton paid approximately $60 per container to move cargo containers arriving by rail to the scanning facility. Further, European customs officials stated that to fully implement the 100 percent scanning requirement at large ports with complex operations would likely result in the need for a fundamental redesign of several ports, entailing substantial costs to terminal users. In January 2009, a consortium of four international terminal operators formed the Terminal Operator Security Study Group to examine the 100 percent scanning requirement and outline potential collaborative approaches to expand the SFI program in partnership with the U.S. government. The group proposed, among other things, that the U.S. government reach out to host governments to determine the extent to which terminal operators could be involved in running portions of the SFI program in foreign countries. According to an official from the group, if foreign governments do not want to conduct scans of U.S.-bound containers, terminal operators would purchase, operate, and maintain the SFI equipment for scanning cargo containers entering the port on trucks. Transshipment cargo containers would not be included in the program, however, since no technical solution currently exists for scanning these containers. The terminal operators would also be responsible for adjudicating scanning equipment alarms with local government officials. Terminal operators would recoup their costs for purchasing, operating, and maintaining the equipment by charging a fee to users of the terminals. An official from the consortium stated that at ports where the volume of cargo containers is such that fees would not cover the cost of purchasing, operating, and maintaining the scanning equipment, the U.S. government would be responsible for covering the cost of SFI program operations. In addition, the U.S. government would be responsible for purchasing and operating equipment to conduct secondary inspections—more involved inspections of cargo containers determined to pose a risk—as well as be responsible for providing personnel to review scanned images of the cargo containers. According to the terminal operators’ representative, this model would lessen the financial burden on the U.S. government and allow for scanning equipment to be deployed to the terminals where these terminal operators are located in about 18 months. DHS has indicated that it is open to the possibility of working with terminal operators to receive scan data; however, CBP officials stated that they do not approve of the plan proposed by the Terminal Operator Security Study Group because terminal operators have an incentive to move cargo containers through their facilities quickly and there is little assurance that they will adequately review scanning equipment outputs. The officials also stated that this proposal is not consistent with CBP’s strategic trade corridor strategy—which aims to focus scanning efforts at those ports where doing so would provide the greatest benefit—because it includes ports outside the proposed corridor. While CBP has reported costs of the SFI program to date, it has not developed a comprehensive life-cycle cost estimate for full implementation of 100 percent scanning of U.S.-bound cargo containers. CBP reported in December 2008 that establishing a single scanning lane costs approximately $9.7 million for infrastructure, construction, and equipment and roughly 2,100 scanning lanes would be needed at foreign ports to fully implement the program at all ports that ship cargo to the United States. CBP acknowledged that this $20 billion estimate of program implementation costs was rough and based on the costs of implementing SFI thus far. CBP officials also developed rough implementation cost estimates for potential deployment options for SFI consistent with its secure trade corridor strategy. These estimates range from $500 million (with most SFI costs paid by the trade community or foreign governments) to $1.6 billion (with SFI costs at 70 ports paid by DHS). However, the officials acknowledged that none of these estimates were developed in a manner consistent with the DHS cost estimation guidelines. CBP officials stated that they have not developed a more comprehensive cost estimate because DHS has not specified a clear path forward for the program. CBP officials added, though, that it is difficult to estimate the cost for implementing SFI at a single port without conducting a thorough assessment of the port and obtaining the input of local government officials. Given the agency’s limited resources they stated that they cannot conduct these types of detailed assessments at all ports that ship cargo containers to the United States. These officials added that any estimates of costs for full implementation would be of limited use given the complexity and variability of operations at individual ports. Additionally, officials from Industrial Economics, Inc. concurred that cost estimating would be difficult because of the different factors beyond CBP’s control that would need to be considered, including whether the port was publicly or privately held, whether port operations are centralized or spread out over a large geographic area, the willingness of the host government to accommodate the scanning program, and whether and to what extent the port had communications and information technology infrastructure available. While U.S. program cost of implementing the SFI program at individual ports will likely vary based on factors beyond CBP’s control, commonalities exist among ports that allow for assumptions to be made regarding costs for program implementation. Examples of such commonalities include the need for inspection equipment at foreign ports participating in the program—which has generally been paid for by the U.S. government—and the need for personnel to review images produced by imaging equipment. DHS’s guidance on cost estimation states that program managers need to keep analysis of costs moving forward, even in periods of ambiguous, partial, or even missing information, and that this is best managed by making assumptions to resolve uncertainty and allow analysis to continue. Further, as we have previously reported, having a realistic cost estimate makes for effective resource allocation and increases the probability of a program’s success. Additionally, a cost estimate can serve as a basis for establishing and defending budgets and driving affordability analyses. A cost estimate also helps agencies determine whether a program is feasible and the resources needed to support it. While we recognize that CBP may have difficulty developing cost estimates because of the uncertainties and assumptions that will have to be made, having a more comprehensive cost estimate could provide CBP with valid cost information to share with Congress to allow it to make sound and prudent decisions regarding SFI program implementation, and could better position CBP and Congress to evaluate alternatives for SFI program configuration and implementation. In addition to not identifying estimates of U.S. program costs, CBP has not developed estimates of economic costs to other stakeholders such as costs that would result from lowering terminal efficiency. For example, Industrial Economics, Inc. concluded that 100 percent scanning will likely reduce port and terminal efficiency as well as increase costs. Officials from Industrial Economics, Inc. stated that these increased costs would be due to costs to accommodate scanning—additional land, labor, and equipment—as well as to delays caused by 100 percent scanning. These officials also stated that while the precise degree to which costs may increase is uncertain, some costs could be substantial, particularly for larger volume ports or ports with significant amounts of transshipment cargo containers as operations at these ports would need to be more significantly altered to accommodate 100 percent scanning. Further, officials from the World Bank and the WCO with whom we spoke stated that implementing 100 percent scanning would likely create additional shipping costs in certain parts of the world because of changes in trade routes that would be necessary. In particular, the officials stated that U.S.- bound cargo containers may have to be funneled through hub ports that could accommodate and operate the scanning equipment before the containers are then shipped to the United States. They noted that these additional logistics costs would have a disproportionately negative economic impact on developing economies and countries with comparatively small ports. Furthermore, CBP has not performed a cost-benefit analysis to assess alternatives to achieving 100 percent scanning, such as its proposed strategic trade corridor strategy and, as appropriate, other alternatives for enhancing container security. According to CBP officials, they have not performed this type of analysis because it is not legally required since the 100 percent scanning requirement was mandated and not initiated by CBP. Although we recognize the 100 percent scanning requirement was mandated by law, development of a systematic cost-benefit analysis, which incorporates more comprehensive cost estimates, could better inform CBP and Congress of the relative costs and benefits of different alternatives for achieving 100 percent scanning of U.S.-bound goods from all ports that ship directly to the United States as well as alternatives for a path forward to enhance container security. This type of analysis could, in turn, help DHS and Congress identify whether and to what extent other viable options exist to implementing the 100 percent scanning requirement. The Office of Management and Budget states that any cost-benefit analysis that serves as a basis for evaluating government programs or policies should identify and measure overall societal costs and benefits, not solely costs and benefits to the federal government. For example, as discussed later in this report, the implementation of the 100 percent scanning requirement could potentially create challenges to the continued operation of CBP’s existing layered security programs and hinder their implementation by reducing the willingness of foreign countries and industry to participate. If participation is diminished, this could constitute a cost (e.g., reduced implementation and effectiveness of other programs), which would be one element to consider in any cost-benefit analysis. As noted earlier, other costs beyond the federal government are those incurred by foreign governments, the shipping industry, and consumers. Further, OMB cites as a key element of cost-benefit analysis the consideration of alternative means of achieving program objectives by examining different program methods of provision and different degrees of government involvement. Additionally, DHS’s Cost-Benefit Analysis Guidebook states that cost-benefit analysis is designed to identify the superior financial solution amongst competing alternatives, and that it is a proven management tool to support planning and managing costs and risks. By utilizing cost-benefit analysis to compare the current implementation requirements of SFI with other alternatives, which might include its proposed strategic trade corridor strategy or CBP’s existing layered strategy, CBP could more fully ensure that it is efficiently allocating and prioritizing its limited resources, as well as those of individual ports, in a way that maximizes the effectiveness of its cargo container security efforts. This analysis could also provide information on other potential alternatives for achieving the 100 percent scanning requirement. The 100 percent scanning requirement is a departure from several existing container security programs, which creates potential challenges for CBP as it may hinder the programs’ continued operation. The scanning requirement differs from existing container security programs because it requires CBP to scan all containers before performing analysis to determine their potential risk level. Our work also indicates that the 100 percent scanning requirement could hinder implementation of some existing container security programs by reducing the willingness of some foreign governments to work with CBP to identify and examine containers at their ports, and the willingness of some private companies to partner with CBP to improve their internal security programs. Some foreign governments have expressed concern that the 100 percent scanning requirement is being put forth solely by the United States, in contrast to existing container security programs that were negotiated multilaterally or bilaterally with willing partners. In addition, some foreign governments have expressed the possibility of imposing a reciprocal scanning requirement on the United States. Our work has indicated that the 100 percent scanning requirement is a departure from existing container security programs built on bilateral partnerships with foreign governments and the private sector. This situation may hinder continued operation of these existing programs, depending on how the SFI program is expanded and how the 100 percent scanning requirement is implemented. The 100 percent scanning requirement is a departure from CBP’s use of ATS and the 24-hour rule to first determine risk before scanning containers. Through ATS and the 24-hour rule, CBP gathers advanced information on U.S.-bound cargo containers provided by carriers and importers and makes determinations as to the risk level associated with the cargo containers before using imaging equipment to examine containers’ contents. At CSI ports, when it is determined through advanced information that a U.S.-bound container poses some potential risk of WMD, CBP typically requests that the host government scan the container with radiation detection and NII equipment. If these scans indicate the potential presence of WMD, CBP requests that the host government conduct physical examination of the container, which could involve physically removing the container’s contents for inspection. If the host government declines a request to give the container additional scrutiny, CBP can issue a “do not load” order for the container—so it is refused entry onto the vessel—or flag the container for further inspection upon arrival at a domestic port. In contrast, under the 100 percent scanning concept required by the 9/11 Act, all U.S.-bound containers are required to be scanned with radiation detection and NII equipment before any analysis of risk. At the three operational SFI pilot ports we visited, we observed CBP officers reviewing scanning equipment outputs without the use of ATS targeting information. Information is generally not available in ATS at the time of scanning since containers are being scanned upon arrival at the foreign port before the container’s information is received by CBP under the 24-hour rule. Thus, depending on how SFI and the 100 percent scanning requirement are implemented, CBP may face challenges in integrating the scans into its existing ATS program to identify high risk containers. Depending on how it is implemented, SFI or other efforts to achieve 100 percent scanning may potentially replace the CSI program at foreign ports. CBP built the CSI program on bilateral partnerships with foreign governments that allow CBP to place its staff at 58 foreign ports to work with host country customs officials to identify and scan high-risk cargo before it is shipped to the United States. CSI allows for a reciprocal arrangement in which foreign governments may also place staff at U.S. ports. According to CBP, the strength of the CSI program is the information gained from host government officials that CBP would otherwise not have access to. We have also previously reported instances where the CSI program establishes trust and collegiality, leading to increased information sharing, as well as more effective targeting and examination of high-risk cargo containers. For example, CBP officers noted instances in which host government customs officials would notify them of cargo containers they thought could be high risk so that CBP could take a closer look at the information available in ATS related to the containers. However, our work at three of the four operational pilot ports indicates that implementing the SFI program at foreign ports could result in reduced collaboration between CBP and host government customs officials or the end of the CSI program. For example, at the Port of Southampton, United Kingdom, customs officials previously worked side by side to share information with CBP officers as part of the CSI program and during the initial transition from CSI to SFI. However, United Kingdom customs officials no longer participate in SFI, as they withdrew their support for the program after the first 6 months of operation, which was the agreed-upon time frame for their participation. CBP officials stationed at the Port of Southampton stated that it has been more difficult to have containers they determine may pose some risk physically inspected by their British counterparts because of this reduced interaction caused by the transition from CSI to SFI. This reduced interaction and challenges in having U.S.-bound containers physically inspected may be because the port’s participation in the program was viewed by the British government as a pilot and would not necessarily occur when implementing SFI or another form of 100 percent scanning on a more permanent basis. If the SFI program is implemented in such a way that CBP officials are stationed overseas, and if host nation officials work with them to jointly research shipping data on containers, then this type of information sharing could continue under the 100 percent scanning requirement. However, foreign government officials from Singapore and South Korea we spoke with said that given the many security programs the United States has adopted, the United States should choose whether it wants to continue CSI or implement SFI, but that it cannot do both. The willingness of private companies to voluntarily enhance their security practices to join C-TPAT may be diminished if a key benefit of membership is reduced by 100 percent scanning. Through the C-TPAT program, members of the trade community (e.g., importers, vessel carriers, and others) voluntarily enter into an agreement with CBP to improve their security programs in return for various trade-related benefits, such as reduced scrutiny of their cargo containers upon arrival in the United States. As part of this voluntary agreement, C-TPAT participants share sensitive, corporate security plans with CBP and provide CBP with access to their facilities. This level of information sharing would otherwise not be available to CBP for companies that are not C-TPAT members. According to a survey conducted in 2007 by the University of Virginia, the most important motivation for businesses joining C-TPAT was reducing the time and cost of getting cargo released by CBP. However, this benefit could be diminished by the 100 percent scanning requirement since, under such a requirement all cargo is to be scanned regardless of membership in C-TPAT. While the six C-TPAT members we interviewed generally expressed their intent to remain in the program, three stated that there would be less incentive to maintain membership, or for other companies to join C-TPAT if the 100 percent scanning requirement is fully implemented. If companies drop out of or do not join C-TPAT, it could be difficult for CBP to determine what, if any, security initiatives have been undertaken by the companies, unless other programs or methods were developed to do so. CBP officials have stated that they do not believe 100 percent scanning will affect membership in the C-TPAT program, and that the C-TPAT program has some benefits that will continue to exist regardless of container scanning. For example, they note that C-TPAT members that transfer cargo by truck to the United States from Canada or Mexico will not be affected by the requirement. However, given that other companies who use maritime shipping may lose an incentive for joining C-TPAT or maintaining membership, the potential security benefit associated with the program could be diminished to the extent that C-TPAT membership does not grow or decreases. AEO programs—programs similar to C-TPAT run by other countries—may be hindered by 100 percent scanning because it may be viewed as a deterrent to private companies to join AEO programs. A core concept of the SAFE Framework is a system of mutual recognition, whereby two nations’ AEO programs are mutually recognized by the respective customs administrations. Mutual recognition of AEO programs occurs when customs administrations agree to recognize one another’s AEO programs and security features and to provide comparable benefits to members of the respective programs. As of June 2009, CBP had signed mutual recognition arrangements with New Zealand, Canada, Jordan, and Japan. Furthermore, the United States is discussing entering into a nonbinding arrangement with the European Union. According to data from the WCO, as of July 2009, about 70 countries had implemented or had begun developing their own national AEO programs. Foreign government, World Bank, and WCO officials we interviewed expressed concern that implementation of SFI or other efforts to achieve 100 percent scanning may hinder mutual recognition efforts because, under such a program, if all U.S.-bound cargo is to be scanned, there is little incentive for companies to join such partnerships, or governments to develop these partnership programs, without one of the common benefits—reduced scrutiny of cargo containers. CBP has traditionally worked with its international partners to enhance the security of the supply chain. The International Outreach and Coordination Strategy, one of eight supporting plans for The National Strategy for Maritime Security, establishes the goal of developing a coordinated policy for U.S. government maritime security activities with foreign governments, international and regional organizations, and the private sector. According to the strategy, the United States must forge cooperative partnerships and alliances with other nations, as well as with public and private stakeholders in the international community, to achieve effective maritime security. As CBP has recognized in security matters, the United States is not self-contained, either in its problems or in its solutions. The growing interdependence of countries requires policy makers to recognize the need to work in partnerships across international boundaries to achieve vital national goals. As such, CBP has taken a lead role in working with the WCO and foreign customs administrations to establish and implement international customs security standards that benefit all participants. For example, CBP was a principal author of the multilateral SAFE Framework of Standards—based on CBP’s existing layered security strategy—unanimously adopted by the members of the WCO, and CBP officials have stated that its existing layered strategy constitutes U.S. efforts to implement the elements of the SAFE Framework. However, the 100 percent scanning requirement is a departure from these existing efforts to enhance cargo container security through partnerships. Existing CBP efforts to enhance cargo container security, such as collaboration with the WCO to develop the SAFE Framework, have been based on a bilateral and multilateral approach meant to enhance security for all participants. Foreign government and international organization officials with whom we met have also expressed concern that the 100 percent scanning requirement is inconsistent with multilaterally adopted customs security standards, may negatively impact trade, and could diminish container security. For example, customs and other officials from foreign governments, including the European Union, South Korea, Hong Kong, and Singapore, as well as international organizations, including the WCO, have expressed their belief that scanning 100 percent of U.S-bound containers is inconsistent with the risk-based strategy agreed to in the SAFE Framework because it treats all containers as having the same risk level before any analysis of the risks they may pose is performed. Foreign government and international organization officials we spoke with added that, given limited resources, 100 percent scanning could provide a lower level of security, as the focused attention on specific high-risk shipments is replaced by a blanket approach applying to all containers. Because the100 percent scanning requirement was initiated solely by the United States, government officials in Europe, Asia, and the Middle East with whom we met have stated that the requirement is perceived as being for the sole security benefit of the United States. The European Union has formally stated that the 100 percent scanning requirement was imposed unilaterally and implies extraterritoriality. In June 2008, WCO members unanimously endorsed a resolution expressing concern that implementation of 100 percent scanning would be detrimental to world trade and could result in unreasonable delays, port congestion, and international trading difficulties. Similarly, in May 2008, the European Parliament issued a resolution calling for the United States to repeal the 100 percent scanning requirement. Further, in June 2009, the governments of five developing countries submitted a position paper to the WCO opposing 100 percent scanning due to the disproportionate impact it will have on their developing economies. According to State Department officials with whom we met, the 100 percent scanning requirement has negatively impacted interactions with other countries on various issues. State Department officials overseas have acknowledged that the 100 percent scanning requirement has already impacted or could have impact on future U.S. interests. For example, according to these officials, they have experienced difficulty making progress on U.S. concerns related to agricultural exports and registration of chemical products because they cannot discuss these issues without foreign governments raising their concerns with 100 percent scanning. Related to these international concerns, some foreign government officials with whom we spoke are considering requiring a reciprocal scanning requirement for cargo coming from the United States. Specifically, government officials in Honduras and the European Commission—which represents the 27 member states of the European Union—have indicated that they may consider a reciprocal container scanning requirement in which containers from the United States that are being shipped to these countries would have to be scanned. Although the European Commission indicated it does not think scanning will enhance security, it added it would be difficult not to ask for reciprocity if their member states are initiating cargo scanning programs for the security benefit of the United States. According to CBP and domestic port terminal officials, and our observations at the domestic ports we visited, scanning outbound containers to meet a reciprocity requirement would be challenging and require additional resources. CBP officials noted that the difficulty negotiating and obtaining space from terminal operators to install scanning equipment for inbound containers would also apply to installing equipment needed to scan outbound containers should reciprocity be required. CBP officials also noted additional staff would be needed to review container images and adjudicate identified anomalies. Further, it would be difficult to identify the destination of outbound cargo containers, according to CBP and port officials. Therefore, even if a few countries asked that goods bound from their countries be examined, it might be necessary for CBP to examine all outbound goods. CBP officials stated scanning outbound containers could come at the expense of their ability to secure the United States from inbound containers that might contain WMD. Given the situation, foreign governments and the trade industry are awaiting information on how CBP plans to implement 100 percent scanning. Although the scanning requirement is a U.S. law, officials from the European Commission stated that they are aware that DHS and CBP have stated that implementing the law by July 2012 is likely not feasible, which has created a sense of uncertainty regarding future implementation of the scanning requirement. DHS acknowledged this concern, noting that without a clear path forward for SFI, partnerships with foreign governments would be put at risk. Although the Secretary of DHS consequently endorsed the strategic trade corridor strategy as the path forward, the department has not specified whether implementation of 100 percent scanning at strategic corridors would constitute the entirety of CBP’s efforts to implement 100 percent scanning or was an initial phase of a broader effort to implement 100 percent scanning. Foreign terminal operators have also expressed concerns regarding the lack of a clear path forward for the SFI program. During our discussion with the Federation of European Private Port Operators, the terminal operator representatives noted the July 2012 deadline was quickly approaching, but there was a lack of information as to how the requirement would be achieved. The terminal operator representatives added that decisions needed to be made regarding who is required to pay for and operate the scanning equipment, among other things. The officials noted that they did not want to purchase scanning equipment without standards being established because they did not want to bear this expense and later learn that the scanning equipment they purchased is not considered sufficient. Challenges in scanning U.S.-bound cargo containers at participating ports to date, as well as challenges in getting additional ports to participate, have raised questions about the feasibility of scanning 100 percent of U.S.- bound cargo containers. While CBP officials have stated that they may not be able to overcome these challenges based on the experiences of the SFI program to date, the agency has not conducted an analysis of the feasibility of implementing 100 percent scanning. Such an analysis could assist both the agency and Congress by providing important information regarding CBP’s ability to fully implement the 100 percent scanning requirement and determining a path forward to enhance container security. As CBP attempts to expand the SFI program, it will need more comprehensive cost estimates. Such cost estimates could provide CBP with valid cost information to share with Congress to allow it to make sound and prudent decisions regarding SFI program implementation. CBP and Congress could also benefit from a cost-benefit analysis (that includes costs to international maritime stakeholders) to evaluate the relative costs and benefits of various alternatives for implementing the 100 percent scanning requirement, to include its strategic trade corridor strategy. Such an analysis could help to guide CBP and Congress in attempting to implement the 100 percent scanning requirement, as well as assessing other alternatives short of 100 percent scanning for enhancing container security. DHS and CBP officials have acknowledged that they will likely not be able to achieve 100 percent scanning of U.S.-bound cargo containers by 2012, and expressed concerns over the feasibility, costs, and security benefits associated with the requirement. However, without conducting feasibility and cost-benefit analyses, DHS and CBP will not be able to fully evaluate various alternatives for implementing the 100 percent scanning requirement or other alternatives that enhance cargo container security in a cost-efficient manner. To better position DHS to implement the cargo container scanning provisions of the SAFE Port and 9/11 Acts, improve container security programs, and better inform Congress, we recommend that the Secretary of Homeland Security, working with the CBP Commissioner, in consultation with the Secretaries of Energy and State as appropriate, take the following actions: conduct a feasibility analysis of implementing the 100 percent scanning requirement of all U.S.-bound cargo containers in light of the challenges faced at the initial SFI ports; develop more comprehensive cost estimates for achieving the requirement to scan 100 percent of U.S.-bound cargo containers, consistent with best practices for implementing, operating, and maintaining U.S. government programs; conduct a cost-benefit analysis (to include all significant economic costs) of different alternatives for achieving the 100 percent scanning requirement, to include as appropriate, other alternatives short of achieving 100 percent scanning, to enhance container security, and to address the impact that 100 percent scanning may have on other container security programs; and provide the results of the feasibility analysis, U.S. program cost estimates, and cost-benefit analysis outlined above to Congress, along with various cost-effective alternatives to implementing the 100 percent scanning requirement, as appropriate. We provided a copy of this report to the State Department, the Department of Energy (DOE), and the Department of Homeland Security (DHS) for comment. The State Department did not provide written comments to include in the report, but provided technical comments that have been incorporated into the report, where appropriate. DOE provided comments on October 19, 2009, that cite the need to distinguish between challenges regarding the use of radiation versus nonintrusive image scanning equipment. We have modified the report to include this distinction. DOE made no comments on the recommendations since they were directed towards DHS and CBP. A copy of DOE’s comments are reprinted in appendix II. DHS and CBP provided technical comments that have been incorporated into the report, where appropriate. DHS also provided written comments—that incorporated comments from CBP—on October 19, 2009. A copy of DHS’s comments are reprinted in appendix III. In commenting on a draft of this report, DHS noted that it concurred with three recommendations and concurred in part with one. It also commented that CBP views these recommendations as having been largely achieved through its publication of previous reports to Congress. We disagree with this for the reasons discussed in the paragraphs below. Regarding our first recommendation to conduct a feasibility analysis for implementing the 100 percent scanning requirement for all U.S.-bound cargo containers, DHS noted that CBP concurred with our recommendation. The agency further stated that the recommendation had been achieved in its June 2008 report to Congress, “Report to Congress on Integrated Scanning Systems Pilot (Security and Accountability for Every Port Act of 2006), Section 231,” where it discussed challenges to implementing the requirement at participating seaports. Specifically, CBP noted that its report concluded that the 100 percent scanning of U.S.- bound maritime container is possible on a limited scale in locations with an array of accommodating and supportive conditions, such as host nation cooperation, low cargo volumes, low transshipment rates and technology and infrastructure costs covered primarily by the U.S. government. It also noted that its report determined that these conditions would not likely exist at all ports shipping to the United States. During our review, we analyzed the June 2008 report and while it discusses these and other challenges that exist at participating ports, we do not believe that it constitutes a feasibility analysis of the 100 percent scanning requirement, as required by the SAFE Port Act. In particular, as we have noted in this report, the SAFE Port Act requires certain specific elements to be included when evaluating the feasibility of expanding 100 percent scanning to other ports, including an analysis of the infrastructure requirements to implement 100 percent scanning and an analysis of requirements, including costs, to install and maintain an integrated scanning system at ports participating in the Container Security Initiative. These analyses were not included in the 2008 report and CBP has acknowledged that they have not been conducted. Regarding our second recommendation to develop more comprehensive cost estimates for achieving the requirement to scan 100 percent of U.S.- bound cargo containers, consistent with best practices, DHS commented that CBP concurred with the recommendation and had already achieved it through issuance of its June 2008 report to Congress. In particular, CBP stated that it believes that it is incumbent upon the agency to develop realistic cost estimates for the overall operational elements associated with implementing legislative mandates, such as the 100 percent scanning requirement. However, as acknowledged by CBP, the cost estimates generated by CBP to date were not developed in a manner that is consistent with cost estimation guidelines. For example, estimates developed by CBP to date cover implementation of the program as it currently exists, but do not examine costs over the life of the program, which is a best practice identified by GAO and accepted by DHS. As a result, total costs for the life of the SFI program could be significantly greater than CBP’s current cost estimates. As we have noted in this report, having more comprehensive cost estimates could provide CBP with valid cost information to share with Congress to allow it to make sound and prudent decisions regarding SFI program design and implementation. Regarding our third recommendation to conduct a cost-benefit analysis (to include all significant economic costs) of different alternatives for achieving the 100 percent scanning requirement, to include as appropriate, other alternatives short of achieving 100 percent scanning, DHS commented that CBP concurred in part with our recommendation. In its response CBP acknowledged that a cost-benefit analysis would be helpful to frame the discussion and better inform Congress; however, it noted that such a comprehensive study would place significant burdens on its limited resources. Given the potential costs to the United States, foreign governments and trade industry of implementing 100 percent scanning, we believe a cost-benefit analysis is warranted to evaluate other alternatives. CBP added that neither the SAFE Port Act nor the 9/11 Act require CBP to conduct such an analysis and suggests that the Congressional Budget Office is the most appropriate entity to conduct such an analysis. While CBO does prepare cost estimates for pending legislation, as we mention in this report, CBO has evaluated the 9/11 Act and assumed that foreign governments would pay for implementing scanning systems at their port, which has generally not been the case thus far. We believe that, given its daily interaction with foreign customs services and its direct knowledge of port operations, CBP is in a better position to conduct any cost-benefit analysis and bring results to Congress for consideration. Further, as noted in this report, DHS cites cost-benefit analysis as a proven management tool to support planning and manage costs. We believe that the challenges faced in implementing the program thus far, and the potential costs of implementing and operating the 100 percent scanning requirement— particularly non-financial costs such as reductions in the effectiveness of existing container security programs like CSI and C-TPAT—emphasize the importance of such an analysis. This analysis could assist both the agency and Congress in understanding CBP’s ability to implement the 100 percent scanning requirement as well provide Congress more complete understanding of the scanning requirement’s advantages and disadvantages. Congress could then use this information in its role providing oversight over the program or in considering alternatives for enhancing cargo container security in a cost-efficient manner. Finally, regarding our fourth recommendation to provide results of the feasibility analysis, U.S. program costs estimates, and cost-benefit analysis to Congress, along with various cost-effective alternatives to implementing the 100 percent scanning requirement, DHS commented that CBP concurred with our recommendation, had already achieved it, and outlined its intent to continue to explore the full range of costs associated with scanning efforts at foreign ports. Specifically, CBP stated that in June 2008, it submitted to Congress the findings of the feasibility study required under Section 231 of the SAFE Port Act. It added that this report and the number of subsequent reports provided at 6-month intervals detailed CBP and DOE expenditures under SFI, including the cost of scanning equipment, as well as personnel expenditures for each potential scanning site. While these reports have contained useful information, as mentioned previously, our view is that they do not contain comprehensive analyses of the feasibility or costs of the 100 percent scanning requirement or evaluate potential program alternatives to determine which may be most feasible and cost effective. We believe that feasibility and cost-benefit analyses are critical to help ensure that DHS and CBP have the necessary information to assist the Congress as it considers options for implementing the 100 percent scanning requirement or other alternatives to enhancing cargo container security. This information should include more definitive information on the feasibility of the scanning requirement—to include the factors discussed in the SAFE Port Act such as infrastructure requirements, impact on processing times, ability to meet forecasted container volume, costs, and personnel needs—across different alternative implementation scenarios. As arranged by your offices we plan no further distribution until 30 days after the date of this report. At that time, we will send copies of this report to the Secretaries of Energy, Homeland Security, and State; and other interested parties. In addition, the report will be available on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-9610 or at [email protected]. Key contributors to this report are listed in appendix IV. This report will also be available at no charge on the GAO Web site at http://www.gao.gov. Our objectives were to identify (1) what progress U.S. Customs and Border Protection (CBP) has made toward implementing 100 percent scanning at the initial ports participating in the Secure Freight Initiative (SFI) program; (2) what planning efforts CBP has made to address the requirement to scan all U.S.-bound cargo containers by July 2012; (3) the estimated costs to date of the SFI program, and to what extent future implementation costs have been estimated; and (4) what challenges, if any, CBP faces in integrating the 100 percent scanning requirement with its existing container security programs. To determine the progress CBP has made in implementing the requirement to scan 100 percent scanning of U.S.-bound cargo containers, we conducted site visits at six of the seven foreign ports that have been involved in SFI, and spoke with foreign government, U.S. customs, and terminal operator officials during these visits. While the results of these site visits and interviews cannot be generalized across all ports that ship cargo containers to the United States, by observing operations at six of the seven ports involved with the SFI program to date—Busan, South Korea; Puerto Cortes, Honduras; Salalah, Oman; Southampton, United Kingdom; Hong Kong; and Singapore—we gained a critical understanding of the factors and challenges associated with implementing SFI at these ports. Due to ongoing security concerns, we did not conduct a site visit at Port Qasim, Pakistan. Instead, we observed CBP’s remote operation of the SFI program in Qasim from the National Targeting Center-Cargo in Virginia. To assess CBP’s progress implementing SFI at individual ports, we compared data on the number of containers scanned to the total volume of U.S.- bound containers at each SFI port, to the requirement set forth in the 9/11 Act. CBP was unable to provide container scan data based on container arrival mode (e.g., truck, rail, and transshipment) due to system limitations. After reviewing possible limitations of all the data sources, we determined that the data provided were sufficiently reliable for the purposes for which we have used them in this report. criteria, and a methodology and time line for granting extensions to ports that cannot meet the 2012 deadline for scanning U.S.-bound containers. We compared CBP’s planning efforts to best practices in A Guide to the Project Management Body of Knowledge. To examine the estimated costs of implementing 100 percent scanning of U.S.-bound cargo containers at foreign ports, we interviewed CBP and Department of Energy (DOE) officials, international organization personnel, foreign government officials, and terminal operators to obtain their views as to the types of costs associated with implementing 100 percent scanning. To determine the costs to the U.S. government of implementing, operating, and maintaining the SFI program, we reviewed documentation on CBP’s and DOE’s expenditures to date. After reviewing possible limitations of the cost data provided, we determined that the data provided were sufficiently reliable for the purposes for which we have used them in this report. We compared CBP’s methods for developing cost estimates to further implement 100 percent scanning with the best practices outlined in the GAO Cost Estimating and Assessment Guide. We examined DHS’s Cost-Benefit Analysis Guidebook, as well as Office of Management and Budget (OMB) Circular No. A-11 Preparation, Submission, and Execution of the Budget, OMB Circular No. A-94 Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs, and OMB Circular A-4 Regulatory Analysis to identify the need for, and elements of a comprehensive cost-benefit analysis. To understand the costs to entities other than the U.S. government, we spoke with terminal operators and officials from foreign governments participating in the SFI program. We also interviewed the World Customs Organization (WCO) and the World Bank to further understand other costs that may result from 100 percent scanning, such as changes in trade flow and impacts on developing economies. We reviewed economic studies conducted on the issue, including those conducted by the University of Le Havre and Industrial Economics, Inc. Furthermore, we discussed with officials from foreign governments, representatives of the European Commission, and terminal operators, including the Federation of European Private Port Operators, their willingness to share the costs of container scanning with the United States at SFI ports. over the last several years (see list of Related GAO Products at the end of this report). To determine the impact of scanning on the use of the Automated Targeting System in conjunction with the 24-hour rule, we interviewed CBP officers working at the ports of Baltimore, Maryland and Los Angeles/Long Beach, California—domestic ports with access to SFI data—to discuss how the availability of SFI data affects adjudication of high-risk containers. We observed how domestic CBP officers access and review SFI scan data. To determine the impact of scanning on the Container Security Initiative (CSI), we interviewed foreign government officials at ports participating in both CSI and SFI on how the programs operate simultaneously, and the resulting impact on collaboration between U.S. and host government customs officials. We interviewed CBP’s Customs-Trade Partnership Against Terrorism (C-TPAT) office and six members of C-TPAT to determine what impact 100 percent scanning may have on the benefits of membership and how this will affect participation in C-TPAT. Our interviews with these trade industry representatives were based on a nonprobability sample, so while their views are not generalizable to the entire maritime trade industry, they provide knowledgeable insight into the relationship between the SFI and C-TPAT programs. We spoke with DOE officials responsible for implementing the Megaports Initiative to understand the impact of 100 percent scanning on efforts to expand the Megaports Initiative. We interviewed representatives of the WCO, International Maritime Organization, International Chamber of Shipping, European Commission, and foreign government officials to obtain their views on the consistency of 100 percent scanning with multilateral and bilateral efforts to promote supply chain security. With these entities, we discussed how scanning may affect core principles of the SAFE Framework, including the establishment of customs-to-business partnerships and mutual recognition between countries of these partnerships. While we obtained the perspective of all foreign governments participating in the SFI program that intend to implement the SAFE Framework, with the exception of Pakistan, these views are not necessarily representative of all foreign governments intending to implement the SAFE Framework. We interviewed State Department officials in Washington D.C.; at the U.S. Mission to the European Union; and the U.S. Embassy in Seoul, to discuss how the 100 percent requirement affects the ability of the State Department to defend U.S. interests. With foreign government officials and representatives of the European Commission we discussed their intensions to require a reciprocal 100 percent container scanning requirement of the United States. We also discussed the impact of reciprocity on domestic ports with CBP officials at the Ports of Baltimore, Houston, and Los Angeles/Long Beach; as well as the Houston and Miami Port Authorities. We conducted this performance audit from August 2008 through October 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. In addition to the contact named above, Christopher Conrad, Assistant Director, and Robert Rivas, Analyst-in-Charge, managed this review. Lisa Canini and Julia Coulter made significant contributions to the work. Chuck Bausell, Richard Hung, Stanley J. Kostyla, and Timothy M. Persons assisted with design, methodology, and data analysis. Frances Cook, Geoffrey Hamilton, and Jan Montgomery provided legal support. Katherine Davis and Sally Williamson provided assistance in report preparation. Avrum Ashery and Pille Anvelt helped develop the report’s graphics. Combating Nuclear Smuggling: DHS Improved Testing of Advanced Radiation Detection Portal Monitors, but Preliminary Results Show Limits of New Technology. GAO-09-655. Washington, D.C.: May 21, 2009. Combating Nuclear Smuggling: DHS’s Phase 3 Test Report on Advanced Portal Monitors Does Not Fully Disclose the Limitations of the Test Results. GAO-08-979. Washington, D.C.: September 20, 2008. Supply Chain Security: CBP Works with International Entities to Promote Global Customs Security Standards and Initiatives, but Challenges Remain. GAO-08-538. Washington, D.C.: August 15, 2008 Supply Chain Security: Challenges to Scanning 100 Percent of U.S.- Bound Cargo Containers. GAO-08-533T. Washington, D.C.: June 12, 2008. Supply Chain Security: Examinations of High-Risk Cargo at Foreign Seaports Have Increased, but Improved Data Collection and Performance Measures Are Needed. GAO-08-187. Washington, D.C.: January 25, 2008. Maritime Security: The SAFE Port Act: Status and Implementation One Year Later. GAO-08-126T. Washington, D.C.: October 30, 2007. Maritime Security: One Year Later: A Progress Report on the SAFE Port Act. GAO-08-171T. Washington, D.C.: October 16, 2007. Maritime Security: The SAFE Port Act and Efforts to Secure Our Nation’s Seaports. GAO-08-86T. Washington, D.C.: October 4, 2007. Combating Nuclear Smuggling: Additional Actions Needed to Ensure Adequate Testing of Next Generation Radiation Detection Equipment. GAO-07-1247T. Washington, D.C.: September 18, 2007. Maritime Security: Observations on Selected Aspects of the SAFE Port Act. GAO-07-754T. Washington, D.C.: April 26, 2007. Customs Revenue: Customs and Border Protection Needs to Improve Workforce Planning and Accountability. GAO-07-529. Washington, D.C.: April 12, 2007. Cargo Container Inspections: Preliminary Observations on the Status of Efforts to Improve the Automated Targeting System. GAO-06-591T. Washington, D.C.: March 30, 2006. Combating Nuclear Smuggling: Efforts to Deploy Radiation Detection Equipment in the United States and in Other Countries. GAO-05-840T. Washington, D.C.: June 21, 2005. Container Security: A Flexible Staffing Model and Minimum Equipment Requirements Would Improve Overseas Targeting and Inspection Efforts. GAO-05-557. Washington, D.C.: April 26, 2005. Homeland Security: Key Cargo Security Programs Can Be Improved. GAO-05-466T. Washington, D.C.: May 26, 2005. Maritime Security: Enhancements Made, but Implementation and Sustainability Remain Key Challenges. GAO-05-448T. Washington, D.C.: May 17, 2005. | U.S. Customs and Border Protection (CBP), within the Department of Homeland Security (DHS) is responsible for, among other things, the security of cargo containers shipped to the United States. In fiscal year 2008, 611 ports shipped a total of 9.8 million containers to the country. The 9/11 Commission Act (9/11 Act) requires 100 percent of U.S.-bound cargo containers to be scanned by 2012, and CBP has begun implementing the Secure Freight Initiative (SFI) to address this requirement. GAO was requested to assess CBP's efforts to implement the 9/11 Act requirement. This report addresses (1) CBP's progress at the initial ports participating in the SFI program, (2) CBP plans to implement SFI, (3) the extent to which CBP has estimated costs and conducted a cost-benefit analysis of 100 percent scanning, and (4) any challenges to integrating 100 percent scanning with existing container security programs. GAO reviewed operating procedures for the SFI ports and analyzed cost data. GAO also visited six of the seven original SFI ports and spoke to officials from CBP, foreign governments, and private industry. CBP has made limited progress in scanning containers at the initial ports participating in the SFI program, leaving the feasibility of 100 percent scanning largely unproven. Since the inception of the SFI program, CBP has not been able to achieve 100 percent scanning at any participating port. While CBP has been able to scan a majority of the U.S.-bound cargo containers at the comparatively low volume ports, it has not achieved sustained scanning rates above five percent at the comparatively larger ports. CBP has not developed a plan to scan 100 percent of U.S.-bound container cargo by 2012, but has a strategy to expand SFI to select ports where it will mitigate the greatest risk of WMD entering the United States. CBP does not have a plan to scan cargo containers at all ports because, according to agency officials, challenges encountered thus far in implementing SFI indicate that doing so worldwide will be difficult to achieve. However, CBP has not conducted a feasibility analysis of expanding 100 percent scanning, as required by the SAFE Port Act. Such an analysis could help both CBP and Congress determine the most effective way forward to enhance container security. Recognizing that its strategy will not meet the requirement to scan all U.S.-bound cargo containers, DHS plans to issue a blanket extension to all foreign ports by July 2012 to be in compliance with the 9/11 Act. DHS officials acknowledged that they may revisit this plan before the July 2012 deadline. CBP, while identifying some SFI program costs, has not developed a complete estimate of U.S. program costs because of the lack of a decision on a clear path forward. CBP has also not conducted any cost-benefit analysis which would include other economic costs, including those borne outside the United States, which would be important to any analysis of alternatives to achieving the 100 percent scanning requirement. While uncertainties exist, a cost estimate and cost-benefit analysis, consistent with federal best practices, could assist DHS and CBP in better communicating the magnitude of the costs and benefits to Congress and in designing a clear path forward for enhancing cargo container security. CPB faces a number of potential challenges in integrating the 100 percent scanning requirement into its existing container security programs. The 100 percent scanning requirement is a departure from existing container security programs in that it requires that all containers be scanned before CBP determines their potential risk level. Senior CBP officials and international trading partners say this change differs from CBP's current risk-based approach based on international supply chain security standards. Our work also indicates that the 100 percent scanning requirement could present challenges to the continued operation of existing container security programs--depending upon how the SFI program is implemented and 100 percent scanning is achieved. Some foreign governments have stated they may adopt a reciprocal requirement that all U.S. origin containers be scanned, which would present additional challenges at domestic U.S. ports. |
The MODA program started in Afghanistan in July 2010. DOD developed it as a result of operational requirements in Afghanistan and an increased U.S. government emphasis on civilian-led capacity building at the ministerial level. According to DOD, the program was created to address past concerns relating to advisory services, including that they were often carried out on an ad hoc basis, utilizing uniformed or contract personnel whose functional expertise and advisory skills were not always well-matched to the socio-cultural working environment. Since 2010, DOD has deployed over 200 advisors to the Afghanistan Ministries of Defense and Interior, including about 50 advisors in fiscal year 2014. DOD has typically deployed these advisors for 1- to 2-year assignments. DOD plans to deploy about 90 additional advisors to Afghanistan in fiscal year 2015. Section 1081 of the NDAA for Fiscal Year 2012, as amended by Section 1094 of the NDAA for Fiscal Year 2014, provided DOD authority to carry out a program to assign DOD civilian employees as advisors to the ministries of defense of foreign countries. Using this authority, DOD created the Global MODA program. The NDAA for Fiscal Year 2014 extended the program’s authority through fiscal year 2017. DOD’s Defense Security Cooperation Agency (DSCA) administers the MODA program, with support and oversight from the Office of the Under Secretary of Defense for Policy. The law authorizes DOD’s civilian advisors to (1) provide institutional, ministerial-level advice, and other training to personnel of the ministry to which they are assigned in support of stabilization or post-conflict activities, and (2) assist the ministry in building core institutional capacity, competencies, and capabilities to manage defense-related processes. The policy objective of the Global MODA program is to enhance the capabilities and capacity of the partner nation’s defense ministry, or the security agency serving a similar defense function. According to DOD, as other DOD security cooperation efforts develop partner nation military units, the institutions required to support them with pay, benefits, and equipment must be developed as well. MODA is designed to forge long- term relationships that strengthen a partner nation’s defense ministry. DOD also intends that these efforts support broader U.S. policy goals promoting positive civil-military relations, respect for human dignity and the rule of law, international humanitarian law, and professionalized partner military forces. Funding for the MODA program comes from DOD’s Overseas Contingency Operations appropriation and annual appropriations for operations and maintenance. According to DOD officials, the Overseas Contingency Operations funding is used solely for Afghanistan and funding from the annual operations and maintenance appropriation is split between the Afghanistan and Global MODA programs. DOD documentation indicates that the department planned to spend about $3.8 million in fiscal year 2014 on the Global MODA program. This plan included funds for deployments to 10 countries and training and travel for the advisors. DOD provided documentation indicating that it actually obligated about $2.9 million in fiscal year 2014, including just over $573,000 on advisor deployment costs, a little over $2 million on training, and around $240,000 on program management and travel. The process of selecting locations for the Global MODA program and deploying advisors includes seven components—nominations, initial screening, requirement development, State concurrence, DOD formal approval, recruitment, and training and pre-deployment (see fig. 1). While some of these components must occur in a specific order (e.g., DOD must obtain State concurrence before it can deploy an advisor), others may take place concurrently. DSCA operates a number of related defense institution building programs intended to build partner capacity and support institution building, including the Defense Institution Reform Initiative and the Warsaw Initiative Fund. Like the MODA program, the Defense Institution Reform Initiative provides subject-matter experts to work with partner nations to assess organizational weaknesses and share best practices for addressing those shortfalls; according to DOD officials, this may lead to further exchanges on improving institutional processes and management. Teams of subject-matter experts visit a country periodically to carry out long-term projects, such as conducting a strategic review of the defense sector. The Defense Institution Reform Initiative also focuses on ministry- to-ministry engagement; however, it uses a mix of contractor and civilian personnel and provides short-term, periodic interaction, while the MODA program uses only civilians and is intended to provide long-term, daily interaction. Officials noted that the Warsaw Initiative Fund’s Defense Institution Building Management Team works with former Soviet bloc partner nations to provide short-term technical support in countries that do not have a Defense Institution Reform Initiative presence. According to DOD officials, the MODA program is intended to complement ongoing work by the Defense Institution Reform Initiative and the Defense Institution Building Management Team in nominated countries, and MODA advisors are expected to work closely with Defense Institution Reform Initiative and Defense Institution Building Management Team counterparts. DOD’s actual Global MODA deployments at the end of fiscal year 2014 were significantly less than the goal presented in DOD’s most recent budget estimates. In its March 2014 budget estimates, DOD stated that it intended to deploy 12 advisors to countries distributed across the globe (12 countries) by the end of fiscal year 2014. In its previous budget estimates, published in April 2013, DOD planned to have 30 advisors in the field by the end of fiscal year 2014. For most of fiscal year 2014, however, DOD had only 2 advisors abroad in Kosovo and Montenegro for 1-year assignments. By the end of the fiscal year, DOD had deployed 5 advisors for 1-year assignments to 4 European countries—Kosovo, Montenegro, Georgia, and Bosnia and Herzegovina (see table 1). For more information on DOD’s first 2 Global MODA deployments, see app. II. In late 2014, DOD began a process to prioritize and allocate resources for defense institution building activities globally, including potential MODA program deployments. As a result of this process and new authority in the fiscal year 2015 NDAA to assign MODA advisors to regional organizations with security missions, DOD has not finalized plans for the locations of future deployments. However, DOD has obtained State concurrence for 4 more countries—Botswana, Indonesia, Ukraine, and Yemen (see fig. 2). Although the program has typically deployed advisors on long-term assignments of a year or more, DOD also sent an advisor to Mongolia in fiscal year 2014 on a 2-week assignment using MODA authority and officials stated they plan to send additional short-term advisors in fiscal year 2015. According to DOD officials, the reasons DOD did not meet its goal of 12 advisors in place by the end of fiscal year 2014 are unique to each of the countries and advisors selected. These officials noted there can be delays in the country approval process, or with the recruitment or training of the advisor. While DOD stated that the process of selecting a country and deploying an advisor should take about 6 months, the process for the first 2 advisors—from the scoping visit to deployment—took over a year. Delays in deployments have occurred at various stages in the process of selecting countries and advisors. See Figure 3 for examples of reasons for delays. The fiscal year 2012 and 2014 NDAAs established requirements for the Global MODA program, including that DOD (1) obtain concurrence from the Secretary of State in assigning advisors to foreign ministries of defense; (2) report annually on activities under the program during the preceding fiscal year and include 6 elements on the status of the program in its reports; and (3) update the policy guidance for the MODA program. DOD met some, but not all, of these requirements. Specifically, DOD obtained concurrence on deployments from the Secretary of State, but its most recent annual report to Congress only included 4 of the 6 required elements for the Global MODA program, and it has not developed a policy for the program. As required in the NDAA for Fiscal Year 2012, DOD officials worked with State to obtain concurrence on MODA deployments. According to State officials, DOD provides State with a concurrence package that typically includes an internal DOD action memo seeking final concurrence. The memo may include an opinion from U.S. officials in the nominated country and may note which approvals have been obtained within DOD, such as from the relevant geographic Combatant Command or from the Joint Staff. The program manager in State’s Bureau of Political-Military Affairs then adds an action memo for State reviewers and routes the package to relevant parties within State. State’s internal goal is to vet a package within 10 working days, assuming there is policy agreement. However, if questions or policy disagreements arise, the vetting process can take longer. When State concurs, officials will typically send a message to DOD noting this concurrence and explaining whether its concurrence is conditional on any additional requirements or revisions to the package. State officials noted that they are reviewing the concurrence process to determine where problems may arise and incorporate changes to streamline the process. For example, they are considering whether DOD could provide any additional information to facilitate State’s concurrence process. Additionally, State officials noted that it will be important to share feedback about existing or completed deployments so that lessons learned can be incorporated into the concurrence process going forward. If, for example, State officials in country raise concerns, it would be important for that feedback to be provided to both DOD and State officials in headquarters. State and DOD officials noted that they have discussed some of these potential changes. In the NDAA for Fiscal Year 2012, Congress required that DOD’s annual reports on the status of the MODA program include 6 elements: (1) a list of the defense ministries to which civilian employees were assigned; (2) the number of advisors assigned to these ministries; (3) the duration of the advisors’ assignments; (4) a brief description of the activities carried out by advisors; (5) a description of the criteria used to select the foreign defense ministries and civilian advisors for the program; (6) the cost of each assignment. DOD’s most recent annual report to Congress on the MODA program— covering fiscal year 2013—contained 4 of the 6 required elements for the Global MODA program. The report contained two main sections—one on the MODA program in Afghanistan and one on the Global MODA program. The section on Afghanistan contained all 6 elements, but the Global MODA section did not include required information on the cost or assignment duration for the 2 advisors deployed in late fiscal year 2013 (see fig. 4). According to DOD officials, this information was not provided because DOD had not collected it at the time the report was drafted. In its reporting to Congress, DOD has provided limited performance information beyond the required elements in the law. For example, the 2013 annual report listed the number of advisors assigned through the program, but did not include information on how advisor assignments compare with overall program deployment goals or provide reasons why the program has expanded more slowly than anticipated. Additionally, it did not provide information on the extent to which actual costs compared with planned funding allocations. While DOD is not required by law to report on this information, Congress has required DOD to report on the number, duration, and cost of advisors assigned, and additional information in these areas beyond what is required could be useful to Congress. We have previously reported that agencies should consider the differing information needs of various users to ensure that performance information will be both useful and used in decision making. We have also reported that information on a program’s progress in meeting its objectives, as well as program-level linkages between resources, strategies, and goals, can be useful to Congress. Such information could assist Congress as it makes future decisions about the program. According to DOD officials, DOD does not currently have a policy for the MODA program. The NDAA for Fiscal Year 2014 required DOD to update its policy for the MODA program. DOD officials stated that DOD plans to meet the requirement by providing a broader directive and instruction on defense institution building, which would include the MODA program. Officials stated that DOD is in the process of staffing this effort. In October 2012, the DOD Inspector General reported that MODA program officials cited the absence of a formal policy on building ministerial capacity as a factor that impeded their ability to establish a performance management framework for the MODA program in Afghanistan. Additionally, in a November 2012 report on the Defense Institution Reform Initiative, the DOD Inspector General stated that the absence of a defense institution building policy created programmatic challenges, including allowing overlapping missions in DOD’s defense institution building-related efforts. In June 2012, DOD officials told the Inspector General that they were drafting a policy for developing and maintaining DOD capabilities to assess, support, develop, and advise partner nations. More than 2 years later, the policy still has not been completed. The law did not mandate a date by which DOD should update the policy. However, standard practices in program management include, among other things, developing a plan to execute projects within a specific time frame. DOD has increasingly focused on security cooperation activities such as the Global MODA program to build the defense capacity of foreign partners and allies. It has met most of its legislative requirements for reporting to Congress about the program, except the requirements to include information on the cost and duration of each deployment in its annual reports. Such information could help ensure that Congress can more fully assess the program’s efforts and status. Additionally, given that the program’s current authority expires at the end of fiscal year 2017, providing a direct linkage between projected and actual advisor assignments and program expansion goals, as well as between projected and actual costs—either in its annual reports or in another form—could increase the transparency of some of the reasons behind the program’s slower-than-anticipated start. Such linkage could also ensure that Congress has complete performance information on the status of the program. Finally, as DOD expands the MODA program to new countries, it will be important for the program to be guided by a clearly-defined policy. Given DOD’s stated intent to develop such a policy over 2 years ago, clarifying the time frame in which it plans to complete it could help to ensure that it is available for future deployments. To help improve implementation and oversight of the MODA program, we recommend that the Secretary of Defense take the following three actions: Take steps to ensure that DOD includes all required elements, including information on the cost and duration of each Global MODA advisor assignment, in its future annual reports to Congress. Consider providing additional performance information to Congress on the extent to which DOD is achieving its advisor assignments and program expansion relative to its goals. Establish a time frame for updating the required policy for the MODA program. We provided a draft of this product to the Departments of Defense and State for comment. DOD provided written comments, which are reprinted in appendix III. DOD concurred with our recommendations and stated it will take steps to implement them. DOD also provided technical comments, which we incorporated as appropriate. State had no comments. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, the Secretary of State, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-7331 or [email protected]. 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 IV. The National Defense Authorization Act (NDAA) for Fiscal Year 2012, as amended by the NDAA for Fiscal Year 2014, mandated GAO to report on the effectiveness of the advisory services provided by civilian employees under the Department of Defense’s (DOD) Ministry of Defense Advisors (MODA) program. This report addresses (1) DOD’s progress in expanding the MODA program globally and (2) the extent to which DOD met NDAA requirements. We have also included our observations of the first two global MODA deployments in appendix II. To determine what progress DOD has made toward expanding the MODA program globally, we identified DOD’s goals for the Global MODA program—the program outside of Afghanistan—for fiscal years 2013 and 2014, as laid out in DOD’s budget estimates, and compared those goals with program results for those 2 years. We interviewed DOD, Department of State (State), and foreign ministry officials in Montenegro and Kosovo, the two overseas locations in which Global MODA advisors were deployed for most of fiscal year 2014; and reviewed DOD documentation including its budget estimates, program guidance, and work plans and monthly progress reports from the first two advisors in the field. We identified the steps DOD took to select a location and deploy an advisor by interviewing DOD and State officials and reviewing DOD and State documentation, including documentation on DOD’s nomination and selection process and on State’s concurrence process. Based on this information, we outlined the process DOD has used for selecting a location and deploying a Global MODA advisor through its initial deployments. We reviewed DOD information on its planned spending for fiscal years 2014 and 2015 and on actual obligations for fiscal year 2014. With respect to the obligations information, DOD officials noted that it is difficult to determine the precise amount of obligations for Global MODA due to the fact that some costs, such as training costs, may include funding to support the overall MODA program, including the Afghanistan program. Given the difficulty of obtaining complete and accurate information on obligations for Global MODA, we present DOD’s identified obligations in background for context and background purposes only. To determine the extent to which DOD met NDAA requirements, we reviewed the fiscal year 2012 and 2014 NDAAs to identify requirements, interviewed DOD and State officials, and reviewed DOD and State documentation, including DOD’s annual reports to Congress. To determine whether DOD met the reporting requirements included in the NDAA for Fiscal Year 2012, we reviewed the Global MODA section of DOD’s 2013 annual report to Congress. We determined that a requirement was “met” if it was fully addressed in the annual report; we determined a requirement was “partially met” if it was addressed but did not include all elements of a requirement; and we determined a requirement was “not met” if it was not included in the annual report. We conducted this performance audit from June 2014 to February 2015 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. As of the end of fiscal year 2014, two Global Ministry of Defense Advisors (MODA) assignments—in Kosovo and Montenegro—were completed. The first Global MODA program advisor went to Kosovo in August 2013 for a 1-year deployment to assist the Ministry for the Kosovo Security Force in the area of force development. The goals of the assistance, as described in the Terms of Reference, included supporting the implementation of recommendations from Kosovo’s Strategic Security Sector Review, including restructuring, manning, training, and equipping the Kosovo Security Force. To work toward this goal, the advisor reported various activities, such as developing management databases and formulating force structures for the Kosovo Security Force. In September 2013, Global MODA deployed an advisor to Montenegro to help address capacity gaps in the area of logistics and maintenance that had been identified by a delegation from the Defense Institution Building Management Team. The delegation assisted in a strategic defense review that identified several missing pieces in Montenegro’s military command structure, including the absence of a logistics command. The MODA Terms of Reference included assisting the Ministry in developing a national-level maintenance policy and developing a logistics cost forecasting methodology. To assist the Ministry in building logistics capacity, the advisor participated in the formation of a logistics battalion and helped the Ministry to outline an organizational structure for a logistics command. We traveled to both locations and interviewed the advisors, Department of Defense (DOD) and Department of State (State) officials in the U.S. embassy, and the advisor’s counterparts at the foreign ministries in Kosovo and Montenegro. We made the following observations of these first two advisor deployments: U.S. and Foreign Ministry Officials Were Generally Satisfied with the First Two Global MODA Advisors: The foreign ministry officials with whom we spoke in Kosovo and Montenegro expressed satisfaction with the advising services and welcomed new advisors to continue the program. Additionally, DOD and State officials in both countries stated that the advisors had a positive impact on the host ministry and that the MODA program complemented other U.S. activities in the country. DOD Adjusted Advisor Reporting Requirements Based on Materials Submitted by First Two Advisors: DOD has adjusted its advisors’ reporting requirements based on materials submitted by the first two advisors. Once in country, advisors are required to develop and provide a work plan to MODA program management. These work plans turn broad goals established in the Terms of Reference with the host ministry into specific tasks and objectives. Advisors are also required to report monthly to MODA program management on their progress toward achieving these tasks and objectives. The first two advisors’ work plans and monthly reports differed greatly in terms of length and detail regarding objectives and activities completed, making it difficult to measure or assess their performance. To standardize the work plans and reports, DOD has developed and issued guidance that specifies what the documents submitted by each advisor should contain. In addition, DOD officials have said they plan to have subject matter experts from the Defense Institution Reform Initiative or the Defense Institution Building Management Team assist the advisors in developing the work plans, and assess the work plans and reports to ensure that the plans and activities are appropriate to achieve the established goals. It Is Important to Maintain Clear Communication Between Advisors and the U.S. Embassy: Both of the initial advisors were embedded at the foreign ministry, and DOD and State officials noted that maintaining regular communications with the embassy is important to ensure that the advisor’s efforts are consistent with U.S. goals in the country. Officials in both countries stated that it took some time to determine how the advisor would work with the U.S. country team. Officials stated that it is important to have clear expectations about how the advisor will be integrated into the country team. Advisors May Be Able to Leverage Other U.S. Security Cooperation Resources: U.S. and foreign officials in Montenegro were complimentary of efforts taken by the advisor to leverage DOD’s State Partnership Program. Through that program, Montenegro had an existing relationship with the Maine National Guard. The advisor leveraged that program to organize a logistics training exercise that helped to advance the goal of forming a logistics battalion. The advisor noted that it took some time to understand what resources were available to him and having additional information about other U.S. security cooperation resources upfront could be helpful to future advisors. In addition to the contact named above, Hynek Kalkus (Assistant Director), Kara Marshall (Analyst-in-Charge), Julia Jebo Grant, Ashley Alley, Martin De Alteriis, Karen Deans, Jon Fremont, and Emily Gupta made key contributions to this report. | In 2012, Congress authorized DOD to create a program to assign civilian DOD employees as advisors to foreign ministries of defense. DOD created the Global MODA program, an expansion of a program started in Afghanistan in 2010, which partners DOD civilian experts with foreign defense and security officials to build core competencies in key areas such as strategy and policy, human resources management, acquisition and logistics, and financial management. The NDAA, as amended, required that DOD (1) obtain concurrence on the program from the Secretary of State; (2) provide an annual report to Congress including 6 elements on the status of the program; and (3) update the policy for the program. Congress also required GAO to report on the effectiveness of the program. GAO assessed (1) DOD's progress in expanding MODA globally and (2) the extent to which DOD met NDAA requirements. GAO reviewed MODA program plans, reports, and other documents and interviewed DOD and State officials in Washington, D.C., as well as in Kosovo and Montenegro—the locations to which the first 2 advisors were deployed. The Department of Defense (DOD) has expanded the Global Ministry of Defense Advisors (MODA) program more slowly than planned. It had 2 advisors in the field in Kosovo and Montenegro for most of fiscal year 2014, short of its goal of deploying 12 advisors by the end of fiscal year 2014. DOD deployed advisors to 2 additional countries just before the end of fiscal year 2014 (see figure). According to DOD officials, reasons it has taken longer than expected to expand globally include delays in the country approval process and with advisor recruitment and training. DOD has met most but not all legislative requirements for the MODA program. As required by the National Defense Authorization Act (NDAA) for Fiscal Year 2012, DOD obtained concurrence on its proposed deployments from the Department of State (State). DOD's most recent annual report to Congress included 4 of the 6 required elements, but did not include information on the cost or duration of each Global MODA deployment, which could help Congress assess the value of the program in relation to other capacity-building efforts (see figure). Additionally, DOD has not provided information on the program's performance, such as linking actual performance to goals. Although DOD is not required by law to include this information, GAO has previously reported that such information can be useful to decision makers. Finally, DOD has not updated the policy for the program as required in the NDAA for Fiscal Year 2014. GAO recommends that DOD (1) include all required information in its annual reports to Congress; (2) consider providing Congress with additional information on the program's performance; and (3) develop a time frame for updating the policy for the MODA program. DOD concurred with these recommendations. |
The U.S. tax system depends on the principle of voluntary compliance, that is, when taxpayers comply with the law without compulsion or threat. Penalties are intended to encourage compliance by supporting the tax reporting and remittance standards contained in the I.R.C. According to IRS’s penalty handbook, in order to advance the fairness and effectiveness of the tax system, penalties should be severe enough to deter noncompliance, encourage noncompliant taxpayers to comply, be objectively proportioned to the offense, and be used to educate taxpayers and encourage their future compliance. Penalties are assessed either automatically by IRS’s systems or as a result of audits that reveal the compliance issues. For example, the penalty for filing a tax return late is usually assessed automatically when IRS’s computer system detects a return filed after the filing deadline. Penalties such as those assessed against taxpayers involved with abusive tax shelters are assessed as a result of audits. Supervisors must review and approve the results of an audit to assess a penalty. Most penalties can be abated for reasonable cause if IRS determines that the taxpayer exercised ordinary business care and prudence in determining tax obligations but nevertheless was unable to comply with those obligations. Examples of reasonable cause include, but are not limited to, serious illness or an inability to obtain records. Following the release of an IRS Task Force report on civil tax penalties in 1989 Congress made its last major effort to reform the tax penalty regime because of concerns that a piecemeal approach to legislating civil tax penalties over the course of many years resulted in a complex penalty system that was difficult for IRS to administer and the taxpayer to comprehend. The legislation, the Improved Penalty Administration and Compliance Tax Act, was enacted in large part to simplify civil tax penalties. For example, the act consolidated into one part of the I.R.C. all of the generally applicable penalties relating to the accuracy of tax returns and reorganized accuracy penalties to eliminate situations where one infraction could receive more than one penalty. Overall, the act reformed information reporting penalties; accuracy-related penalties; preparer, promoter, and protester penalties; and penalties for failure to file, pay, withhold, and make timely tax deposits. OSP is assigned overall responsibility for IRS’s penalty programs. As such, OSP is charged with coordinating policy and procedures concerning the administration of penalty programs, reviewing and analyzing penalty information, researching taxpayer attitudes and opinions, and determining appropriate action to promote voluntary compliance. Current Treasury regulations state that every taxpayer that has participated in a reportable transaction and that is required to file a tax return must attach a disclosure statement to his or her return for the taxable year and send a copy to OTSA. In 2004, the American Jobs Creation Act created a new penalty for failing to disclose reportable transactions with a tax return. The purpose of the reportable transaction penalty is to promote compliance with taxpayers’ duty to disclose their participation in transactions IRS has determined to have potential for tax avoidance or evasion. For example, a taxpayer claiming a loss on their tax return of at least $2 million in a single taxable year must separately disclose the transaction to IRS. For most types of reportable transactions, the penalty is $10,000 for an individual taxpayer’s return and $50,000 for other returns, such as business returns and returns for benefit plans. For one type of reportable transaction, a listed transaction, the amount of the penalty is increased to $100,000 for individuals and $200,000 for other returns. The Commissioner of Internal Revenue can abate the penalty for a reportable transaction, other than a listed transaction, if abating the penalty would promote compliance with the requirements of the I.R.C. and effective tax administration. The decision to abate must include a record describing the facts and reasons for the action and the amount abated, and any decision to not abate the penalty is not subject to judicial review. Although IRS policies state that IRS should collect information to evaluate the administration of penalties and their impact on voluntary compliance, and IRS is collecting some relevant information, OSP is not comprehensively evaluating penalty administration or penalties’ impact on voluntary compliance. According to IRS policies, OSP is to do the following: Administer the penalty statutes in a manner that is fair and impartial to both the government and the taxpayer, is consistent across taxpayers, and ensures the accuracy of the penalty computation. Collect statistical and demographic information to evaluate penalties and penalty administration and to determine the effectiveness of penalties in promoting voluntary compliance. Design, administer, and evaluate penalty programs based on how those programs can most efficiently encourage voluntary compliance. Continually evaluate the impact of the penalty program on compliance and recommend changes when the I.R.C. or penalty administration does not effectively promote voluntary compliance. These policies are consistent with positions expressed in the 1989 IRS Task Force report and by Congress when reforming penalties in 1989 and with more recent views expressed by the National Taxpayer Advocate. All stressed the need for IRS to evaluate the administration of penalties and their impact on voluntary compliance. For example, the task force’s report and Congress in the conference report for the act that included the penalty reform recommended that IRS analyze information concerning the administration and impact of penalties for the purpose of suggesting changes in compliance programs, educational programs, penalty design, and penalty administration. The task force also recommended that IRS analyze data to enable IRS, Treasury, and Congress to evaluate how well penalties operate and what impact they have on voluntary compliance. Similarly, in her 2008 annual report, the National Taxpayer Advocate wrote that before serious penalty reform can occur, better data about whether and how penalties promote voluntary compliance is needed. However, OSP generally does not fulfill the responsibilities specified in IRS policy or as envisioned by the 1989 IRS Task Force report, Congress, or the National Taxpayer Advocate. Rather, OSP analysts focus most of their efforts on addressing short-term issues, such as sudden spikes in assessments or abatements. These analyses are useful and should continue, as they could identify emerging problems with how penalties are being administered, but they do not constitute a comprehensive assessment of penalty administration. OSP officials said that they have not done more to evaluate the administration of penalties and their effect on voluntary compliance primarily because of resource constraints both within OSP and IRS’s various research units, methodological barriers that impede their ability to research the effect of penalties on voluntary compliance, and limitations in available databases. OSP does not have a plan for fulfilling its responsibilities. The Government Performance and Results Act of 1993 may be a useful resource in developing such a plan as it provides several key management principles needed to effectively guide, monitor, and assess program implementation. These principles include (1) general and long-term goals and objectives, (2) a description of actions to support goals and objectives, (3) performance measures to evaluate specific actions, (4) schedules and milestones for meeting deadlines, (5) identification of resources needed, and (6) evaluation of the program with processes to allow for adjustments and changes. This approach is intended to ensure that agencies have thought through how the activities and initiatives they are undertaking are likely to add up to the meaningful result that their programs are intended to accomplish. A plan would help to identify resource requirements and support resource requests. In developing a plan, OSP would need to identify the key penalty issues on which to focus its efforts, the types of analyses that would best address those key issues, and the type and amount of resources—whether within OSP or elsewhere in IRS—needed to execute the plan. Thus, by focusing on what it is attempting to accomplish by developing a plan, OSP would be better positioned to determine what resources within IRS are available to assist it. Further, a well-developed plan can provide policymakers within the executive branch and Congress a better basis for determining the appropriate level of resources for a program. Although OSP officials’ concerns about methodological barriers to determining the effect of penalties on voluntary compliance are valid, relevant analyses likely could be performed. Developing a plan would help OSP officials determine which analyses could be useful for this purpose and possible strategies for furthering the state of knowledge on the effect of penalties on compliance. OSP officials pointed to several examples of the methodological barriers to determining the effect of penalties on voluntary compliance. For example, increases in penalty amounts might be accompanied by other changes in enforcement activities, such as a higher audit rate, and separating the effect of these factors on voluntary compliance is difficult. In addition, a number of issues other than IRS enforcement activities affect a taxpayer’s behavior, including income, tax rates, demographics and social factors, and the influence of tax practitioners. Another complication is that a penalty set at a certain amount may effectively encourage voluntary compliance for one type of taxpayer, such as individuals, but not for another type of taxpayer, such as businesses. Our discussions with state officials and review of academic studies raised similar concerns about the methodological barriers. None of the 25 states we contacted evaluate the impact of penalties on voluntary compliance, and FTA was unaware of any states currently doing such evaluations. State officials added that limited resources, political disinterest, and technological barriers further constrain their penalty analysis capacities. Some state officials said that they rely on IRS information and research to establish state enforcement priorities and similarly would look to IRS for penalty research. The academic studies we reviewed concluded, consistent with OSP’s view, that measuring the impact of penalties on voluntary compliance is difficult because numerous variables go into determining a taxpayer’s decision to voluntarily comply with tax laws. These variables include how risk averse a person is and how likely he or she is to attempt to “get away” with not complying. Nevertheless, some analyses likely would be useful for better understanding the effect of IRS penalties on taxpayers’ voluntary compliance. For example, it is widely believed that taxpayers are more likely to comply voluntarily if they believe that the tax code is implemented fairly and consistently across taxpayers. The 1989 IRS Task Force noted that better knowledge of both penalty applications and the perceptions of taxpayers that have been penalized were important in ensuring that taxpayers feel they are being treated fairly. Thus, analyses that determine whether penalties are being consistently applied across IRS so that similarly situated taxpayers receive the same penalties could provide pertinent information. Penalties are also unlikely to have much effect on voluntary compliance if they are not used. Treasury noted the importance of better understanding the relationship between penalty administration and voluntary compliance in its strategic plan for reducing the tax gap. The plan states that Treasury wants penalties to be set at more appropriate levels because some penalties may be too low to change behavior but others may be so high that examiners are reluctant to assess them. The penalties for failure to provide appropriate information returns are an example of penalties that do not appear to be properly calibrated to influence compliance. The instructions for certain information returns require that taxpayers submit the form printed with special ink. Those that fail to do so are subject to a $50 penalty. IRS officials said that this penalty and other format-related penalties are not assessed because the cost of developing and asserting the penalty was not worth it. Instead, IRS officials correct the forms manually. IRS officials said that the penalty would have to be raised substantially to make it worthwhile to assess. The decision to not assess penalties for this error based only on the revenue received from those penalized may have actually undermined voluntary compliance. A version of a popular tax preparation software package informs taxpayers that IRS has accepted forms that are not printed with the special ink. In addition, IRS may be able to do certain longitudinal analyses of whether taxpayers assessed a penalty in one year become more compliant in future years. For example, IRS may be able to determine whether taxpayers that were assessed an underpayment penalty one year were assessed the same penalty in years that followed. Although multiple factors would influence the result, the data might help IRS better understand whether the penalty may have any effect on future compliance. Currently, SB/SE’s Research group is working on a project reviewing the First Time Abate policy that may provide some information related to certain penalties’ effect on compliance. IRS did not know some information about the results of the policy, including the number of penalties abated under the policy, the amount of money involved, and the number of taxpayers qualifying for the abatement but not receiving it. Additionally, other questions have surfaced, including whether the policy is fair, whether taxpayers receiving the abatement “game” the system by complying for 3 years and then getting the abatement again, and, ultimately, whether the policy should be continued. Results of the project are expected in the summer of 2010. In addition to analyses related to voluntary compliance that could be done internally, by developing a plan, OSP may be able to identify other means of developing information useful to gauging penalties’ effect on voluntary compliance. Taxpayer surveys or focus groups, for instance, could provide information on taxpayers’ perceptions about the fairness of penalties. IRS could also explore other avenues for supporting research of penalty effectiveness, such as encouraging others to examine the relationship between penalties and voluntary compliance. For example, IRS hosts an annual research conference and 6 forums across the country used to discuss tax administration issues with experts and practitioners. These conferences and forums have been used to discuss compliance issues. At the 2008 IRS Research Conference, papers on measuring or improving tax compliance were presented. These types of studies, done independently, can potentially add valuable thoughts and information to the discussion on how best to encourage and increase taxpayer compliance with tax laws. Finally, in developing a plan, OSP could assess options for overcoming the limitations in available data that officials say impede its ability to both assess the effect of penalties on voluntary compliance and perform more sophisticated reviews of IRS’s administration of penalties. The 1989 IRS Task Force report said IRS needed to develop an interactive database available for all management levels to perform ad hoc analysis of penalty administration and voluntary compliance. One of the task force’s recommendations was to develop a database that captured the maximum amount of data in order to avoid the expense and delay for special master file extracts. With this database, IRS would evaluate the equitable treatment of taxpayers with respect to all aspects of penalties (e.g., penalty waivers and taxpayer demographic information, such as income). The Enforcement Revenue Information System (ERIS) contains substantial data on all IRS enforcement activities, including penalties. However, ERIS does not meet several of the task force’s recommendations. For example, ERIS does not include readily usable information related to taxpayer income or practitioner representation that could be used to determine equitable treatment, develop employee training, or provide taxpayer education outreach. ERIS is not available at all management levels. While the system is used to develop many standard reports, officials say a lack of resources has prevented it from producing additional reports that could increase understanding of penalties. For example, the First Time Abate policy research project is using master file extracts instead of ERIS. In addition, IRS does not routinely use existing penalty data to evaluate the administration of penalties. For example, IRS does not identify penalties with low or high assessment and abatement rates, whether significant differences exist in the abatement rate for high-income taxpayers relative to lower-income taxpayers, whether significant differences exist in penalty size between taxpayers that negotiate an installment agreement relative to those who pay cash, whether returns prepared by a paid preparer are more or less likely to whether penalties are assessed or abated at different rates based on the geographic location where the case is worked, whether individual taxpayers receive more or fewer abatements than businesses for the same penalties, and whether the rate of erroneous penalty assessments is increasing or decreasing. Analyses of trends in penalty data could help IRS identify areas that need further investigation and when penalties may not be applied consistently and fairly. For example, a low assessment rate could indicate that a penalty is effectively deterring noncompliance and that the infrequency of its assessment is appropriate. However, a low assessment rate might also indicate that a penalty has become outdated or is deemed too burdensome to assess. Similarly, a high abatement rate could indicate that IRS officials are hesitant to sustain a penalty because they deem it too harsh for the infraction. IRS changed the process it follows to assess the penalty for an employer’s failure to deposit the correct amount of taxes for employees, known as the Failure to Deposit (FTD) penalty, based on a trend analysis done by others. The Taxpayer Advocate Service (TAS) noted in its 2003 report that IRS abated a substantial number of FTD penalties and that the higher the penalty, the more likely the penalty was to be abated. According to IRS, 24 percent of FTD penalties had been abated in 2002 accounting for 62 percent of the assessed dollars. Based in part on TAS’s data analysis, IRS changed the procedures it follows to assess the FTD penalty by sending a notice to taxpayers warning them of possible assessment if they did not deposit what they owed. According to a report by the Treasury Inspector General for Tax Administration, this procedural change helped lead to a decrease in penalty assessments and abatements. IRS issued guidance to implement a new penalty for taxpayers that fail to disclose a reportable transaction in a timely manner and began assessing penalties after audits had been conducted. The reportable transaction penalty was effective immediately after its passage in October 2004, making the development of guidance on how IRS would interpret and implement the law important. Within 3 months, in January 2005, IRS issued interim guidance to alert taxpayers and practitioners to the reportable transaction penalty and how IRS planned to implement it. For example, the interim guidance explains the conditions under which IRS would impose the penalty and how it would use the authority to abate the penalty. Officials in the Office of Chief Counsel told us that their criterion for issuing guidance successfully is whether it was released in time to meet their customers’ needs. The practitioners we spoke with from two leading practitioner organizations said that issuing the interim guidance in only 3 months was quick and the guidance included the information they needed to understand how IRS would implement the penalty. Those same practitioners were concerned that other practitioners may lack an understanding of all of the requirements for disclosing reportable transactions and suggested that more targeted outreach regarding the reportable transaction penalty was needed, since the penalty is large and the process to get the penalty abated is difficult. As mentioned earlier, the Commissioner of Internal Revenue, or the Commissioner’s delegate, can abate the penalty for most types of reportable transactions, but if a taxpayer is penalized for a listed transaction there is no abatement option. These practitioners said that it would be easy to inadvertently violate the provision because taxpayers and practitioners may not realize that transactions that seem reasonable to them and have resulted in no net gain are considered reportable. They noted that if some practitioners or taxpayers are associating this penalty only with abusive tax shelters, they may not realize all of the situations where the requirement to disclose a transaction applies. They added that in the current economic climate there are likely to be many transactions that result in a loss that do not get disclosed on the required form. The practitioners said that they were concerned because taxpayers and other practitioners may not have been in such situations before, and it is likely that IRS will see a significant increase in undisclosed transactions of this nature. In the 2008 Annual Report, TAS also expressed concerns that the reportable transaction penalty is being assessed against taxpayers for which it was not intended and that the penalty is unfairly harsh. According to TAS, the purpose of the penalty is to combat tax shelters by penalizing taxpayers that failed to disclose that they have entered into transactions deemed aggressive by IRS. Because the reportable transaction penalty applies without exception to the failure to include disclosure on a return when required, an improper tax benefit is not required as long as the tax return reflects tax consequences or a tax strategy described in public guidance. IRS officials said they conducted standard educational outreach to the practitioner community regarding the specifics of the reportable transaction penalty. This included sending updates to e-mail groups regarding notices and revenue procedures implementing the new penalty requirements, postings of the latest news to IRS’s Web site, and requesting comments on proposed regulations. In addition, officials in OTSA said that they had presented information on the penalty to practitioner groups as part of larger presentations on civil penalties. However, some of the practitioners we spoke with said that in the current substantially altered economic climate, some taxpayers may be caught unaware of the need to disclose a reportable loss transaction and be penalized without a ready avenue for relief. Further, there is little basis to reliably predict which taxpayers might be caught in this situation. IRS officials recognize the need to further raise awareness with taxpayers. They plan to use the National Tax Forums during the summer of 2009 to hold focus groups regarding the reportable transaction penalty. The goal of the focus groups is to reach out to practitioners who may not understand the disclosure requirements and get the thoughts of those who have had experience with the reportable transaction penalty. However, at best, IRS would only reach a small portion of the tax return preparer community in this fashion even though many preparers may end up with clients susceptible to the penalty. Using its standard, low-cost outreach methods to again focus tax preparers and the public’s awareness on the disclosure requirements for the reportable loss transaction could reach a wider audience. IRS officials said that the majority of tax returns eligible for assessment of the penalty were not filed until fall 2005, well after the interim guidance had been released, and would not have been audited until 2006. IRS officials said that development of these cases takes time and that IRS could not assess the penalty until there was sufficient basis to believe that a taxpayer had participated in a reportable transaction during a specific taxable year, had a disclosure requirement, and failed to complete the required form. IRS receives the required forms at its Ogden facility but does not assess penalties until after referring cases to an examiner. A penalty is only assessed after an examiner reviews the case because examiners develop related issues that may not be apparent from the face of the form itself. If a taxpayer failed to report participation in a reportable transaction, IRS would not know of the taxpayer’s participation until it examined the tax return or investigated the promoter of the transaction. Therefore, the majority of cases for which a penalty may have been appropriate would not have been identified until late 2006 and 2007. According to IRS officials, as of January 2009, IRS had assessed 98 of the penalties for $13.7 million and collected $2.7 million. In addition, 1,188 returns had been assigned to field groups and 50 returns were being reviewed by IRS’s Appeals Division. Civil tax penalties play an important role in helping ensure that taxpayers make an honest effort to pay the taxes that they owe. Twenty years after Congress and an IRS Task Force said that IRS needs to conduct more continuous and comprehensive analyses of the penalties it administers and their effect on voluntary compliance, and after having designated an office with those responsibilities, IRS is not meeting this expectation. IRS does not have a plan that identifies how it will carry out these responsibilities and address the resource, methodological, and data limitations that officials say impede its progress. IRS should develop and execute such a plan to better focus its efforts and ensure that penalties are being administered efficiently, effectively, fairly, and consistent with encouraging taxpayers’ voluntary compliance. IRS issued guidance for the reportable transaction penalty in a timely manner following its passage in 2004. However, in the current economic climate certain transactions involving losses may subject many unsuspecting taxpayers to a harsh penalty. They may be unaware of reporting requirements because they have never been in such situations before. IRS’s planned additional outreach on this penalty is not sufficient. IRS should use its standard, low-cost outreach methods to alert as many tax return preparers and taxpayers as possible about the need to properly report loss transactions to avoid penalties. In order to ensure the most efficient, fair, and consistent administration of civil tax penalties, and that penalties are achieving their purpose of encouraging voluntary compliance, the Commissioner of Internal Revenue should direct OSP to evaluate penalty administration and penalties’ effect on voluntary compliance. The Commissioner also should direct OSP to develop and implement a plan to collect and analyze penalty-related data. The plan should address the constraints officials have identified as impeding progress in analyzing penalties. In addition, the Commissioner of Internal Revenue should use IRS’s standard, low-cost methods of outreach to again alert as many tax return preparers and taxpayers as possible about the need to properly report loss transactions to avoid penalties. The Deputy Commissioner for Services and Enforcement provided written comments in a May 26, 2009, letter, which is reprinted in appendix I. IRS staff also provided technical comments that we incorporated as appropriate. IRS agreed that OSP will develop a plan to comprehensively evaluate penalty administration and the impact of penalties on voluntary compliance. IRS said that such a plan was important in understanding the relationship between penalty administration and voluntary compliance and in identifying priorities and potential resource needs. Developing a comprehensive plan may take time. In the interim, we believe that the data IRS currently collects can be used to begin useful penalty analyses. For example, IRS could evaluate whether penalties are assessed or abated at different rates based on the geographic location of the office responsible for the case or whether significant differences exist in the abatement rate for high-income taxpayers relative to lower-income taxpayers. Such analyses could be done now and help IRS determine whether penalties are being applied consistently. IRS also agreed to undertake outreach to ensure that taxpayers are again alerted to the situations where disclosure of reportable transactions is needed. 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 Chairman and Ranking Member, House Committee on Ways and Means; the Secretary of the Treasury; the Commissioner of Internal Revenue; and other interested parties. This report also 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 on (202) 512-9110 or [email protected]. 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 II. In addition to the contact named above, Jonda R. Van Pelt, Assistant Director; Julia T. Coulter; Benjamin C. Crawford; Alison Hoenk; Ellen M. Rominger; Elwood D. White; and John M. Zombro made key contributions to this report. | Civil tax penalties are an important tool for encouraging compliance with tax laws. It is important that the Internal Revenue Service (IRS) administers penalties properly and determines the effectiveness of penalties in encouraging compliance. In response to a congressional request, GAO determined (1) whether IRS is evaluating penalties in a manner that supports sound penalty administration and voluntary compliance and, if not, how IRS may be able to do so, and (2) whether IRS's guidance for a new penalty for failure to disclose reportable transactions was issued in a timely manner and was useful to affected parties, and whether and how IRS has assessed the penalty. GAO reviewed IRS documents and guidance, and interviewed IRS officials and tax practitioners. The Office of Servicewide Penalties (OSP) does not comprehensively evaluate the administration of civil tax penalties or their impact on voluntary compliance, but a plan could help it do so. OSP has responsibility for administering penalty programs and determining the action necessary to promote voluntary compliance. According to IRS policy, OSP should collect information to evaluate penalties and penalty administration and to determine the effectiveness of penalties in promoting voluntary compliance. This policy is consistent with positions expressed in 1989 by both an IRS Task Force report and by Congress when reforming penalties in 1989, and more recently by the National Taxpayer Advocate. OSP does not fulfill the responsibilities specified in IRS policy. Rather, OSP analysts focus on short-term issues, such as sudden spikes in assessments or abatements. OSP officials said that they have not done more to evaluate the administration of penalties and their effect on voluntary compliance because of resource constraints, methodological barriers, and limitations in available databases. A plan could help IRS focus its efforts and address the constraints to evaluating penalties. In developing a plan, IRS could identify the analyses it should do and the resources needed to do them. OSP could then determine what resources are available to assist it and what additional resources, if any, are needed. A plan also could lay out feasible research for evaluating the effect of penalties on voluntary compliance. For example, fairness is believed to undergird voluntary compliance. Thus, analyses that determine whether penalties are being consistently applied across IRS would provide pertinent information. Data limitations could be addressed in a plan, as well. The Enforcement Revenue Information System (ERIS) contains substantial data on IRS enforcement activities, but does not include all of the information recommended by the 1989 IRS Task Force report. For example, ERIS does not include readily usable information related to taxpayer income that could be used to determine equitable treatment of taxpayers. IRS issued guidance regarding its implementation of a penalty for failure to disclose reportable transactions-- transactions IRS identified as tax avoidance transactions--within 3 months of the provision's passage. IRS officials said that their criterion for issuing timely guidance is whether it was released in time to meet customers' needs. Tax practitioners from two leading practitioner organizations said the guidance was issued timely and included information they needed. However, the practitioners said more targeted outreach about the penalty was needed, specifically regarding reportable loss transactions caused bythe current economic climate in which many taxpayers may experience losses that could trigger the reportable transaction requirements. IRS officials recognize the need to further raise awareness of the penalty, but their planned efforts would reach only a small portion of tax return preparers and taxpayers. As of January 2009, IRS has assessed 98 penalties for $13.7 million.In addition, 1,188 returns had been assigned to field groups. |
Under CERCLA, the Environmental Protection Agency (EPA) can compel the parties responsible for hazardous waste contamination to pay to clean up sites. The cleanup costs can be considerable. EPA estimates that the average cost to clean up a site on the National Priorities List (NPL), its list of highly contaminated sites, is $26 million. Although most brownfields are not highly contaminated, cities, lenders, and developers cite the possibility that the liability provisions in CERCLA could be applied to these properties as a major barrier to redeveloping them. Under CERCLA, the responsible parties are strictly liable for cleanup costs—they can be compelled to perform cleanups—and can be subject to “joint and several” liability. Under strict liability, a responsible party is liable regardless of whether the party is at fault. Under joint and several liability, each party can be held responsible for the entire cost of the cleanup. Most states have similar liability laws and develop their own lists of the sites needing cleaning up. EPA defines brownfields as “abandoned, idled or underused industrial and commercial facilities where expansion or redevelopment is complicated by real or perceived environmental contamination.” When industries choose to avoid such potential problems by locating on uncontaminated sites rather than on brownfields, they may seek suburban “greenfields.” Although these sites may require building additional infrastructure, such as access roads and sewer systems, that brownfield sites would not, the developers may still view greenfields as more cost-effective than the sites requiring a cleanup. When the developers choose greenfields over brownfields, city residents lose employment opportunities, city governments lose tax revenue, and the new development contributes to urban sprawl. Several legislative proposals that would address brownfield issues, including S. 1285, have been introduced. Also, the President recently proposed tax incentives for those who voluntarily clean up brownfield properties. Besides these proposals, other executive agencies have provided funds for brownfield redevelopment. EPA issued a “brownfields action agenda” in 1995, which, among other things, provides 50 grants to local governments to fund a wide variety of 2-year demonstration projects that address brownfield problems. It has also removed nearly 28,000 sites from its list of potential NPL sites, thereby potentially stimulating redevelopment at these sites by reducing the possibility of Superfund liability. Additionally, EPA clarified its enforcement policies toward lenders, property purchasers, and certain property owners to alleviate their concerns and facilitate their involvement in the cleanup and redevelopment of brownfields. The abandoned or idled industrial sites that could be classified as brownfields probably number in the tens of thousands, totaling hundreds of thousands of acres, but no official nationwide count exists. Some of the research and advocacy organizations involved in urban issues have developed estimates, and municipalities have also estimated the potential number of brownfield sites, or acreage, within their borders. However, any estimate of the number of brownfields is likely to be imprecise because the cities and others measuring the number of brownfields often use different techniques and definitions. The researchers at the Urban Land Institute estimated that about 150,000 acres of abandoned or underused industrial land exist in major U.S. cities.This estimate excludes some commercial properties that could also be classified as brownfields; those excluded are sites with underground storage tanks, such as former gas stations, or dry cleaners. Therefore, this estimate represents the lower end of the range of estimates. While the federal government and the states have not identified and listed brownfield properties, several local governments that received grants under EPA’s brownfields pilot program have also developed estimates of brownfield acreage within their borders. (See table 1). In addition, the U.S. Conference of Mayors, an organization for local government issues, recently surveyed its member cities about the amount of brownfield acreage in their cities. (See app. I for a summary of the survey results for cities with populations over 100,000.) As with the cities participating in EPA’s brownfields program, these estimates varied considerably, from a low of 39 acres in Houston (the estimate was limited to a 20-square-mile area of the city targeted for redevelopment) to a high of 14,000 acres in Cleveland, depending, in part, on how the cities defined and counted their brownfields. The researchers and the cities have used different techniques and definitions in measuring the number of brownfields. For example, the Urban Land Institute’s estimate used a relatively narrow definition of a brownfield site because it focused primarily on the industrial corridors in larger cities. The number of brownfield acres could actually be greater than that estimate if it were based on the broader definitions that some local governments used in preparing their own estimates. Table 2 outlines the ways in which brownfield definitions vary. The potential of being held liable under CERCLA for the contamination on brownfield properties is a significant barrier to redevelopment, according to lenders, property purchasers such as developers, and property owners. Most brownfields are not likely to be added to the list of potential NPL sites because they are not severely contaminated. However, these investors still are wary of the cleanup liability provisions of both federal and state legislation because these can apply even at non-NPL sites. As a result, lenders and developers may avoid investing in potentially contaminated properties, and current owners may avoid selling them. To lower the barriers to brownfield redevelopment, S. 1285 would limit the liability of lenders and such property purchasers as developers under certain conditions and also would provide assistance for the state programs that encourage the voluntary cleanup of hazardous waste sites. However, these initiatives will not remove all barriers to brownfield redevelopment, such as the initial cleanup costs or high urban property taxes, that may still make them unattractive to business in comparison with suburban greenfields. The liability for the costly cleanup of environmental contamination is a barrier to brownfield redevelopment because it discourages lenders, developers, and property owners from participating in these projects. Under CERCLA, the owners of property containing hazardous substances are among those who can be held liable for the cleanup costs incurred by EPA, the states, and other responsible parties, regardless of whether the property is currently listed on the NPL. The lenders who hold a security interest in contaminated property may be considered property owners under CERCLA if they participate in the management of the property. The developers who purchase property may also become liable for any contamination later found at the site. Former property owners may also be liable for the cleanup costs if the contamination occurred during their ownership of the property. Thus, even the suspicion of current or prior contamination may make lenders less willing to provide funds, developers less willing to purchase property, and owners less willing to place their property on the real estate market. The Congress and EPA have already taken some steps to limit lenders’ liability. Under CERCLA, a party (such as a bank) that holds the evidence of ownership (such as a mortgage) in the property to protect its interest, and does not participate in the management of the property, is not considered a property owner. However, the statute does not define what actions constitute “participation in the management of the contaminated property,” and the courts have given varying meaning to this phrase. As a result, many lenders are reluctant to finance the purchase of property they suspect is contaminated, or to foreclose on such property in order to avoid the potential liability for cleanup. In an attempt to clarify these matters, EPA issued a rule in 1992 that outlined the actions a lender could take without becoming subject to liability. However, in 1994 a federal appeals court held that EPA was not authorized to issue the rule. After the rule was invalidated, EPA and the Department of Justice issued a policy stating that they intend to apply the provisions of the rule when deciding whether to take enforcement action against lenders. However, the lenders can still be sued by third parties seeking contributions for the cost of the cleanup. The Senate bill proposes two actions specifically designed to lower CERCLA’s liability barriers to redeveloping brownfields. First, the bill would define in detail the circumstances under which a lender who holds a security interest could act to protect that interest without becoming liable for cleanup costs. It also places a cap on the total amount that lenders would have to pay in the event they are liable. Second, the bill would limit the liability of certain purchasers of property, such as developers, if they assess a site for contamination before buying it and find none. Because the Senate bill does not exempt property owners from liability, these owners may continue to avoid selling contaminated properties because they fear drawing attention to the contamination and thus incurring cleanup costs. However, the bill authorizes funds from the Superfund trust fund to be used to help the states develop their voluntary cleanup programs. These programs often provide liability relief from the states’ hazardous waste laws to developers or property owners that volunteer to clean up contaminated sites. Resolving CERCLA’s liability concerns may not address all of the barriers to redeveloping brownfields. According to representatives of several large banks, the contamination at brownfields still generally makes them risky investments. Because of the potential contamination, developers have difficulty in predicting what the cost to clean up a site will be and when it will be ready for redevelopment; as a consequence, a return on the investment is uncertain in comparison with the potential return on a project on a greenfield site. Lenders, developers, and property owners could also be liable under other federal laws, such as the Resource Conservation and Recovery Act, or the states’ hazardous waste laws, potentially increasing costs and slowing down the project. Also, it may still be difficult for some of these urban industrial sites to compete with greenfields even if they are not contaminated. Although brownfield sites have some advantages for developers, such as having the necessary water, power, and road infrastructure in place to support a business, while greenfield sites may lack this infrastructure, some brownfield properties present other problems that can be associated with urban areas, such as higher property taxes caused by a decline in the tax base. These problems may be even more intractable barriers to redevelopment than Superfund. The interest-free loans of $100,000 to $200,000 to municipalities proposed in S. 1285 to fund site assessment activities should be sufficient to cover the average cost at a brownfield site. Before brownfields can be redeveloped, it is necessary to perform a site assessment to determine the nature and extent of the contamination present. Because the site assessment requires research into a site’s history and a technical analysis of the site’s conditions, a substantial expenditure may be involved. For most brownfield sites, assessment costs could range from an average of $60,000 to $85,000 to more than $200,000; thus, the loan amounts proposed in S. 1285 would cover the costs in most cases. However, the costs could be higher for very large sites or those with complex contamination. Conducting a site assessment is the first step in deciding how to clean up and redevelop a site. The parties conducting these assessments generally use standard processes developed by the American Society for Testing and Materials (ASTM). Under this system, the property owners, investors, or lenders hire a contractor to conduct a Phase I assessment. This phase involves identifying potential contamination by (1) reviewing the site’s historical records, (2) interviewing those with knowledge of the former activities at the site, and (3) visually inspecting the site for physical evidence of hazardous waste. If the Phase I assessment turns up any evidence of environmental contamination, a Phase II assessment is necessary. In this phase, environmental professionals identify the nature and location of the contamination through sampling and analyzing materials from the site’s structures and environmental media, such as soil and groundwater. As a final stage, the environmental professionals prepare a plan for cleaning up the contamination identified in Phase II. These plans are often subject to review and approval by the local or state government. We interviewed cleanup contractors and city officials that have overseen the assessment and redevelopment of brownfields to determine the costs of assessing a 10- to 20-acre site. These officials told us that developers are typically interested in properties ranging from 10 to 20 acres in size because these would support a substantial new business, such as a manufacturing facility or a business park. Some small commercial sites, such as former gas stations, are often consolidated into larger parcels to be economically viable for redevelopment. See table 3 for a summary of these officials’ estimates. On the basis of their experience, these city officials and a contractor concluded that the proposed loan of $100,000 per year would be sufficient to assess a site and prepare a cleanup plan for most sites. Costs in the high range could be encountered at larger properties or sites with complex contamination, such as those with extensive groundwater contamination, which is costly to assess. These sites could require more than the proposed $100,000 per year and could also occasionally exceed the $200,000 loan total. Local officials told us that some flexibility to exceed the $100,000 per year limit and the $200,000 total would be helpful for such sites. We provided a draft of this report to EPA for its review and comment. We met with EPA officials that manage EPA’s brownfield initiatives, including the Director of the Outreach and Special Projects Staff in the Office of Solid Waste and Emergency Response, and an attorney with the Office of Enforcement and Compliance Assurance. They generally agreed with the information in the report. However, they pointed out that the estimates of the number of brownfields in the United States vary widely and that the Urban Land Institute’s estimate is likely to be conservative. We have provided more details on the sites potentially excluded from this estimate. The officials also explained that the loan program provided for in S. 1285 could be difficult and costly for EPA to administer and instead preferred the provision of grants to local governments. They also noted a number of policies that EPA has issued to help remove some of these liability barriers to brownfield redevelopment. We have recognized some of these policies, as appropriate, throughout the report. To estimate the inventory of brownfields in the United States, we contacted the research organizations attempting to inventory brownfields. We also contacted local officials in five cities that may have developed an inventory as part of their application for a grant under EPA’s brownfields pilot program. To identify the difficulties in redeveloping brownfields, we interviewed federal officials involved in EPA’s brownfields program, officials of five states’ voluntary cleanup programs, local officials with experience in redeveloping brownfields, and representatives of lending institutions. To determine the potential cost of assessing brownfield sites, we contacted city officials in eight cities that have already redeveloped brownfield properties and environmental cleanup contractors with experience in working with brownfields. Because of time constraints, we could not independently survey cities to identify the number of brownfield properties within their boundaries and relied on the information that various cities had already compiled. We also reviewed the existing literature on identifying and redeveloping brownfields. We conducted our review from November 1995 through April 1996 in accordance with generally accepted government auditing standards. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 10 days after the date of this letter. Please call me at (202)512-6112 if you or your staff have any questions about this report. Major contributors to this report are listed in appendix II. The U.S. Conference of Mayors, an organization for municipalities, completed a survey of its member cities in January 1996. The survey asked the cities to provide information on the brownfields within their borders. Table I.1 summarizes the survey results for cities with populations over 100,000, for those cities that provided estimates in acres. Population (1992) Eileen Larence Katherine Siggerud Rosa Maria Torres Lerma 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. 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 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. | Pursuant to a congressional request, GAO reviewed proposed legislation to redevelop abandoned, urban industrial sites, focusing on: (1) the number of potential sites nationwide; (2) impediments to redeveloping sites posed by the Superfund program; and (3) whether proposed loans to local governments are sufficient for conducting site assessments. GAO found that: (1) researchers estimate that about 150,000 acres of abandoned or underused industrial land exists nationwide; (2) lenders, property buyers, and property owners are reluctant to redevelop these sites because federal and state environmental laws may require expensive cleanups of latent industrial wastes before property improvements can be made; (3) federal law limits the liability of a party that holds ownership in a property but does not manage the property; (4) proposed legislation would limit the amount lenders would have to pay in the event they are liable, limit the liability of property buyers who assess a site for contamination before buying it, and provide assistance for state programs that encourage voluntary cleanup of industrial waste sites; (5) even if the liability of lenders and property buyers is limited, abandoned industrial sites might continue to be viewed as risky investments due to the possibility of contamination; and (6) proposed legislation would provide interest-free loans to localities to conduct site assessments to determine the extent of contamination. |
Since the 1960s, the United States has used satellites to observe the earth and its land, oceans, atmosphere, and space environments. Satellites provide a global perspective of the environment and allow observations in areas that may be otherwise unreachable or unsuitable for measurements. Used in combination with ground, sea, and airborne observing systems, satellites have become an indispensable part of measuring and forecasting weather and climate. For example, satellites provide the graphical images used to identify current weather patterns, as well as the data that go into numerical weather prediction models. These models are used to forecast weather 1 to 2 weeks in advance and to issue warnings about severe weather, including the path and intensity of hurricanes. Satellite data are also used to warn infrastructure owners when increased solar activity is expected to affect key assets, including communication satellites or the electric power grid. When collected over time, satellite data can also be used to observe trends and changes in the earth’s climate. For example, these data are used to monitor and project seasonal, annual, and decadal changes in the earth’s temperature, vegetation coverage, and ozone coverage. Environmental satellite programs generally fall into two categories: operational satellites and research and development satellites. Operational environmental satellites contribute to weather and climate predictions on a regular basis, and federal agencies sustain them by launching new satellites as older ones reach the end of their useful lives. Alternatively, research and development satellites are designed to test new technologies or to provide insights into environmental science. While there is not a commitment to sustain the capabilities demonstrated on research and development satellites on subsequent missions, these capabilities can be included on operational satellites if they demonstrate the usefulness of a new measurement or the maturity of new technology. Currently, the United States operates a fleet of operational environmental satellites, as well as multiple research and development satellites. Operational environmental satellites conduct earth observations from space in either a low-earth polar orbit or a geostationary earth orbit. Polar- orbiting satellites circle the earth in an almost north-south orbit within 1,250 miles of the earth, providing global coverage of conditions that affect weather and climate. Each satellite makes about 14 orbits a day. As the earth rotates beneath it, each satellite views the entire earth’s surface twice a day. In contrast, geostationary satellites maintain a fixed position relative to the earth from an orbit of about 22,300 miles in space. Figure 1 describes key characteristics of polar-orbiting and geostationary satellites. The United States currently operates two operational polar-orbiting meteorological satellite systems: the Polar Operational Environmental Satellites (POES) series, which is managed by NOAA, and the Defense Meteorological Satellite Program (DMSP), which is managed by the Air Force. The POES and DMSP programs provide data that are processed to provide graphical weather images and specialized weather products. They also provide the predominant input into numerical weather prediction models, a primary tool for forecasting weather. These satellites also provide data used to monitor environmental phenomena, such as ozone depletion, drought conditions, and energetic particle activity in the near- earth space environment, as well as data sets that are used by researchers to monitor climate change. Currently, one POES and two DMSP satellites are positioned so that they can observe the earth in early morning, midmorning, and early afternoon polar orbits. In addition, a European satellite, called the Meteorological Operational (MetOp) satellite, provides observations in the midmorning orbit. Together, they ensure that, for any region of the earth, the data provided to users are generally no more than 6 hours old. Figure 2 illustrates the current operational polar satellite configuration. NOAA, NASA, and DOD are currently developing the next generation of operational polar-orbiting environmental satellites, called NPOESS. This program was planned to converge the POES and DMSP satellite programs into a single program capable of satisfying both civilian and military requirements for earth and space weather, as well as climate monitoring. As currently defined, NPOESS consists of a series of four satellites, as well as a demonstration satellite called the NPOESS Preparatory Project (NPP). NPP is intended to reduce the risk associated with launching new sensor technologies and to ensure continuity of climate data. The agencies plan to launch NPP in 2011, with the other satellites following at regular intervals to ensure satellite coverage in two orbits through 2026. Due to poor program performance and interagency conflicts over system requirements, the NPOESS program is currently being restructured to allow separate acquisitions by NOAA and DOD. However, it is not yet clear how or when this transition will take place. In addition to the polar satellite program, NOAA also manages an operational geostationary satellite program, called the Geostationary Operational Environmental Satellite (GOES) program. NOAA operates GOES as a two-satellite system that is primarily focused on the United States (see fig. 3). These satellites are uniquely positioned to provide broad, continuously updated coverage of atmospheric and surface conditions on the earth, as well as the space environment surrounding the earth. For example, geostationary satellites observe the development of hazardous weather events, such as hurricanes and severe thunderstorms, and track their movement and intensity to help reduce or avoid major losses of property and life. In addition, the geostationary satellites track space weather variables such as solar X-ray fluctuations and high-energy particles that are used in identifying emerging solar storms. NOAA is currently developing the next generation geostationary series, called GOES-R. GOES-R is expected to provide satellite data products to users more quickly and to provide better clarity and precision than prior geostationary satellites. It is expected to be a two-satellite system, launching in 2015 and 2017, and is considered critical to the United States’ ability to maintain the continuity of data required for weather forecasting through 2028. In addition to operational polar and geostationary satellites, the United States operates research satellites to better understand scientific earth processes and to develop new technologies. Since the early 1990s, NASA has launched 18 research satellites under its Earth Observing System, and plans to launch 6 more by 2013. These satellites continue to provide global and seasonal earth system measurements, which have provided a better understanding of human impacts on the earth, as well as improved disaster prediction and mitigation technologies. They are used both by NASA’s research communities and by other agencies, including the U.S. Department of Agriculture, for operational and decision-making purposes. NASA is now planning the next generation of research satellites, called its Earth Systematic Missions program. This program consists of three series of satellites to advance understanding of the climate system and climate change. In addition to its earth observation activities, NASA has been working to understand and measure solar activity in the space environment. For example, the observations of solar winds from its Advanced Composition Explorer mission and solar X-ray images from its Solar and Heliospheric Observatory mission are used for both solar research and space weather forecasting. DOD also develops environmental research satellites in support of its mission when a need is identified. For example, the Navy and others developed the WindSat program to demonstrate new capabilities for measuring the ocean surface wind vectors from space and to demonstrate an instrument that was originally planned for the NPOESS mission. In addition, DOD’s Communication/Navigation Outage Forecasting System satellite is expected to develop a capability for detecting and forecasting space weather events that lead to disruptions in communication signals in high-frequency radios and Global Positioning System (GPS) satellites. Environmental satellites gather a broad range of data that are transformed into a variety of products. Satellite sensors observe different bands of radiation wavelengths, called channels, which are used for remotely determining information about the earth’s environment. When first received, satellite data are considered raw data. To make them usable, NOAA, NASA, and DOD operate data processing centers that format the data so that they are time-sequenced and include earth location and calibration information. After formatting, these data are called raw data records. The data centers further process the raw data records into channel-specific data sets, called sensor data records and temperature data records. These data records are then used to derive weather and climate products called environmental data records and climate data records. Environmental data records generally support near-term weather observations and include a wide range of atmospheric products detailing cloud coverage, temperature, humidity, and ozone distribution; land surface products showing snow cover, vegetation, and land use; ocean products depicting sea surface temperatures, sea ice, and wave height; and characterizations of the space environment. Combinations of these data records (raw, sensor, temperature, and environmental data records) are also used to derive more sophisticated products, including the forecasts that result from weather prediction modeling. In contrast, climate data records identify longer term variations in the climate and include observations of the land, ocean, and atmosphere. While environmental and climate data products use much of the same data, the two user communities’ needs differ. In order to deliver timely weather forecasts and warnings, meteorologists require the rapid delivery of environmental data. Alternatively, scientists involved in climate monitoring, prediction, and research require accurate, precise, and consistent data over long periods of time. Figure 4 is a simplified depiction of the various stages of environmental satellite data processing, and figure 5 depicts examples of two different weather products. Figure 6 depicts an example of a climate data record. One subset of satellite-provided environmental weather information is climate data. Satellite-provided climate data are used in combination with ground and ocean observing systems to understand seasonal, annual, and decadal variations in the climate. Satellites provide land observations such as measurements of soil moisture, changes in how land is used, and vegetation growth; ocean observations such as sea levels, sea surface temperature, and ocean color; and atmospheric observations such as greenhouse gas levels (e.g., carbon dioxide), aerosol and dust particles, and moisture concentration. When these data are obtained over long periods of time, scientists are able to use them to determine short- and long-term trends in how the earth’s systems work and how they work together. For example, climate measurements have allowed scientists to better understand the effect of deforestation on how the earth absorbs heat, retains rainwater, and absorbs greenhouse gases. Scientists also use climate data to help predict climate cycles that affect the weather, such as El Niño, and to develop global estimates of food crop production for a particular year or season. Table 1 provides examples of ways in which satellite-provided climate products are used. Another subset of satellite-provided environmental weather information is space weather. Satellite-provided observations of space weather generally describe changes in solar activity in the space environment. Just as scientists use observations of weather that occurs on the earth’s surface and in its atmosphere to develop forecasts, scientists and researchers use space weather observations to detect and forecast solar storms that may be potentially harmful to society. Examples of space weather observations include bursts of solar energy called solar flares, solar winds, geomagnetic activity associated with solar storms, solar X-ray images and fluctuations, and solar ultraviolet images and fluctuations. These activities can adversely impact space assets (such as communication, GPS, and environmental satellites), airplanes flying at high altitudes or over the poles, ground assets (such as the electric energy grid), and the communications infrastructure (including high-frequency radio communications and transmissions between GPS satellites and ground- based receivers). Figure 7 provides an illustration of the key assets that are affected by solar weather and the solar weather activities that could put these assets at risk, while table 2 provides examples of ways in which space weather products and services are used. Three key federal agencies—NOAA, NASA, and DOD—are responsible for managing environmental satellite programs, processing the collected environmental data into usable climate and space weather products and services, and disseminating the data and products to others. Many other agencies use these data and products to support their missions. For example, the Department of Agriculture uses temperature, precipitation, and soil moisture data and products to inform farmers on what to plant, when to plant, and strategies to employ during the growing season, while the Department of Energy uses space weather information to help determine when the electrical grid could be damaged by solar events. These agencies also participate in one or more federal working groups that coordinate the agencies’ needs for and uses of environmental satellite products. These interagency working groups are overseen by offices within the Executive Office of the President. NOAA, DOD, and NASA manage multiple organizations with a diverse set of climate responsibilities. Specifically, NOAA has several organizations with responsibilities for developing and using satellite data to monitor and predict the earth’s climate. These include the following: The National Environmental Satellite, Data, and Information Service manages the development of environmental satellite products. It also has three data centers that archive environmental data and products related to climate, oceans, and geophysical features and disseminate these data and products to the public. The National Weather Service is responsible for weather, hydrologic, and climate forecasts and advisories for the United States, its territories, and adjacent waters and ocean areas for the protection of life and property and the enhancement of the national economy. Through its National Centers for Environmental Prediction’s Climate Prediction Center, it disseminates products and services that describe the earth’s climate and provides near-term climate predictions. The Office of Oceanic and Atmospheric Research has climate responsibilities focusing on understanding causes of global climate change and on improving operational climate forecasting capabilities through its Earth System Research Laboratory and Geophysical Fluid Dynamics Laboratory. Organizations within DOD also have responsibilities for providing climate forecasts that are specifically tailored for military planning and operations. For example, the Air Force Weather Agency is responsible for providing environmental outlooks to support the Air Force and Army, including forecasts of the properties of clouds (such as density or ice content) and ground conditions to support planning for airborne and ground operations. In addition, the Navy’s Naval Oceanographic Office tracks ocean currents for planning ship tracking and missions, and provides outlooks of the acoustical environment for submarines. The Navy’s Fleet Numerical Meteorology and Oceanography Command provides environmental outlooks in support of naval operations, including outlooks on coastal and open ocean conditions. NASA’s Earth Science Division is responsible for advancing the understanding of the earth system and demonstrating new satellite technologies through its environmental research and development satellites. NASA currently demonstrates new measurements and technologies for measuring climate through various satellite and airborne missions, including the Earth Observing System. In addition to NOAA, DOD, and NASA, the Department of the Interior’s U.S. Geological Survey is responsible for operating the Landsat satellites, distributing the data, and maintaining an archive of Landsat 7 and other remotely sensed data. Other agencies use climate products in their operations. For example, the Environmental Protection Agency uses sea level data and products to examine the potential societal impacts, adaptation options, and other decisions sensitive to sea level rise in coastal communities, while the Department of Homeland Security’s Federal Emergency Management Agency uses climate research and predictions to help develop disaster preparedness and response plans. Additional processing and product development is done in partnership with universities, nongovernmental organizations, and industry. See appendix II for more information on federal agencies and their climate-related responsibilities. NOAA, DOD, and NASA also manage organizations with responsibilities for space weather satellites and prediction. NOAA and DOD both obtain satellite and land-based measurements of solar activity and produce operational space weather products for a variety of users. Specifically, NOAA’s National Weather Service manages the Space Weather Prediction Center, which is responsible for continuously monitoring space weather for civilian user communities, and provides official space weather warnings, watches, and alerts. In addition, NOAA’s National Environmental Satellite, Data, and Information Service has a data center that archives environmental data related to space weather and disseminates them to the public. Complementing NOAA’s responsibilities for civilian space weather forecasts, DOD’s Air Force Weather Agency is responsible for continuously monitoring space weather for defense and intelligence user communities. The Air Force Weather Agency and NOAA products are similar, and the majority of the space weather data they use are the same. However, the Air Force customizes specialized products to provide space situational awareness for its users. Both the Air Force and NOAA work together to ensure that both the civilian and military sectors understand and can respond to changes in the space environment. NASA conducts space weather research and development activities using environmental satellites. For instance, NASA observes solar wind data from its Advanced Composition Explorer mission and solar X-ray images from its Solar and Heliospheric Observatory mission to better understand the sun and its effects on the earth and solar system. Data from these satellites are used for solar research and are also used by other agencies for operational space weather forecasting, including watches and warnings. Other federal agencies use space weather products to support their respective missions. For example, the Department of Transportation’s Federal Aviation Administration examines radiation exposure at high altitudes, while the Department of Energy uses observations from space weather satellites to study possible impacts on electrical energy transmission through the energy grid. See appendix II for more information on federal agencies and their space-weather-related responsibilities. In addition to agencies with responsibilities for acquiring, processing and disseminating environmental data and information, there are two organizations—the U.S. Group on Earth Observations (USGEO) and the U.S. Global Change Research Program (USGCRP)—that are primarily responsible for coordinating federal efforts with respect to observations of the earth’s environment. The National Space Weather Program serves as the coordinating body for space weather. USGEO is made up of representatives from federal agencies with a role in earth observations, as well as liaisons from the Executive Office of the President. The group’s responsibilities include developing and coordinating an ongoing process for planning, developing, and managing an integrated U.S. earth-observing system consisting of ground, airborne, and satellite measurements. USGEO reports to the National Science and Technology Council’s Committee on Environment and Natural Resources. USGCRP consists of representatives from 13 federal departments and agencies, as well as liaisons from the Executive Office of the President and USGEO. Congress established USGCRP in 1990 to coordinate and integrate federal research on changes in the global environment and to discuss its implications for society. USGCRP reports to the National Science and Technology Council’s Committee on Environment and Natural Resources. The National Space Weather Program is responsible for coordinating federal efforts and leveraging resources with respect to space weather observation. The program consists of representatives from eight federal agencies, who coordinate their activities through NOAA’s Office of the Federal Coordinator for Meteorology. Appendix III identifies the federal organizations that participate in these interagency coordination groups. The Executive Office of the President provides oversight for federal space- based environmental observation. Within the Executive Office of the President, the Office of Science and Technology Policy (OSTP), the Office of Management and Budget (OMB), and the Council on Environmental Quality carry out these governance responsibilities. In addition, the National Science and Technology Council and its Committee on Environment and Natural Resources provide the Executive Office of the President with executive-level coordination and advice. Table 3 identifies roles and responsibilities of organizations within the Executive Office of the President that provide oversight of federal environmental observation efforts. In recent years, we have issued a series of reports on the NPOESS and GOES-R satellite programs. Both programs are critical to United States’ ability to maintain the continuity of data required for weather forecasting and global climate monitoring through the years 2026 and 2028, respectively. However, both of these programs were restructured due to their complexity and growing costs. These restructuring efforts involved removing selected climate and space weather instruments. Specifically, on the NPOESS program, four instruments were removed and four had their capabilities reduced. On the GOES-R program, NOAA removed an advanced instrument that was important to the weather and climate community. In May 2008, we recommended that the agencies develop a long-term strategy for restoring the NPOESS sensors in order to guide short-term decision making and to avoid an ad hoc approach to restoring capabilities. In addition, in April 2009, we recommended that NOAA develop a plan for restoring the advanced GOES-R capabilities that were removed from the program, if feasible and justified. Federal agencies have not yet established plans to restore all of the capabilities removed from the NPOESS and GOES-R programs. As originally planned, the NPOESS and GOES-R programs included instruments and products to meet a wide range of user needs through 2026 and 2028, respectively. Specifically, both NPOESS and GOES-R were envisioned to fulfill requirements for weather, space weather, and climate monitoring. However, in 2006, both of these programs were restructured due to growing costs. These restructuring efforts involved removing selected climate and space weather instruments—and, in some cases, replacing them with a less-capable instrument. Table 4 lists the instruments that were removed or degraded. Since June 2006, the agencies have taken steps to restore selected capabilities that were removed from NPOESS in the near-term; however, they do not yet have plans to restore capabilities for the full length of time covered by the NPOESS program. Specifically, the agencies decided to restore the capabilities of three NPOESS instruments through 2016 or 2021, the capabilities of a fourth instrument through 2018 for NOAA and through 2025 for the Navy, and to accept degraded capabilities in replacing a fifth instrument between 2019 and 2024. The agencies have not yet made any plans to restore the capabilities of a sixth NPOESS instrument, and NOAA has not yet made plans to restore the capabilities of the GOES-R instrument. This leaves gaps in promised capabilities ranging from 1 to 11 years, depending on the instrument. Figure 8 provides a visual summary of plans and gaps in plans for key instruments through 2026. Both DOD and NOAA officials reiterated their commitment to look for opportunities to restore the capabilities that were removed from NPOESS and GOES-R. However, agency officials acknowledge that they do not have plans to restore the full set of capabilities because of the complexity and cost of developing new satellite programs. Until the capabilities that were removed from NPOESS and GOES-R are restored, there will be future gaps in key atmospheric measurements, including aerosols and key cloud properties. There will also be future gaps in oceanic measurements, including sea surface height and wave height. These gaps will reduce the accuracy of key climate and space weather products—and could lead to interruptions in the continuity of data needed for accurate climate observations over time. Meteorologists, oceanographers, and climatologists reported that these gaps will seriously impact ongoing and planned earth monitoring activities. For over a decade, the climate community has clamored for an interagency strategy to coordinate agency priorities, budgets, and schedules for environmental satellites over the long term—and the governance structure to implement that strategy. Specifically, in 1999, the National Research Council reported on the need for a comprehensive long-term earth observation strategy and, in 2000, for an effective governance structure that would balance interagency issues and provide authority and accountability for implementing the strategy. The National Research Council has repeated these concerns in multiple reports since then. Similarly, in 1999, the Administrators of NOAA and NASA wrote letters to the White House’s OSTP noting the need for an interagency strategy and the means to implement it. They called for OSTP to work with OMB to better define agency roles and responsibilities and to align a satellite strategy with agency budgets. More recently, in 2008, a strategic policy research center recommended that the United States develop an overall plan for an integrated, comprehensive, and sustained earth observation system and the governance structure to support it. While progress has been made in developing near-term interagency plans, this initiative is languishing without a firm completion date, and federal efforts to establish and implement a strategy for the long-term provision of satellite data are insufficient. Specifically, in 2005, the National Science and Technology Council’s Committee on Environment and Natural Resources established USGEO to develop an earth observation strategy and coordinate its implementation. Since that time, USGEO assessed current and evolving requirements, evaluated them to determine investment priorities, and drafted the Strategic Assessment Report—a report delineating near-term opportunities and priorities for earth observation from both space and ground. According to agency officials, this report is the first in a planned series, and it was approved by OSTP and multiple federal agencies in May 2009. However, OSTP has not yet forwarded the draft to the Committee on Environment and Natural Resources and the President’s National Science and Technology Council because it is reconsidering whether to revise or move forward with the plan. USGEO officials could not provide a schedule for completing this near-term interagency plan. This draft report is an important first step in developing a national strategy for earth observations, but it is not sufficient to ensure the long-term provision of data vital to understanding the climate. The draft report integrates different agencies’ requirements and proposes continuing or improving earth observations in 17 separate areas, using both satellite and land-based measuring systems. However, the report does not include costs, schedules, or plans for the long-term provision of satellite data. For example, it does not fully address the capabilities that were removed from the NPOESS and GOES-R missions. While the report notes the importance of continuing current plans to fly the Total Solar Irradiance Sensor on the NPP satellite and the Clouds and the Earth’s Radiant Energy System sensor on the NPP and first NPOESS satellites, it does not make recommendations for what to do over the long term. In addition, the federal government lacks a clear process for implementing an interagency strategy. Key offices within the Executive Office of the President with responsibilities for environmental observations, including OSTP and the Council for Environmental Quality, have not established processes or time frames for implementing an interagency strategy— including steps for working with OMB to ensure that agencies’ annual budgets are aligned with the interagency strategy. As a result, even if an interagency strategy was finalized, it is not clear how OSTP and OMB would ensure that the responsibilities identified in the interagency strategy are consistent with agency plans and are funded within agency budgets. Agency officials cite multiple reasons for the difficulties they have encountered over the last decade in establishing a national interagency plan for long-term earth observations. One issue involves conflicting priorities between and among agencies, including disconnects between the research and operational communities and between the weather and climate communities. Another issue is the lack of agreement on how and when to transition research capabilities to operational satellites—and how to fund them. Without a long-term interagency strategy for satellite observations, and a means for implementing it, agencies face gaps in satellite data and risk making ad hoc decisions on individual satellites. For example, until recently, NASA’s QuikScat research satellite provided measurements of the effect of wind on ocean surfaces, which were used by the National Weather Service to improve tropical and midlatitude storm warnings and by the National/Naval Ice Center to improve its understanding of Arctic and Antarctic ice environments. However, NOAA does not plan to replace the satellite until at least 2014. This extended gap leaves the organizations that used QuikScat with degraded measurements. As another example, Landsat satellites have provided data on land cover change, vegetation mapping, and wildfire effects for over 35 years. Currently, there are two Landsat satellites in operation, and both are long past their expected life spans. While there is a plan to develop and la the Landsat Data Continuity Mission by June 2013, there is no comm to ensure continuity after that mission. satellite program, there will be a significant gap in land cover images an other important global climate data ranging from water manageme nt to agriculture. Without Landsat or a similar Until an interagency strategy for earth observation is established, and a clear process for implementing it is in place, federal agencies will continue to procure their immediate priorities on an ad hoc basis, the economic benefits of a coordinated approach to investments in earth observation may be lost, and the continuity of key measurements may be lost. This will hinder our nation’s ability to understand long-term climate changes. While key federal agencies have taken steps to plan for continued space weather observations in the near term, they lack a strategy for the long- term provision of space weather data. Similar to maintaining satellite- provided climate observations, maintaining space weather observations over the long term is important. The National Space Weather Program, the interagency coordinating body for the United States space weather community, has repeatedly recommended taking action to sustain the space weather observation infrastructure on a long-term basis. In August 2007, a White House working group called the Future of Land Imaging Interagency Working Group issued A Plan for a U.S. National Land Imaging Program. This report recommended that the Department of the Interior manage future Landsat programs and have NASA develop future satellites. However, this plan has not yet been implemented. experimental space-observing satellites. In addition, at OSTP’s request, the National Space Weather Program reported in 2008 on the impacts for both operations and research of not having NASA’s aging Advanced Composition Explorer or the planned space weather capabilities from the NPOESS program. It subsequently developed, again at the request of OSTP, two reports documenting specific recommendations for the future of space weather, one on what to do about the Advanced Composition Explorer and the other on the replacement of the space weather capabilities removed from the NPOESS program. The program submitted the reports in October and November of 2009, respectively. However, OSTP officials do not have a schedule for approving or releasing the reports. While the agencies’ short-term actions and the pending reports hold promise, federal agencies do not currently have a comprehensive interagency strategy for the long-term provision of space weather data. Until OSTP releases the reports, it will not be clear whether they provide a clear strategy to ensure the long-term provision of space weather data—or whether the current efforts are simply ad hoc attempts to ensure short- term data continuity. Without a comprehensive long-term strategy for the provision of space weather data, agencies may make ad hoc decisions to ensure continuity in the near term and risk making inefficient decisions on key investments. Almost 4 years after key climate and space weather instruments were removed from the NPOESS and GOES-R satellite programs, there are still significant gaps in future satellite coverage. While individual agencies have taken steps to restore selected capabilities in the near term, gaps in coverage ranging from 1 to 11 years are expected beginning as soon as 2015. The gaps in satellite coverage are expected to affect the continuity of important climate and space weather measurements, such as our understanding of how weather cycles impact global food production, and when radio and GPS satellite communications are likely to be affected by space weather. Looking more broadly, despite repeated calls for interagency strategies for the long-term provision of environmental data (both for climate and space weather purposes), our nation still lacks such plans. Efforts to develop even short-term strategies have languished in committees and offices supporting the Executive Office of the President, and there is no schedule for them to be approved or released. Further, even if an interagency strategy for the long-term provision of environmental observations was established, there are not clear processes in place to implement it or align it with individual agencies’ plans and annual budgets. Specifically, key organizations within the Executive Office of the President, including the Office of Science and Technology Policy, the Office of Management and Budget, and the Council on Environmental Quality, lack a coordinated process for ensuring that individual agencies align their plans and budgets to the greater good identified in an interagency plan. Until the Executive Office of the President establishes comprehensive interagency strategies and internal processes that foster the implementation of these strategies, individual agencies will continue to address their most pressing priorities as they arise and opportunities to effectively and efficiently plan ahead will be lost. In order to effectively address our country’s need for sustained environmental observations, we recommend that the Assistant to the President for Science and Technology, in collaboration with key Executive Office of the President entities (including the Office of Science and Technology Policy, the Office of Management and Budget, the Council on Environmental Quality, and the National Science and Technology Council), take the following four actions: Establish a firm deadline for the completion and release of three key reports on environmental observations: USGEO’s report on near-term priorities and opportunities in earth observations, called the Strategic Assessment Report; The National Space Weather Program’s report on how to address the loss of the Advanced Composition Explorer capabilities; and The National Space Weather Program’s report on how to address the space weather capabilities that were removed from the NPOESS program. Direct USGEO to establish an interagency strategy to address the long- term provision of environmental observations from satellites that includes costs and schedules for the satellites, as well as a plan for the relevant agencies’ future budgets. Establish an ongoing process, with timelines, for obtaining approval of the interagency strategy and aligning it with agency plans and annual budgets. Direct the National Space Weather Program Council to establish an interagency strategy for the long-term provision of space weather observations. A senior policy analyst from the Office of Science and Technology Policy/Executive Office of the President provided comments on a draft of this report via e-mail. In addition, we received written comments on a draft of this report from the Secretary of Commerce, who transmitted NOAA’s comments (see app. IV), and NASA’s Associate Administrator for its Science Mission Directorate (see app. V). DOD officials declined to comment on a draft of the report. The Executive Office of the President did not agree or disagree with our recommendations; however, officials noted that OSTP is currently revising USGEO’s Strategic Assessment Report to update information on launch schedules and on the availability of certain measurements that have changed since completion of the report a year ago. Further, officials agreed that the Strategic Assessment Report is a first step in developing a strategy for earth observations, and noted that they plan to use the report as a basis for meeting congressional reporting requirements directing OSTP to develop a strategy on earth observations. In crafting this strategy, it will be important for OSTP to address long-term interagency needs and to work with OMB to ensure that the long-term plans are aligned with individual agencies’ plans and budgets. If the plan does not include these elements, individual agencies will continue to address only their most pressing priorities, other agencies’ needs may be ignored, and the government may lose the ability to effectively and efficiently address its earth observation needs. In its comments, NOAA noted that it had completed its actions relative to delivering input to the Executive Office of the President for developing strategies for climate and space weather observations. We agree; it is now up to the Executive Office of the President to establish and implement an interagency strategy for the long-term provision of these observations. The agency also responded to our statement that it had not established plans to restore all of the capabilities that were removed from the GOES-R and NPOESS programs. Regarding GOES-R, NOAA stated that it will continue to evaluate the feasibility and priority of addressing requirements and determine the appropriate means to meet them. Regarding NPOESS, NOAA noted that, in fiscal year 2009, the agency restored the highest priority climate sensors that were removed from the NPOESS program. NOAA also reported that the fiscal year 2011 President’s Budget Request includes plans to restore additional key climate sensors on JPSS and other satellite programs. However, as discussed in our report, NOAA’s efforts to restore sensors in 2009 addressed only selected near-term needs and did not address the full set of capabilities over the life of the NPOESS program. Further, regarding the fiscal year 2011 President’s Budget Request, at the time of our review the full set of capabilities planned for the JPSS program had not yet been determined. For example, the Total Solar Irradiance Sensor (which was one of the high-priority sensors that was restored to the NPOESS program in fiscal year 2009) will not be included on the JPSS satellite, but could instead be included on another to-be-determined satellite. As noted several times in our report, we focused on the capabilities that were planned for the NPOESS program because plans for JPSS had not yet been finalized. We have ongoing work to examine the JPSS program, which will further evaluate NOAA’s plans as they are solidified. In a final comment, NOAA stated that we did not distinguish between potential data gaps in existing and new capabilities, and suggested that we only use the term “gap” to describe the potential loss of an existing capability. Given that the requirements for the NPOESS programs were developed and validated by multiple agencies nearly a decade ago, and requirements for the GOES-R sensor were revalidated by NOAA in 2007, we believe it is appropriate to view the removal of these requirements as gaps—whether they represent existing or new capabilities. In its written comments, NASA provided further details on its efforts to advance the understanding of earth systems and Heliophysics through environmental research satellites, and provided clarification on plans for future missions that are included in the fiscal year 2011 President’s Budget Request. The agency also noted that OSTP developed a plan for the future of the land-imaging program, under which NASA would develop future Landsat-like satellites on behalf of the Department of the Interior. However, this plan was established in 2007 and has not yet been funded or implemented. It is not clear that it will be implemented. This situation illustrates that having an approved plan is not enough to ensure that critical satellite capabilities are obtained, and reiterates the need for an ongoing process that aligns interagency strategies with individual agencies’ plans and annual budgets. OSTP, NOAA, and NASA also provided technical comments on the report, which 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. At that time, we will send copies of this report to interested congressional committees, the Secretary of Commerce, the Secretary of Defense, the Administrator of NASA, the Director of the Office of Science and Technology Policy, the Director of the Office of Management and Budget, and other interested parties. The report also will be available on the GAO Web site at http://www.gao.gov. If you or your staff members have questions about this report, please contact me at (202) 512-9286 or [email protected]. 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 VI. Our objectives were to (1) assess plans to restore capabilities that were originally planned for, but then removed from, the National Polar-orbiting Operational Environmental Satellite System (NPOESS) and Geostationary Operational Environmental Satellite-R series (GOES-R) satellites; (2) evaluate the adequacy of federal efforts to establish a strategy for the long- term provision of satellite-provided climate data; and (3) evaluate the adequacy of federal efforts to establish a strategy for the long-term provision of satellite-provided space weather data. To assess plans for restoring capabilities from the NPOESS and GOES-R programs, we compared the original program plans for sensors and products with current plans and identified gaps over time. We also observed monthly senior-level management review meetings, reviewed documentation from those meetings, and interviewed agency officials to obtain information on any changes in program plans. To evaluate the adequacy of federal efforts to establish a strategy for the long-term provision of satellite-provided climate data, we compared plans developed by the Department of Defense (DOD), National Aeronautics and Space Administration (NASA), National Oceanic and Atmospheric Administration (NOAA), and a draft strategy developed by the Executive Office of the President’s Office of Science and Technology Policy (OSTP) and the U.S. Group on Earth Observations for the provision of climate data with recommendations made by the National Research Council and GAO for the development of a long-term strategy. We identified the shortfalls of and challenges to those plans. We also visited NOAA’s National Climatic Data Center, Climate Prediction Center, and Earth System Research Laboratory; the Navy’s Fleet Numerical Meteorology and Oceanography Center and Naval Oceanographic Office; and the Air Force Weather Agency to obtain information on the uses and users of satellite data for climate monitoring and prediction, as well the need for interagency strategic planning for space-based climate observations. We also interviewed relevant agency officials. To evaluate the adequacy of federal efforts to establish a strategy for the long-term provision of satellite-provided space weather data, we compared DOD, NASA, and NOAA plans for the provision of space weather data to leading practices for the development of a long-term strategy, and we identified the potential shortfalls of and challenges to those plans. We also identified OSTP plans for space weather. We attended a space weather events workshop to determine key issues related to long-term plans for space weather observations. We also visited the Air Force Weather Agency, the Space Weather Prediction Center, and NOAA’s National Geophysical Data Center to obtain information on the uses and users of satellite data for space weather monitoring and prediction, as well the need for interagency strategic planning for space weather observations. We also interviewed relevant agency officials. We conducted our work at NOAA, NASA, DOD, and OSTP facilities in the Washington, D.C., metropolitan area. In addition, we conducted work at satellite data processing facilities in Asheville, North Carolina; Monterey, California; Boulder, Colorado; Bay Saint Louis, Mississippi; and Omaha, Nebraska. We selected these facilities because they host key military and civilian users of satellite data for weather, climate, and space weather forecasting. We conducted this performance audit from June 2009 to April 2010, 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. Multiple agencies have a role in developing or using climate and space weather products. Table 5 lists key federal organizations’ roles with respect to climate observation, while table 6 lists key federal organizations’ roles with respect to space weather observation. Interagency committees coordinate the interests of the multiple federal agencies whose missions involve environmental monitoring and research. These include the U.S. Global Change Research Program, which coordinates federal climate research efforts; the U.S. Group on Earth Observations, which plans for and coordinates earth observations; and the National Space Weather Program, which coordinates federal space weather monitoring, research, and forecasts. Table 7 identifies federal organizations that participate in these interagency coordination groups. In addition to the individual named above, Colleen M. Phillips, Assistant Director; Bill Carrigg; Neil Doherty; Joshua Leiling; Kathleen S. Lovett; Lee McCracken; and Joseph D. Thompson made key contributions to this report. | Environmental satellites provide data on the earth and its space environment that are used for forecasting the weather, measuring variations in climate over time, and predicting space weather. In planning for the next generation of these satellites, federal agencies originally sought to fulfill weather, climate, and space weather requirements. However, in 2006, federal agencies restructured two key satellite acquisitions, the National Polar-orbiting Operational Environmental Satellite System (NPOESS) and the Geostationary Operational Environmental Satellite-R series (GOES-R). This involved removing key climate and space weather instruments. GAO was asked to (1) assess plans for restoring the capabilities that were removed from the two key satellite acquisitions, (2) evaluate federal efforts to establish a strategy for the long-term provision of satellite-provided climate data, and (3) evaluate federal efforts to establish a strategy for the longterm provision of satellite-provided space weather data. To do so, GAO analyzed agency plans and reports. After key climate and space weather instruments were removed from the NPOESS and GOES-R programs in 2006, federal agencies decided to restore selected capabilities in the near term. However, neither the National Oceanic and Atmospheric Administration (NOAA) nor the Department of Defense (DOD) has established plans to restore the full set of NPOESS capabilities over the life of the program. Further, NOAA has not made any plans to restore the advanced climate capabilities of the instrument that was removed from GOES-R. Expected gaps in coverage for the instruments that were removed range from 1 to 11 years, and begin as soon as 2015. Until these capabilities are in place, the agencies will not be able to provide key environmental data that are important for sustaining climate and space weather measurements. For over a decade, federal agencies and the climate community have clamored for a national interagency strategy to coordinate agency priorities, budgets, and schedules for environmental satellite observations over the long-term-- and the governance structure to implement that strategy. In mid-2009, a White House-sponsored interagency working group drafted a report that identifies and prioritizes near-term opportunities for environmental observations; however, the plan has not been approved by key entities within the Executive Office of the President and there is no schedule for finalizing it. In addition, the report does not address costs, schedules, or the long-term provision of satellite data, and there is no process or time frame for implementing it. Without a strategy for continuing environmental measurements over the coming decades and a means for implementing it, agencies will continue to independently pursue their immediate priorities on an ad hoc basis, the economic benefits of a coordinated approach to investments in earth observation may be lost, and our nation's ability to understand climate change may be limited. While federal agencies have taken steps to plan for continued space weather observations in the near-term, they lack a strategy for the long-term provision of space weather data. NOAA and DOD plan to replace aging satellites, and an interagency space weather program drafted two reports on how to mitigate the loss of key satellites and instruments. These reports were submitted to the Executive Office of the President's Office of Science and Technology Policy (OSTP) in the fall of 2009. However, OSTP has no schedule for approving or releasing the reports. Until OSTP approves and releases the reports, it will not be clear whether the reports provide a strategy to ensure the long-term provision of space weather data--or whether the current efforts are simply attempts to ensure short-term data continuity. Without a comprehensive longterm strategy for the provision of space weather data, agencies may make ad hoc decisions to ensure continuity in the near term and risk making inefficient investment decisions. |
FOIA establishes a legal right of access to government information on the basis of the principles of openness and accountability in government. Before its enactment in 1966, an individual seeking access to federal records faced the burden of establishing a “need to know” before being granted the right to examine a federal record. FOIA established a “right to know” standard, under which an organization or person could receive access to information held by a federal agency without demonstrating a need or reason. The “right to know” standard shifted the burden of proof from the individual to a government agency and required the agency to provide proper justification when denying a request for access to a record. Any person, defined broadly to include attorneys filing on behalf of an individual, corporations, and organizations, can file a FOIA request. For example, an attorney can request labor-related work compensation files on behalf of his or her client, and a commercial requester, such as a data broker that files a request on behalf of another person, may request a copy of a government contract. In response, an agency is required to provide the relevant record(s) in any readily producible form or format specified by the requester unless the record falls within a permitted exemption. Nine specific exemptions can be applied to withhold, for example, classified, confidential commercial, privileged, privacy, and several types of law enforcement information. (See appendix II for an explanation of the nine exemptions.) Since its enactment 50 years ago, FOIA has been amended to increase openness and access to government information. As the overseer of agencies’ FOIA implementation, in October and November 2008, Justice issued guidance to assist federal agencies in implementing the FOIA amendments of the 2007 OPEN Government Act. In September 2013, Justice incorporated in the procedural requirements chapter of the Department of Justice Guide to the Freedom of Information Act procedures for agencies to follow when responding to FOIA requests. Specifically, the guidance discusses how requests are to be processed— from the point of determining whether an entity in receipt of a request is subject to FOIA, to responding to the review of an agency’s decision regarding a request on an administrative appeal. Agencies are generally required to make a determination on a FOIA request within 20 working days of receiving a request. A request may be received in writing or by electronic means. Once received, the request goes through multiple phases, which include assigning a tracking number, searching for responsive records, processing records, and releasing records. FOIA allows a requester to challenge an agency’s final decision on a request through an administrative appeal or a lawsuit. Specifically, a requester has the right to file an administrative appeal if he or she disagrees with the agency’s decision on their request. Agencies generally have 20 working days to respond to requesters regarding administrative appeals. A requester should generally exhaust their administrative remedies, such as filing an administrative appeal, before a lawsuit can be filed. If a request is denied on appeal, the requester then has 6 years to file a lawsuit pertaining to the request. Further, if a requester substantially prevails in a FOIA lawsuit, the court may assess against the government reasonable attorneys’ fees and litigation costs. Figure 1 provides a simplified depiction of the federal government’s FOIA administrative appeal and litigation process. FOIA assigns Justice the responsibility to develop guidance for federal agencies on the implementation of the law and to oversee the agencies’ compliance with FOIA requirements. Justice also provides training to agencies on all aspects of FOIA and prepares annual summary reports on agencies’ FOIA processing and litigation activities. These activities are carried out by the department’s Office of Information Policy, as follows: Develops guidance. The office develops guidance and best practices documents to assist federal agencies in complying with FOIA requirements. For example, it has developed guidance for ensuring timely determinations on requests; expediting the processing of requests; and reducing backlogs. It also has developed guidance to inform agencies on what information should be contained in their Annual FOIA Reports, to include information on agencies’ overall processing and litigation costs. In addition to the guidance, the office has documented best practices for improving transparency. Oversees agency compliance. To oversee FOIA operations, the office collects information from agencies, including through Annual FOIA Reports and Chief FOIA Officer Reports. These reports include information such as the number of FOIA requests received and processed in a fiscal year, the disposition of requests processed, and total costs associated with processing and litigating requests. Provides training. The office conducts training sessions on a variety of FOIA-related topics. For example, it conducts an annual training class that provides a basic overview of the act. It also offers a seminar for attorneys that handle FOIA litigation, which includes lectures and instruction on, for example, a successful litigation strategy. Hands-on courses focused on the procedural requirements involved in processing a request from start to finish also are offered. Prepares annual reports. As required by FOIA, the office prepares an annual report—Justice’s Litigation and Compliance Report. This report, which is submitted to Congress, describes the department’s efforts during the year to encourage compliance with the act. It also provides a listing of all FOIA lawsuits filed or decided in that year, along with information on the exemptions involved in each case, the disposition of each case, and any court-assessed costs, fees, and penalties. In addition to the aforementioned responsibilities, Justice is responsible for representing federal agencies if they are sued for an action or inaction under FOIA. The department’s attorneys and support staff are assigned to work on each lawsuit. (The agency subject to the lawsuit also plays a supporting role.) Justice’s Civil Division and the 93 United States Attorneys’ Offices handle the defense of the majority of the lawsuits on behalf of other federal agencies. According to the department, the United States Attorneys’ Offices handle about 70 percent of the lawsuits, while the Civil Division handles most of the remaining lawsuits brought against agencies. A small percentage of FOIA lawsuits are handled by other components of Justice, such as the Tax Division. However, if a lawsuit involves multiple agency defendants, a United States Attorneys’ Office may be primarily responsible for the lawsuit. Once a case is assigned to a specific division within Justice, the attorneys use various case management systems to track the lifecycle of the lawsuit (e.g., from receipt of complaint to final disposition). Specifically, Justice identified three case management systems that are used by the United States Attorneys’ Offices and the Civil Division: The United States Attorneys’ Offices primarily use two systems to track lawsuits—the Legal Information Office Network System (LIONS) and the United States Attorneys’ Resource Summary Reporting System (USA-5). LIONS allows individual Attorneys’ Offices to maintain, track, and report information on pending employee workloads and lawsuit assignments. This system contains data fields for limited, pre-specified case-specific information, such as the amounts of relief requested, estimated, or granted. FOIA lawsuits are specifically identified through a “cause of action” field in LIONS. However, according to Justice officials in the Executive Office for United States Attorneys, FOIA lawsuits can also be included under other categories in this system, such as categories for lawsuits related to the Privacy Act or miscellaneous claims against the government. The United States Attorneys’ Offices also use USA-5 to track lawsuits. Within this system, attorneys do not track the amount of time spent on individual lawsuits, but instead, the amount of time spent on particular program categories. FOIA litigation lawsuits are generally included in the “Program Litigation” category, which is a category that includes programs others than FOIA, such as administrative matters, veterans’ re-employment rights, and the Privacy Act. Justice’s Civil Division uses its automated case management system (CASES) to track lawsuit-related information. According to the department, this system is primarily used for assigning lawsuits to a particular section within the Civil Division; routing case-related mail; identifying the attorneys handling a particular case; and generating statistical, management, and budget information, such as the amount of time spent by an attorney on a particular lawsuit. The system may also include information on the amount of attorneys’ fees and costs paid in a lawsuit, if applicable. As previously mentioned, Justice annually publishes a litigation and compliance report that is required by FOIA. This report provides information on all of the FOIA lawsuits filed in federal district court each year, as derived directly from the federal courts’ docketing systems through the Public Access to Court Electronic Records (PACER) system. Justice’s litigation and compliance reports indicated that 3,350 FOIA lawsuits were filed across the federal government between 2006 and 2015, as shown in table 1. The litigation and compliance reports also identify the FOIA lawsuits for which a decision was rendered by federal courts each year. According to the department, the report data are compiled through a summary of court decisions issued by the Office of Information Policy on a weekly basis and a survey of PACER data. The reports provide a description of the disposition in each FOIA case, any claimed exemptions, and any costs, fees, or penalties assessed by the courts. For the 112 selected FOIA lawsuits where the plaintiffs had prevailed, litigation-related costs could not be fully determined. Litigation-related costs associated with such lawsuits are comprised of (1) Justice’s costs for defending the lawsuits on behalf of agencies, (2) the agencies’ respective costs for the lawsuits, and (3) any attorneys’ fees and costs as assessed by a court or based on settlement agreements awarded to plaintiffs. However, Justice does not collect and track all of the costs that its attorneys and staff incur for individual lawsuits in which the plaintiffs prevailed. Moreover, agencies involved in the selected lawsuits did not have mechanisms in place to track FOIA litigation costs where the plaintiff prevailed, thus hindering their reporting of these costs for 55 of the selected lawsuits. Justice’s and the agencies’ FOIA officials stated that they had not taken steps to track their expenses for individual lawsuits where the plaintiffs prevailed because there is no statutory requirement for them to do so. Further, while Justice’s annual Litigation and Compliance reports contained information on attorneys’ fees and costs assessed by the courts as required by FOIA, the information was not comprehensive because it did not reflect attorneys’ fees and costs awarded to plaintiffs in settlement agreements or changes in award amounts due to the appeals process. While Justice defends FOIA lawsuits on behalf of the federal government, it does not track all costs that the department incurs in defending individual lawsuits in which the plaintiffs prevailed. As noted previously, Justice relies on its three case management systems to manage the lawsuits. However, officials in the United States Attorneys’ Offices stated that their case management systems—LIONS and USA-5—do not track any expenses related to FOIA lawsuits. According to the officials, these systems were not designed to track costs that the department incurs in defending individual lawsuits. Furthermore, these systems are not used by the department to specifically track FOIA lawsuits in which the plaintiffs prevailed. Officials in the Civil Division stated that their case management system, CASES, includes data fields that can be used to track time spent on each FOIA lawsuit and the award of any attorneys’ fees and costs paid to the plaintiffs. However, according to the officials, the department does not require its staff to enter such data into these fields. Accordingly, of the 112 selected lawsuits, Justice provided cost information, totaling about $97,000 for 8 lawsuits in which the plaintiffs substantially prevailed. Officials in the Office of Information Policy, the United States Attorneys Offices, and the Civil Division told us that the department did not provide cost information for the other 104 lawsuits because it could not easily or accurately calculate hours and the value of the time spent by the department’s attorney or other staff that worked on the lawsuits. They stated that the department did not have tracking capabilities that would allow staff to easily produce the information without significant resources. For example, they explained that providing information on all 112 lawsuits would be a time-consuming task that would require staff to gather piecemeal data from each of the 93 United States Attorneys’ Offices throughout the country. Further, the officials acknowledged that their systems do not contain comprehensive cost information on individual FOIA lawsuits that would enable them to easily or accurately calculate the total time spent by their attorneys and other staff on the lawsuits. They stated that there is no statutory requirement for them to have such information. In the absence of a requirement for Justice to collect and track comprehensive information on its expenses incurred for individual FOIA lawsuits where the plaintiffs prevailed, the ability to reliably ascertain the department’s costs associated with such lawsuits would be difficult. Federal agencies have received guidance from Justice that asks them to provide their total litigation-related costs to the department as part of the annual FOIA reporting process. The guidance states that the agencies’ total litigation-related costs are to include the salaries of personnel involved in the litigation, litigation overhead expenses, and any other FOIA litigation-related costs. In addition, it states that an agency’s annual FOIA budget may be used as a resource for determining and reporting the FOIA litigation expenses. In response to the guidance, the agencies involved with the selected lawsuits had provided litigation-related cost information to Justice as part of their annual reporting on FOIA. For fiscal years 2009 through 2014, these agencies collectively reported costs totaling $144 million for all of the FOIA lawsuits that they defended. However, with respect to cost data at the individual lawsuit level, 17 of the 28 agencies provided cost information in response to our data collection instrument for 57 of the 112 lawsuits where the plaintiff substantially prevailed. According to this information, the agencies incurred approximately $1.3 million in FOIA litigation-related costs for these lawsuits during fiscal years 2009 through 2014. For example, the Department of Energy reported $76,440 in litigation-related costs for its 2 lawsuits, while the Social Security Administration reported $7,284 in litigation-related costs for its 3 lawsuits. (Appendix III provides descriptive examples of the 112 selected lawsuits and appendix IV identifies any costs reported by the 28 agencies for these lawsuits.) As part of their responses to our data collection instrument, each of these 17 agencies told us they had a system or process in place for tracking FOIA litigation-related cost information. The agencies described various systems or processes that they used. For example, the Internal Revenue Service stated that it tracked FOIA litigation cost data in a database that it used to collect information related to all of its lawsuits. Similarly, the Federal Election Commission provided cost data and noted that staff members in its Office of General Counsel were required to file monthly time reports in an electronic case management system that showed the lawsuits on which they had worked. Further, the Nuclear Regulatory Commission stated that its staff reported the hours worked on lawsuits and had time codes for the lawsuit in our review. Other agencies also reported that they were able to provide cost data by going back to specific lawsuit case files or time and attendance systems to determine the information. For example, Social Security Administration officials stated that agency’s attorneys input their time spent on individual lawsuits into a docket management information system. Additionally, the General Services Administration said it based its data on a review of case notes and e-mails from the attorneys that worked on specific cases. However, for the remaining 55 selected lawsuits where the plaintiff substantially prevailed, litigation-related costs were not provided by the responsible agencies. Officials representing these agencies generally stated that they did not have mechanisms in place to track FOIA litigation- related costs where the plaintiffs prevailed. Moreover, they pointed to the fact that Justice’s guidance does not require them to collect and report this information. For example, an Associate Deputy General Counsel at the Department of Defense noted that the department’s attorneys did not track their work on any particular FOIA cases and that there were no other offices within the department that tracked the hours worked by their staff on individual cases. Similarly, FOIA officials at the Departments of Transportation, Treasury, Homeland Security, Agriculture, State, Justice, Health and Human Services, Education, and Commerce; the Environmental Protection Agency; the Office of Personnel Management; the Office of Management and Budget; the Central Intelligence Agency; the Consumer Financial Protection Bureau; and the Federal Housing Finance Agency stated in their responses that they could not provide information on specific FOIA lawsuits because the data were not being tracked or because staff that had worked on the lawsuits were no longer employed at these agencies and, thus, were not available to reconstruct the data. Requiring agencies to collect information on actual costs incurred in defending FOIA lawsuits, including those in which the plaintiffs prevailed, could enhance transparency in federal government operations. However, such a requirement would likely necessitate costly modifications to agencies’ information systems and business processes. FOIA requires Justice to report on attorneys’ costs and fees assessed by the courts and associated with lawsuits for which decisions have been rendered by the end of a calendar year. Specifically, Justice is to annually report to Congress a listing of the number of FOIA cases handled by each agency; the exemption(s) involved in each case; the disposition of each case; and the cost, fees, and penalties assessed and awarded to plaintiffs by the courts. To meet this requirement, Justice has posted annually on its website using information derived from the federal courts’ docketing system—the Public Access to Court Electronic Records— its Litigation and Compliance reports. Specifically, the Litigation and Compliance reports include information for lawsuits with decisions rendered by the end of the calendar year, the disposition of each lawsuit, the exemptions involved, and fees awarded by the courts, if any. These reports also include any decisions made by the appellate courts and, to the extent available on PACER, any stipulations of dismissals filed by the parties due to settlement. For fiscal years 2009 through 2014, the department reported that the courts had awarded $587,438 in attorneys’ fees and costs to the attorneys representing the plaintiffs in 10 of the 112 selected lawsuits. However, for these 10 lawsuits, Justice’s reported cost information differed from the cost information provided by agencies for 8 lawsuits. Specifically, the agencies reported that they had paid higher award amounts than what were reported by Justice. Conversely, for 1 lawsuit, the amount of attorneys’ fees and costs that the agency reported paying was less than what was reported by Justice. For the other lawsuit, the appeal process was ongoing and no attorneys’ fees and costs had been paid as of June 2016. The differences in Justice’s and the agencies’ reporting on these lawsuits, which amounted to $58,576 (more than what agencies said had been paid), are shown in table 2. According to the department, the differences in the awards of attorneys’ fees and costs are due to the appeals process and the settlement agreements between the respective agencies and the plaintiffs. For example, during the appeals process, courts may change their rulings and either increase or decrease the awards of attorneys’ fees and costs. Further, when a plaintiff and an agency enter into a settlement agreement, the court documents may not reflect the agreed upon amounts to be awarded. According to officials in Justice’s Office of Information Policy, the inclusion of costs resulting from settlement agreements and appeals is not required to be included in the department’s reports to Congress. Since Justice is not required to track and report on appeals, which can impact the total amount awarded to a plaintiff, the actual costs associated with the awards of attorneys’ fees and costs may not be known. Requiring Justice to include in its Litigation and Compliance reports the awards of attorneys’ fees and costs resulting from appeals and settlement agreements could keep Congress and the public more informed of the results and costs associated with FOIA lawsuits. However, it should be noted that such a requirement could be costly to Justice. Thus, a consideration of both the costs and benefits of such a requirement would assist Congress in determining whether a requirement to include information on appeals and settlement agreements would lead to an efficient use of government resources. Each year, federal agencies are subject to hundreds of lawsuits from FOIA requesters whose requests were denied or not responded to in a timely manner. Agencies subject to the lawsuits and Justice incur costs to defend against these lawsuits and may, in lawsuits where the plaintiff prevailed, be ordered to pay the plaintiff’s attorneys’ fees and costs. However, the costs associated with FOIA lawsuits where the plaintiff prevailed cannot be fully determined because not all federal agencies, including Justice, track their costs at the individual lawsuit level. Moreover, the data regarding attorneys’ fees and costs reported by Justice do not capture changes in award as a result of appeals or settlement agreements. Although requiring Justice and agencies to report actual cost information on lawsuits, and tracking the appeals process and settlement agreements between agencies and plaintiffs could lead to better transparency and openness in federal operations, there would be costs associated with doing so. Considering these costs relative to the potential benefits could help in determining whether establishing such a requirement would be an effective means of enhancing FOIA litigation- related operations. To provide greater transparency in the reporting of FOIA litigation costs, Congress could consider requiring Justice to provide a cost estimate for collecting and reporting information on costs incurred when defending lawsuits in which the plaintiffs prevailed. Further, Congress could consider amending the act to require Justice to reflect in its Litigation and Compliance reports, changes in the award of attorneys’ fees and costs resulting from the appeals process and settlement agreements between agencies and plaintiffs, if deemed to be cost-effective. We received written comments on a draft of this report from Justice. In its comments (reprinted in appendix V), Justice stated that, in the face of ever-increasing numbers of FOIA requests, the department appreciated our recognition of the need to balance the cost of additional reporting against the benefit it could provide to achieve the goal of good FOIA administration. Further, the department noted a number of steps that it had taken to provide new information on agency FOIA administration, both at the administrative stage, which comprises the majority of FOIA activity, and for requests that reach litigation. In addition, Justice provided technical comments, which we incorporated, as appropriate. Beyond Justice, we sought comments on the draft report from the 27 other agencies included in our study. Of these, 20 agencies told us they had no comments on the draft report. The 7 remaining agencies—the Departments of Commerce, Interior, and Transportation; the Nuclear Regulatory Commission, the Social Security Administration, the Federal Election Commission, and the U.S. Railroad Retirement Board—provided technical comments. We also incorporated these comments, as appropriate. We will send copies of this report to other interested congressional committees, the Attorney General, the Secretaries of Agriculture, Commerce, Defense, Education, Energy, Health and Human Services, Homeland Security, Housing and Urban Development, the Interior, Labor, State, Transportation, the Treasury, and Veterans Affairs; the administrators of the Environmental Protection Agency, General Services Administration; the commissioners of the Nuclear Regulatory Commission and the Social Security Administration; the directors of the Office of Personnel Management, Office of Management and Budget, Federal Housing Finance Agency, and the Consumer Financial Protection Bureau; and the Chairman of the Railroad Retirement Board. In addition, this 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) 512-6304 or [email protected]. 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 VI. Our objective was to determine the Freedom of Information Act (FOIA) litigation-related costs incurred by federal agencies for lawsuits in which the plaintiff substantially prevailed. To address the objective, we obtained and reviewed the Department of Justice’s (Justice) Litigation and Compliance Reports, covering the time period from January 2009 through December 2014, to identify FOIA lawsuits where decisions were rendered. Our review led to the identification of 1,672 lawsuits for that time period. Of this total number of lawsuits, we identified those lawsuits in which information indicated that the courts or a stipulation had awarded attorneys’ fees and costs to the plaintiffs. (For this study, we established that if a plaintiff was awarded attorneys’ fees and costs, then the plaintiff had substantially prevailed in the lawsuit). We did not include lawsuits where the plaintiffs may have substantially prevailed in the lawsuits but were not awarded attorneys’ fees and costs. This resulted in our selection of 112 lawsuits across 28 federal agencies where the courts had awarded attorneys’ fees and costs. For the 28 agencies, we developed and administered a data collection instrument to obtain information on the agencies’ respective litigation costs for the identified lawsuits and the attorneys’ fees and costs paid to the plaintiffs. We requested the following for each lawsuit: (1) the number of hours spent by each employee (e.g., attorney, administrative assistant, and FOIA staff) that worked on the lawsuit; (2) the annual salary for each employee that worked on the lawsuit; (3) an explanation as to whether the lawsuit was or was not exclusively related to FOIA; (4) the amount of litigation overhead and any other FOIA litigation-related expenses associated with the lawsuit; and (5) the total amount of judgment paid, including date paid, if applicable. We administered the data collection instrument in February 2016 and received responses from all 28 agencies. To test the accuracy and completeness of data provided to us by agencies we performed the following procedures: compared cost data against available court records; interviewed FOIA staff and legal counsels in the Departments of Agriculture, Defense, Housing and Urban Development, and State, and the Environmental Protection Agency and the Office of Management and Budget to determine what cost data are collected and reported; and determined agencies’ processes in reporting estimated hours spent on litigating FOIA-related lawsuits. Based on the results of our testing, we believe the data were reliable enough for the purposes used in this report. For agencies that had an established process for collecting and reporting lawsuit information, we calculated the total cost for the agency by multiplying time spent by staff on a case with the employee’s hourly salary rate and added any applicable overhead costs reported by the agency. To determine the costs incurred by Justice on these lawsuits, we first determined how Justice tracks lawsuit information and attorney time spent on each lawsuit. We then requested and received documentation on case management systems used across Justice’s divisions and reviewed this documentation to determine if these systems had capabilities to track the amounts of time attorneys and other staff spent working on FOIA litigation lawsuits. We reviewed system documentation for the following Justice case management systems: United States Attorneys’ Resource Summary Reporting System (USA-5), Legal Information Office Network System (LIONS), Civil Division’s Case Management System (CASES), and Tax Division’s Case Management System (TaxDoc). We then requested information from these systems on the amounts of time recorded by Justice staff for the 112 lawsuits included in our study. We supplemented this information by interviewing Justice officials in the Office of Information Policy, the Executive Office for United States Attorneys, and the Civil Division. To determine the details of selected lawsuits, we reviewed case information and court documentation for each of the 112 lawsuits obtained from www.foiaproject.org, CourtLink, and Public Access to Court Electronic Records (PACER) and selected a variety of types of lawsuits to illustrate in our report. To determine attorney fees and costs for the 112 lawsuits, we reviewed Justice’s annual litigation and compliance reports, where information on attorney fees and costs awarded by the court to the plaintiff is reported. We then compared these amounts to the totals reported by agencies on what they paid to plaintiffs to identify any differences. In lawsuits where there was a difference, we asked Justice and the agencies for information on why the differences could have occurred. We conducted this performance audit from September 2015 through September 2016 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 Freedom of Information Act (FOIA) prescribes nine specific categories of information that are exempt from disclosure, which are described below. Of the 112 lawsuits selected where the plaintiff substantially prevailed, a lawsuit was filed either because (1) the agency failed to respond within the statutory time frame (58 lawsuits); (2) the agency failed to provide all of the documentation in the FOIA request (46 lawsuits); or (3) for other reasons, such as denial of a fee waiver or appealing a dismissal of a claim (8 lawsuits). The following examples illustrate the reasons lawsuits were filed and the corresponding decisions rendered that resulted in payments of attorneys’ fees and court costs to the plaintiffs. Failure to Respond Within the Statutory Time Frame In May 2011, a requestor sought records from the Federal Election Commission related to correspondence pertaining to agency business between three commissioners and any outside entities. The Federal Election Commission acknowledged receipt of the request by e-mail the next day and granted the requestor a fee waiver. Two months after the initial request was submitted, the Federal Election Commission informed the requestor that it had received the first set of potentially responsive documents from its searches, was still performing more searches, and was reviewing thousands of potentially relevant documents. The requestor claimed the agency had said it could release the first batch of responsive documents within 2 weeks and filed suit when the agency failed to do so. The Federal Election Commission responded with the first set of records about 3 weeks later and completed its response 10 days after that by releasing two more batches of records. At that time, the agency provided an explanation of its exemption claims and told the requestor that it could file an appeal. The court ultimately found that the agency acted unreasonably in withholding documents in response to the FOIA request and ordered it to pay the requester $153,759 in attorneys’ fees. In March 2013, a requestor asked the Office of Management and Budget to provide documents relating to communications to or from Congressional staff which contained information on federal expenditures. After 4 months with no response, the requestor filed a lawsuit. The Office of Management and Budget and the requester entered into a settlement agreement resulting in the lawsuit being dismissed and the agency paying $4,182 in attorneys’ fees and costs. In March 2012, a requestor sought documentation related to a warrant search. The Federal Bureau of Investigation produced more than 1,000 pages of responsive records and withheld approximately 600 under the Privacy Act and various FOIA exemptions. The requester filed a lawsuit after not receiving a response to the administrative appeal. The court ordered the Federal Bureau of Investigation to release the information that was withheld and to pay $7,500 in attorneys’ fees and costs arising from the lawsuit. In March 2014, a requester asked the Office of Personnel Management to provide documents relating to understanding the basis of the agency’s annuity computations. After 5 months with no response, the requestor filed a lawsuit. The Office of Personnel Management and the requester entered into a settlement agreement resulting in the lawsuit being dismissed and the agency paying $1,250 in attorneys’ fees and costs. Agency Failed to Provide All Documentation In March of 2013 the requester filed a lawsuit in connection with a request for records concerning how the Department of Labor audits permanent labor certification applications made by employers pursuant to the Immigration and Nationality Act. The lawsuit was filed after a year of correspondence concerning fees and the scope of the request. Over the course of several months after the suit was filed, the department provided 347 documents in full or in part to the requester but attempted to withhold other sensitive records and information regarding how the audits are conducted. In November 2013, the court ruled against the department’s FOIA exemption assertions and ordered an additional search. As a result, the original 347 documents were all released in full in addition to approximately 1,045 additional documents. In October of 2014, the Department of Labor and the requester entered into a settlement where it agreed to pay the requester $51,000 to cover attorneys’ fees, expenses, and costs in exchange for the plaintiff withdrawing any remaining claims. In July 2013, a requestor sought documentation related to the renovation of Consumer Financial Protection Bureau headquarters. The Consumer Financial Protection Bureau told the requester it had located 257 pages of documents and was withholding 254 pages of documents under exemptions 5 and 6. The requester filed an administrative appeal. After 3 months, the bureau upheld its decision to withhold the 254 pages and agreed to the request for a further search. The bureau located 93 additional pages and withheld 81 pages under exemptions 5 and 6. The requester then filed a lawsuit. The bureau and the requester entered into a mutual decision resulting in the lawsuit being dismissed and Consumer Financial Protection Bureau paying $800 in attorneys’ fees and costs. In December 2011, a requestor sought documentation concerning the Department of Homeland Security’s social media monitoring initiatives. The department did not provide documentation or a determination regarding the request, so the requestor filed an administrative appeal. After the initial request, the requester filed a lawsuit after not receiving a response to the administrative appeal or any documentation. The Department of Homeland Security released 286 pages in full, 173 with redactions, and withheld 286 pages. The court ruled for the jointly for the requester and the department. The court also ordered the department to pay $30,000 in attorneys’ fees and costs. In 2012, a plaintiff filed a FOIA lawsuit seeking non-tax return information related to his deceased father from the Social Security Administration. Since Privacy Act rights end with death and no other federal regulation prohibited the records disclosure, the agency provided the records sought. The requestor then requested damages and litigation fees under FOIA, which was dismissed. The requestor appealed the judgment, but the dismissal was affirmed. The agency did not contest the request for litigation costs of $350 in filing fees and awarded them accordingly. In January 2014, a request was made to the U.S. Fish and Wildlife Service for a 2009 memorandum concerning the legal status of the thick-billed parrot, the wood bison, the margay, and the northern swift fox under the Endangered Species Act. The agency withheld the memorandum under exemption 5 claiming it was protected by the attorney-client privilege. The requestor appealed the agency’s decision and then filed a lawsuit. The parties settled with the agency paying $8,000 to the cover the requestor’s attorneys’ fees and costs. We identified 112 lawsuits across 28 federal agencies where the courts had awarded attorneys’ fees and costs from 2009 to 2014. The following table shows the agencies with lawsuits, the total number of lawsuits at each agency, the number of lawsuits for which agencies provided costs, the reported costs for those lawsuits, and the amount of attorneys’ fees and costs agencies reportedly paid to plaintiffs for the total number of lawsuits defended. In addition to the contact names above, Anjalique Lawrence (Assistant Director), Eric Trout (Analyst in Charge), Andrew Banister, Chris Businsky, Rebecca Eyler, Kendrick Johnson, David Plocher, Rosalind Romain, Jonathan M. Wall, and Charles Youman made key contributions to this report. | FOIA requires federal agencies to provide the public with access to government information and each year, agencies release information. Nevertheless, many FOIA requests are denied or not responded to in a timely manner. The act allows requesters to litigate if the agency does not respond to a request within the statutory time frames. Over the last decade, Justice reported 3,350 FOIA lawsuits filed against agencies, with a 57 percent increase in lawsuits filed since 2006 (see figure). GAO was asked to determine FOIA litigation-related costs incurred by federal agencies for lawsuits in which the plaintiffs substantially prevailed. To do so, GAO reviewed Justice's data on FOIA-related lawsuits with a decision rendered from 2009 through 2014, and identified 112 lawsuits across 28 federal agencies where the plaintiff substantially prevailed. GAO reviewed cost data from Justice and the selected agencies, and interviewed agency officials to discuss the availability and reliability of these data. Of the 1,672 Freedom of Information Act (FOIA) lawsuits with a decision rendered between 2009 and 2014, GAO identified 112 lawsuits where the plaintiff substantially prevailed. Litigation-related costs for these 112 lawsuits could not be fully determined. Costs associated with such lawsuits are comprised of (1) the Department of Justice's (Justice) costs for defending the lawsuits on behalf of agencies, (2) the agencies' respective costs for the lawsuits, and (3) any attorneys' fees and costs as assessed by a court or based on settlement agreements awarded to the plaintiffs' attorneys. Of the 112 lawsuits, Justice provided information on its costs for defending 8 lawsuits totaling about $97,000. Justice officials stated that the department does not specifically track costs for lawsuits in which the plaintiffs substantially prevailed and that its attorneys are not required to track such costs for individual lawsuits. Regarding individual agencies, 17 of the 28 in GAO's study had a system or process in place that enabled them to provide cost information on 57 of the 112 selected lawsuits. According to this information, the agencies incurred approximately $1.3 million in FOIA litigation-related costs for these lawsuits during fiscal years 2009 through 2014. The remaining agencies did not have a mechanism in place to track FOIA litigation-related costs where the plaintiffs prevailed. These agencies said costs were not tracked because Justice's guidance does not require agencies to collect and report costs related to specific lawsuits, or if the plaintiff prevailed as a result of a lawsuit. As required by FOIA, Justice has reported annually on the results of all lawsuits, including any awards of attorneys' fees and costs to the plaintiffs. However, for 11 of the 112 selected lawsuits, Justice reported an amount of attorneys' fees and costs awarded that differed from the amounts reported by the defending agencies. According to Justice, the differences in the award of attorney's fees and costs were due to the appeals process and settlement agreements between the respective agencies and the plaintiffs. Although requiring Justice and agencies to report actual cost information could lead to better transparency regarding federal operations, costs would be associated with such reporting. Considering these costs, as well as potential benefits, could help Congress in determining whether such a requirement would be cost-effective for enhancing oversight of FOIA litigation-related operations. If Congress determines that transparency in the reporting of FOIA litigation costs outweighs increased costs for systems and processes to be developed, then it could consider requiring Justice to provide a cost estimate for collecting and reporting information on costs incurred when defending lawsuits in which the plaintiffs prevailed. In commenting on a draft of this report, Justice stated that it appreciated GAO's recognition of the need to balance the cost and benefit of additional reporting to achieve good FOIA administration. |
Cyber-based threats to federal systems and critical infrastructure are evolving and growing. These threats can be intentional or unintentional, targeted or non-targeted, and can come from a variety of sources, including criminals, terrorists, and other adversarial groups, as well as hackers and disgruntled employees. These potential attackers have a variety of techniques at their disposal, which can vastly enhance the reach and impact of their actions. For example, cyber attackers do not need to be physically close to their targets, their attacks can cross state and national borders, and they can preserve their anonymity. Further, the growing interconnectivity among different types of information systems presents increasing opportunities for such attacks. Reports of security incidents from federal agencies are on the rise, increasing by more than 200 percent from fiscal year 2006 to fiscal year 2008. In February 2009, the Director of National Intelligence testified that foreign nations and criminals had targeted government and private sector networks to potentially disrupt or destroy them, and that terrorist groups had expressed a desire to use cyber attacks as a means to target the United States. As recently as July 2009, media accounts reported that a widespread and coordinated attack over the course of several days targeted Web sites operated by major government agencies, including the Departments of Homeland Security and Defense, the Federal Aviation Administration, and the Federal Trade Commission, causing disruptions to the public availability of government information. Such attacks highlight the importance of developing a concerted response to safeguard federal information systems. Compounding the growing number and kinds of threats, we—along with agencies and their inspectors general—have identified significant weaknesses in the security controls on federal information systems, which have resulted in pervasive vulnerabilities. These include deficiencies in the security of financial systems and information and vulnerabilities in other critical federal information systems and networks. These weaknesses exist in all major categories of information security controls at federal agencies; for example, in fiscal year 2008, weaknesses were reported in such controls at 23 of the 24 major agencies. Specifically, agencies did not consistently authenticate users to prevent unauthorized access to systems; apply encryption to protect sensitive data; and log, audit, and monitor security-relevant events, among other actions. Our recent work focusing on specific agencies has also revealed security weaknesses, as illustrated by the following examples: In 2009, we reported that three National Aeronautics and Space Administration centers had not, among other things, sufficiently restricted system access and privileges to only those users that needed access to perform their assigned duties, appropriately implemented encryption to safeguard sensitive information, and expeditiously applied a critical operating system patch or patches for a number of general third-party applications. At the same time, the agency experienced numerous cyber attacks and malicious software infections, thereby exposing critical and sensitive data to unauthorized access, disclosure, and manipulation. We recommended that the agency take steps to mitigate these weaknesses and fully implement a comprehensive information security program. In the same year, we reported that the Financial Crimes Enforcement Network, a bureau within the Department of the Treasury, had not consistently implemented effective password controls or effectively controlled user identification and authentication. As a result, there was increased risk that malicious individuals could gain inappropriate access to sensitive systems and data. We recommended that the agency take steps to fully implement an agencywide security program. In 2008, we reported that although the Department of Energy’s Los Alamos National Laboratory—one of the nation’s weapons laboratories—had implemented measures to enhance the information security of its unclassified network, there were still vulnerabilities in monitoring and auditing compliance with security policies and controlling and documenting changes to a computer system’s hardware and software. Finally, we reported in 2007 that the Department of Homeland Security had significant weaknesses in computer security controls intended to protect the information systems used to support its U.S. Visitor and Immigration Status Indicator Technology program for border security. For example, the department had not implemented controls to effectively prevent, limit, and detect access to computer networks, systems, and information. Specifically, it had not provided adequate logging or user accountability for the mainframe, workstations, or servers and had not consistently maintained secure configurations on the application servers and workstations at a key data center and points of entry. In each of these cases, we made recommendations for strengthening or fully implementing agencies’ information security programs. In addition to the responsibilities of individual agencies, OMB and NIST play key roles in ensuring the security of federal systems and information. Under the Federal Information Security Management Act of 2002 (FISMA), OMB is responsible for developing and overseeing the implementation of policies, principles, standards, and guidelines on information security, and reviewing agency information security programs at least annually. In addition, the act requires that OMB report to Congress no later than March 1 of each year on the status of agency compliance with FISMA. The act, which sets forth a comprehensive framework for ensuring the effectiveness of information security controls over information resources that support federal operations and assets, also assigned NIST responsibility for developing standards and guidelines (for systems other than national security systems) that include minimum information security requirements. FISMA also assigns specific responsibilities to agencies to document and implement agencywide security programs and report on their security policies, procedures, and practices. For example, agencies are responsible for developing and complying with minimally acceptable system configuration requirements. Finally, FISMA requires agency inspectors general to annually evaluate agency information security activities. To help carry out its responsibilities for ensuring federal information security, OMB launched the FDCC initiative in March 2007. This initiative required federal agencies to implement common security configurations on Windows XP and Vista operating systems by February 2008. Subsequently, OMB issued several other memorandums detailing additional requirements and guidance to agencies on completing implementation of the initiative. OMB also has responsibility for approving any changes to the settings or setting parameters. At the request of OMB, NIST published the first beta version of the FDCC configuration settings in July 2007 for federal workstations that use Windows XP or Windows Vista as their operating system. FDCC was based on settings developed by the Air Force in partnership with the National Security Agency, Defense Information Systems Agency, NIST, and representatives from the Army, Navy, and Marines. Over the course of the next 11 months, NIST made several updates to the content and posted the revised versions on its Web site. The first major version of the configuration settings, version 1.0, was posted on NIST’s Web site in June 2008 after a period of public comment. Based on implementation information reported by the agencies to NIST in March 2008, agency feedback on settings that were problematic to implement, and comments from the federal community, OMB had NIST remove 40 settings from the original beta version for version 1.0. In addition to publishing the FDCC settings, NIST also has responsibility for: Developing resources, in collaboration with Microsoft, to aid agencies in deploying and testing the security configuration settings within their computing environments. These include group policy objects, which allow agencies to deploy the settings to desktop and laptop computers agencywide, and virtual hard-disk files, which allow agencies to test the settings in a non-operational environment. These files were first made available for agencies to download from NIST’s Web site starting in July 2007 and were later updated with the release of major version 1.0. Establishing the Security Content Automation Protocol (SCAP), which can be used to support the automated checking, measuring, and monitoring of the FDCC settings for compliance. Product vendors can create a tool (i.e., application) that uses SCAP for these activities. Validating SCAP tools to ensure that a tool uses the features and functionality available through SCAP. In order for a tool to receive validation, a vendor must first have the tool tested by 1 of 10 independent testing laboratories accredited under NIST’s National Voluntary Laboratory Accreditation Program. The testing results are then sent by the laboratory to NIST for review. If the tool passes, NIST will validate the SCAP tool, which is valid for 1 calendar year. Making technical changes to the SCAP that support the FDCC settings, such as when new specifications are added, existing specifications are updated, or when a more efficient method is found to test a particular setting. NIST has released two additional major versions to make technical modifications to the SCAP: version 1.1 in October 2008 and version 1.2 in April 2009. NIST also publishes patch content updates based on Microsoft’s patch releases. Posting frequently asked questions on its Web site on behalf of OMB to answer agencies’ questions about testing, deployment, reporting deviations, and use of SCAP tools for evaluation of compliance. The questions have also provided clarification of the settings requirements and their applicability to different types of computers, including contractor- owned or operated machines. These questions are revised on a periodic basis as needed and as determined by NIST. In its March 2007 directives to agencies to implement FDCC, OMB established two goals for the initiative: improve information security and reduce overall information technology (IT) operating costs for agencies that use or plan to use Windows XP or Vista operating systems on their workstations. By implementing the initiative, OMB intended that agencies should be able to achieve the following objectives: Provide a baseline level of security through the use of standardized configuration settings that limit access privileges granted to users and other access controls, thereby controlling what a user may or may not do on his or her workstation. The settings create a baseline from which agencies may increase the level of security by making the settings more restrictive or by employing firewalls and intrusion detection systems along with other security devices and practices. Reduce risk from security threats and vulnerabilities by employing the use of standards that are more restrictive than the default settings of the manufacturer. For example, the required settings do not allow the installation of unauthorized software, which lowers the risk of introducing a virus or other malicious device along with the software. Save time and resources by requiring all FDCC workstations within an agency to use the same settings. This standardization also allows an agency’s IT department to be more efficient in repairing computer problems. Improve system performance by restricting the access privileges of administrators and users to only those necessary to perform their duties. This helps to limit downloading of unapproved software and information that could tie up system and help desk resources. Decrease operating costs by using standard configuration settings that allow IT personnel to solve a workstation problem once and then replicate that solution for every workstation in the agency, saving labor and time. Ensure public confidence in the confidentiality, integrity, and availability of government information by standardizing strong security settings across all federal agencies. This will help to protect federal systems from cyber attacks and may help to ensure the public’s confidence that their personal information will not be compromised. In its initial memorandums and subsequent guidance, OMB identified several requirements with which agencies were directed to comply in order to implement FDCC. The following are the key FDCC requirements: Submit a draft implementation plan to OMB by May 1, 2007. Agencies were required to submit an implementation plan to OMB describing how they intended to (1) test configuration settings in a non- production environment to identify any adverse effects on system functionality; (2) implement the settings and automate monitoring and use; (3) restrict administration of these settings to authorized professionals; (4) ensure, by June 30, 2007, that new IT acquisitions include the settings and require IT providers to certify that their products operate effectively using the settings; (5) apply Microsoft patches available from the Department of Homeland Security when addressing new Windows XP or Vista vulnerabilities; (6) provide to NIST documentation of any deviations from these settings and the rationale for the deviations; and (7) ensure the settings are incorporated into agency capital planning and investment control processes. Adopt the Windows XP and Vista security configuration settings by February 1, 2008. Agencies were required to implement the FDCC configuration settings on all government-owned desktops and laptops that use Windows XP or Vista operating systems and the Internet Explorer 7 or Windows Firewall applications. This requirement was later clarified to include desktops and laptops that are owned or operated by a contractor on behalf of or for the federal government or that are integrated into a federal system. The requirement excludes servers, embedded computers, process control systems, specialized scientific or experimental systems, and similar systems using these operating systems. FDCC major version 1.0 includes 674 configuration settings for Windows XP and Windows Vista systems, when bundled with Internet Explorer 7 and Windows Firewall. Examples of these settings include the following: Specifies the number of minutes a locked-out account remains locked out before it automatically unlocks. Specifies the minimum number of characters a password must have. Specifies whether or not the user is prompted for a password when the system resumes from sleep mode. Requires the use of Federal Information Processing Standards- compliant algorithms for encryption, hashing, and signing. Shuts the system down immediately if it is unable to log security audits. Creates a log when Windows firewall with advanced security allows an inbound connection. The log will detail why and when the connection was formed. Document deviations and have them approved by a designated accrediting authority. Agencies were required to document deviations initially as part of their draft implementation plan efforts. OMB later required agencies to report these deviations to NIST in March 2008. OMB also later noted that configuration setting deviations are to be approved by the department or agency accrediting authority. Acquire a SCAP tool and use it to monitor FDCC. Agencies are required to acquire a NIST-validated SCAP tool and to use these tools when monitoring the settings. Ensure that new acquisitions include security configuration settings. Agencies are required to ensure that new acquisitions include FDCC settings and products of information technology providers operate effectively using them. Submit FDCC compliance reports to NIST by March 31, 2008. Agencies were required to submit a spreadsheet that summarized workstation counts, setting deviations, and descriptions of plans of action and milestones for the deviations, along with related reports generated by a SCAP tool for each operational environment present within the agency. Report on status of FDCC compliance in annual FISMA reporting. None of the agencies has fully implemented all FDCC configuration settings on all applicable workstations, although most have complied with other requirements. Specifically, 11 agencies reported they had completed implementation of an agency-approved subset of the FDCC settings and do not plan to implement all the configuration settings, while the remaining agencies reported they are still completing implementation of the settings. However, most agencies have generally complied with other initiative requirements. For instance, 19 agencies have fully documented their deviations and 16 have established a policy for having those deviations approved by a designated authority. In addition, 15 agencies have acquired and deployed a NIST-validated SCAP tool to monitor the compliance of their setting implementation. Eight agencies have also incorporated language into their contracts to ensure that new acquisitions comply with FDCC. While agencies were required to submit a draft implementation plan to OMB by May 1, 2007, fewer than half of the agencies developed plans that addressed the seven actions necessary to fully implement the initiative. Of the 24 agencies, 19 provided their plans to us, while 5 agencies either did not develop an implementation plan or were unable to locate a copy of the plan. Of the 19 plans, 11 described how the agency intended to implement each of the seven actions required by OMB. The remaining 8 plans either did not address the actions or described only some of them. Table 1 shows how many agencies addressed each of the required actions in their FDCC implementation plans. Officials from one of the agencies whose plan did not address the required activities told us that OMB had provided feedback and requested changes to the plan, but the remaining agencies indicated that OMB had not provided feedback on the submitted plans and had not requested any changes. OMB was unable to confirm whether the 24 agencies had submitted the implementation plans by the required deadline because, officials stated, this information had been archived with the previous administration. As discussed later in the section on lessons learned, agencies experienced problems in implementing this requirement due to unrealistic deadlines. Though agencies were required to adopt and implement the FDCC settings by February 1, 2008, as of September 2009, none of the 24 major agencies reported that they had adopted and fully implemented the complete set of prescribed settings on all applicable workstations. Instead, all agencies planned to implement a subset of the FDCC settings, which they referred to as their agency baseline; these baselines included deviations from the approved parameters established by FDCC, in some cases for up to one- fifth of the settings. As of September 2009, 11 agencies reported they had completed implementation of their baselines on all applicable workstations, and 11 were still in the process of finishing implementation of their baseline. The other 2 agencies were unable to provide sufficient data to determine the status of implementation because they either lacked a SCAP tool or had data reliability issues due to using multiple tools. (See app. II for more details on the status of each agency in implementing the FDCC settings, as of September 2009.) For those agencies that were still in the process of completing implementation of their baseline, agency officials reported various milestones for expected completion; however, some of those deadlines had not been met, and other agency officials did not report a milestone for completion. For example, a few agency officials indicated they would complete implementation by September 2009; however, this deadline was not met. Figure 1 summarizes the status of agency-reported implementation of their FDCC baselines for applicable workstations with Windows XP and Vista operating systems. Agency officials told us that several factors had influenced their decision to establish deviations, whether less or more stringent, from the settings. These factors included cases where FDCC settings had an adverse impact on applications, production, or legacy systems; conflicted with agency policy; prohibited agency administrators from completing tasks; and impaired the capability to provide customer support or remote assistance. In establishing their baselines, agencies allowed a range of deviations, some with parameters that were less stringent (e.g., less secure) than the approved parameters, while others were more stringent. Of the 24 agencies, 23 provided us a list of their deviations and 1 agency indicated it had not developed a list. Each of the 23 lists identified deviations that were less stringent than the FDCC settings. Specifically, 15 agencies had 10 or more less-stringent deviations, and 6 agencies had 40 or more less- stringent deviations, which is 6 percent of the 674 total number of FDCC settings. Table 2 shows the range of the number of less-stringent deviations and the corresponding number of agencies. Our analysis revealed ten most common less-stringent deviations across the federal government. For example, 21 of the 23 agencies that provided deviation lists had a deviation for the use of encryption algorithms that are compliant with Federal Information Processing Standards, and 17 agencies had a deviation for the setting regarding digital signatures of client communications. Table 3 shows the 10 most common less-stringent deviations and the number of agencies that reported having them. Additionally, 7 agencies listed deviations that were more stringent (e.g., had parameters that were more secure) than the FDCC settings. Of the 7 agencies with more-stringent deviations, 1 had 10 or more of these more- stringent deviations, while the remaining 6 agencies had fewer than 10. There is also a common set of these more-stringent deviations among the 7 agencies. For example, 3 agencies have a deviation for duration accounts can be locked out, 2 agencies have a deviation for how many invalid logon attempts can occur before an account is locked out, and 2 agencies have a deviation for the type of user who can format and eject removable media. Until those agencies that have not completed implementation of their FDCC baseline (see app. II) establish firm milestones for completion and complete implementation, agencies risk not achieving the potential benefits of the initiative. Although OMB guidance indicates that agencies are to document and have a designated accrediting authority approve deviations from FDCC, several agencies did not do so. Of the 24 agencies, 23 had deviations and 1 did not maintain a list. Of the 23, 19 had fully documented their deviations but 4 had not. In addition, 16 agencies established a policy to have deviations approved by a designated accrediting authority, while 8 agencies have not established such a policy. Table 4 shows which agencies have documented deviations and have a policy in place to approve deviations by a designated authority. Agency officials who had not documented deviations said they either did not maintain lists for field offices or had not yet completed the process for establishing the agency baseline and documenting the deviations. Officials from agencies that did not have a policy in place for approving deviations told us they were still working to develop an approval process. Until agencies document their FDCC deviations or have a policy in place to approve those deviations, they cannot fully assess the potential risk of not implementing the required settings and they cannot ensure that configuration baselines are effectively controlled and maintained. Agencies were required to obtain a NIST-validated SCAP tool and use it to consistently monitor the implementation of the configuration; however, while 15 agencies reported acquiring and deploying NIST-validated tools, 6 had not. Of the 3 remaining agencies, some of their components have a NIST-validated SCAP tool, while the other components either do not have a tool or do not use a NIST-validated tool for monitoring workstation configurations. Regardless of whether the tool has been validated or not, most agencies used one to monitor FDCC implementation. However, 2 agencies that had a validated tool had not yet established a policy for monitoring compliance. Table 5 shows which federal agencies have acquired a NIST-validated tool and were using it to monitor their workstation configurations. At agencies that did not have a NIST-validated SCAP tool, officials told us they were in the process of acquiring a tool but had been delayed due to funding issues. For those agencies where only some components had acquired a tool, officials told us their components were responsible for acquiring a tool and noted that funding had been an issue. At agencies without a policy for monitoring implementation, officials told us that either a policy had not been finalized or a policy would be developed once a SCAP tool had been acquired. However, officials from one of these agencies noted that although they lacked a policy, they were still performing some monitoring of workstations. Until agencies acquire and deploy a NIST-validated SCAP tool and develop, document, and implement policies to monitor compliance, they will not be able to ensure that the FDCC settings have been successfully implemented to help protect the confidentiality, integrity, and availability of their information. Although OMB requires agencies to include language in contracts to ensure new acquisitions include FDCC settings and products of information technology providers operate effectively using them, most agencies have not done so. Eight agencies had incorporated the language into their contracts, while 13 agencies had not, and 3 agencies had partially implemented the requirement. Table 6 shows which agencies have incorporated language into their contracts. Officials from agencies that had not included language in the contracts had either included language in only a portion of the contracts reviewed, or the agency indicated it was still working on incorporating the language into its contracts. In addition, two agencies had one or more components that had not included the language in contracts. Until these agencies ensure that language is included into contracts to ensure that new acquisitions include FDCC settings and products of information technology providers operate effectively using them, agencies will not be able to ensure that new acquisitions are in compliance with FDCC requirements. Although most agencies submitted a compliance status report to NIST, the documentation was not always complete, including plans for mitigating deviations, or timely. Agencies were required to report to NIST the status of their compliance with FDCC by March 31, 2008, and submit a list of deviations, their plans of action and milestones for mitigating the deviations, and copies of reports generated by their SCAP tools. The majority of the agencies in our review submitted documentation to NIST; however, 2 agencies told us they had not submitted information to NIST, and 1 agency was unable to locate all the documents submitted. Of the 21 agencies that provided documentation, 12 agencies submitted all of the required information and documents. The remaining 9 agencies were either missing the required information or did not submit all of the required SCAP tool reports. In addition, while many of the agencies listed deviations, they either noted they did not plan to mitigate the deviations, or made general statements about addressing them at some point in the future. Furthermore, only 13 of the agencies in our review generally met the March 31, 2008, deadline for submission, while the remaining agencies took an additional month or more to provide documentation to NIST. As discussed later in the section on lessons learned, agencies experienced problems in implementing this requirement due to unrealistic deadlines. While implementation of FDCC can result in improvements to agencies’ information security as well as other benefits, such as cost savings, attempting to meet the requirements yielded lessons learned that could improve the implementation of future versions of FDCC or other workstation configurations. In addition, agencies continue to face significant challenges in meeting FDCC requirements, monitoring their implementation of the settings, and measuring benefits of the initiative, among other things. FDCC has the potential both to increase agencies’ information security and to standardize their management of workstations. Other potential benefits include cost savings arising from reduced power usage. FDCC implementation enhances security by requiring stricter security settings on workstations than those that may have been previously in place at federal agencies. Specifically, some of the key configuration settings serve to secure agency workstations by restricting user and administrative rights to particular system functions. These settings reduce the potential for malware and other known vulnerabilities to affect agency workstations because the stricter access rights would prevent their automatic download and installation. As an example, officials at two agencies reported that FDCC was responsible for protecting their workstations from recent malicious code infections. The settings also reinforce access controls by restricting users’ rights to what is necessary for their work. Ten of the agencies in our review attributed either increased security or increased security awareness to implementation of the settings and were generally supportive of a stricter configuration for the agency. FDCC implementation also enabled agencies to reap the benefits of having more standardized configurations within agency computing environments. For example, a more secure enterprisewide Windows configuration and consistent workstation profile (i.e., the set of configuration settings and other software applied to a workstation) across the agency can not only improve security but can also make it easier to manage changes to the security features of workstation software, such as applying updates or patches. Updates or patches can be applied more expeditiously because there are fewer workstation profiles that they must be tested on, which also reduces the amount of necessary supporting documentation. Agency officials we spoke to confirmed that FDCC provided an improved understanding of their computing environment as well as a consistent desktop image across the department. Another official stated that adopting and implementing the configuration settings would raise awareness of the importance of workstation configuration management across the government. Beyond the benefits to enhancing security within agency computing environments, there are other potential, if unanticipated, benefits to implementing particular settings and standardizing them across the federal government. For example, while settings related to activating and password-protecting screen savers can provide added security by locking the workstation while the user is not present, they could also reduce power consumption and lead to savings in utility costs. One agency official said his agency was anticipating saving between $10 million and $15 million a year by implementing the power settings, and would be deploying a tool to track this data. In addition, an agency official from the Chief Information Officers Council’s FDCC Change Control Board said the board was working on recommending what it considered “green settings” to OMB, which would also potentially reduce consumption of power and the paper used to print documents. Officials at one agency also told us that because they had observed several benefits— including improved security, cost avoidance through acquisition of workstations with settings already implemented, and a simplification of the software development process—by implementing their agency FDCC baseline, they were in the process of developing or finalizing configuration settings for other operating systems and servers. There are a number of lessons to be learned from the management and implementation of the FDCC initiative which, if considered, could improve the implementation of future versions of FDCC or other configuration efforts. OMB did not provide a realistic time frame for agencies to meet the requirements of the initiative and complete implementation of FDCC by February 2008. This is due in large part to OMB not considering several constraints when establishing time frames for agencies to complete the requirements and implement the beta version of the settings within 7 months, including: Agencies were required to submit draft plans to implement the settings by May 1, 2007, approximately 3 months before being informed of the settings they were required to implement. Only one SCAP tool was validated in time for agencies to use to report the status of implementation to NIST, and one agency found that the tool did not produce the needed reports required for NIST reporting. The earliest any of the other tools were validated was 7 months after the deadline. Multiple changes occurred to the FDCC content—including the settings, SCAP, and resources—that agencies were supposed to use in order to complete implementation by the February 2008 deadline. In addition, another version of the settings was released between the February deadline and the March 2008 compliance reporting deadline. Furthermore, once the beta version of the settings was revised and major version 1.0 was released in June 2008, OMB did not establish a deadline for agencies to complete implementation of this version. OMB officials confirmed they have not established a schedule for announcing changes to FDCC versions or implementation deadlines. However, they stated they were working with the Chief Information Officers Council and its newly developed FDCC Change Control Board to provide a framework for soliciting input and feedback on future versions of the settings on a yearly basis. Nevertheless, without realistic deadlines that are effectively communicated with sufficient notice, agencies will continue to face challenges in meeting implementation deadlines for future versions of FDCC. OMB and NIST guidance with regard to deviations was not always comprehensive, and agencies interpreted it in divergent ways. Specifically, OMB memorandums and guidance published on NIST’s Web site were not clear as to under what conditions deviations were permitted; whether deviations could be permanent, or should be mitigated in a timely how deviations should be documented, tracked, and approved by a how frequently and to whom deviations should be reported. As a result, agencies interpreted this guidance in significantly different ways. Only one agency interpreted the requirements to mean that no deviations were permitted, while other agencies, by contrast, interpreted full implementation of FDCC to mean applying 85 to 95 percent of the settings, with deviations allowed under certain circumstances. In addition, most agencies responded, either in their descriptions of plans of action and milestones or in interviews, that they had permanent deviations from FDCC, indicating they interpreted the guidance to mean that deviations could be permanent. However, several agencies also reported they may reduce the number of deviations as they upgrade, modify, or replace existing systems and applications. In addition, agency processes to document and approve deviations varied. For example, some agencies documented and approved deviations at the agency level while other agencies allowed their components to determine the number of deviations and approve them. Some agency officials told us their list of deviations may not be complete because they provided deviations from only a few components, or did not track or maintain a list of deviations at the component level. For those agencies, officials noted they did not have visibility into the deviations documented and approved at the component level because responsibility for this was delegated to the components. Furthermore, agencies’ interpretation of the requirement to report deviations to NIST varied, with some agencies stating they were only supposed to report deviations to NIST in March 2008, while other agencies said they reported deviations to NIST whenever they updated their lists. OMB officials stated that full compliance with the configuration meant implementing all the settings without deviations on all applicable workstations, although they allowed agencies to document deviations and later required them to be approved. Nevertheless, without further clarification on the approval, permanence, and reporting of deviations, the federal government will continue to be hindered in consistently implementing FDCC, and OMB will be hindered in assessing the status and effectiveness of implementation across federal agencies. The variety of approaches agencies took to testing the settings prior to implementation affected how successful they were. In one case, an agency implemented the settings without testing, discovered problems, and subsequently changed its approach to include testing prior to implementation. Another agency reported having success with collaborative testing among agency components, which included officials from the components sharing results and other information at regular meetings. Officials from another agency stated that automated testing was a better approach because it allows for easier confirmation that there is a standard workstation configuration in use on the agency’s systems. Ensuring that testing is carried out prior to implementation, with opportunities for information sharing and consideration of the benefits of automation, can help agencies make implementation of future versions of FDCC or similar configurations more successful. Agencies that implemented the settings in a phased, or sequential, fashion were able to avoid disruption in their operations and identify problems that arose during implementation. Officials from four agencies cited the benefits of or need for using such a phased implementation approach, rather than implementing the settings in one pass. One agency’s officials observed that sequential implementation was key to avoiding system disruption and down time because settings were not applied to all components within the agency at the same time. Following such an approach for future versions of FDCC and other configurations could prove beneficial to agencies. Another success factor in implementing FDCC was frequent communication and collaboration among and within agencies. Officials from two agencies noted that collaboration among its agency components on testing was helpful in addressing problems that occurred. Agencies noted that keeping the lines of communication open, both among agency components and between OMB and NIST and other agencies, would help in making such an initiative more successful. One agency official recommended that there should be a way for NIST to communicate operational impacts prior to the release of new FDCC settings, and another suggested that future versions of FDCC should be vetted by the broader IT community before being rolled out to agencies. Officials from another agency stressed the importance of having communication and outreach among agencies to discuss FDCC issues and changes. Lastly, officials from one agency suggested having FDCC compliance sessions where agencies could discuss issues and learn from one another’s experiences. Further collaboration between OMB, NIST, and agencies could increase the effectiveness of implementation among agencies and the chances for the success of similar future initiatives. Independent testing performed by the General Services Administration and Department of the Interior’s Inspector General found compliance results that differed from agency-reported information. In a policy utilization assessment conducted over 2 years in multiple phases, the General Services Administration tested FDCC implementation at three agencies between December 2008 and February 2009. The results generally differed from agency-reported information on the level of policy implementation, level of compliance, and number of deviations reported between October 2008 and November 2008. At all three agencies, the scan results showed a higher level of policy implementation than the agencies had reported. In addition, two agencies learned they had a lower number of deviations on the workstation sample than they had reported, and two agencies were provided a more accurate indication of their level of compliance. In September 2009, the Inspector General of the Department of the Interior reported widespread noncompliance with mandatory FDCC settings and noncompliance with agency directives at the agency. Based on testing performed during summer 2009, Interior averaged 68 percent compliance for the configuration settings, which varied from the compliance status reported to us. In addition, the Inspector General noted that agency components reported an additional 323 deviations at the components that were not documented and approved according to the agency’s policy. The Inspector General made a recommendation to ensure Interior’s compliance with FDCC guidance. These results suggest that agency self- reported compliance may not always be accurate and that continued independent testing can provide important insight into the extent of FDCC implementation. Additional independent testing performed by external parties could provide opportunities for agencies to acquire additional information to assist them in complying with FDCC requirements. In launching an initiative such as FDCC, having sufficient notice to marshal the necessary resources can improve agencies’ chances of success. Agencies reported that having advance notice of the requirement to implement the initiative, with sufficient time for preparation and training, was necessary to successfully implement the initiative. Officials from one agency stated that such mandates should be widely announced well in advance of anticipated completion dates to allow all agencies appropriate lead time to ensure that budgets and resources would be available and that requirements and resulting impacts could be completely assessed. Further, agencies commonly reported a lack of sufficient resources (time, money, labor, technical expertise) to implement the FDCC settings, understand how the settings would affect their environments, address issues found with testing, and purchase a SCAP tool. Some agencies cited having to reallocate approved funding to cover the costs of implementation and the purchase of the tools. Although most agencies could not provide estimates of the time and labor spent implementing FDCC, several agencies provided estimates of the costs of implementation and purchasing SCAP tools, which ranged from the tens of thousands to hundreds of thousands of dollars. In addition, officials from a few agencies stated they did not always have staff dedicated specifically to FDCC, which contributed to delayed implementation. Ensuring sufficient lead time can help agencies better plan use of their resources to implement initiatives like FDCC. Agencies face several ongoing challenges to fully complying with FDCC requirements, including retrofitting their existing applications and systems to comply with the settings, assessing the risks associated with deviations, and monitoring workstations to ensure that the settings are applied and functioning properly. Applying the configuration settings has and will continue to cause problems for agencies due to the variety of applications, legacy systems, and agency environments that exist within the federal government. In particular, agencies have legacy systems or applications that use old software that have to be reconfigured to work with the settings. In addition, while some agency environments consist of a small number of offices with under 10 thousand workstations, other agency environments have multiple components with hundreds of thousands of workstations that are spread out geographically across the country, and in a few cases, the world. Although agencies were required to implement all the FDCC settings, the number and scope of the deviations that agencies had to implement highlight the magnitude of the challenge that agencies faced in implementing the settings. Agency officials confirmed during interviews that there were several challenges in retrofitting their systems and applications to comply with the settings, including the following examples: Some of the settings had affected other settings on workstations and servers, and it had been a challenge to determine which FDCC settings were responsible. Some of the settings impaired the functioning of custom programs, caused problems in environments, or interfered with basic functions (e.g., network printing). The settings prevented the agencies from accessing legitimate Web sites, such as certain federal, state, and local government sites. Applying particular FDCC settings to legacy systems or applications would require agencies to update their applications or operating systems. However, potential solutions to these challenges are either not simple or may not exist. As new versions of the settings or other configurations are established, it will be important for OMB to recognize that retrofitting systems and applications to comply with new settings in complex environments will remain an ongoing challenge for agencies, and that sufficient time for implementation and the use of deviations may be necessary. However, OMB has not provided guidance to agencies on submitting plans for mitigating deviations, including the resources necessary for doing so. Until OMB provides guidance to agencies on submitting plans of actions and milestones for mitigating deviations, to include resources necessary for doing so, OMB will lack sufficient information to make decisions about the use of deviations and whether potential changes to FDCC are warranted. A related challenge for agencies is sufficiently assessing the risks associated with deviations from the official FDCC settings. As mentioned earlier, all agencies in our review had deviations, regardless of whether these deviations had been sufficiently documented or approved. There are risks associated with deviations from individual settings and groups of settings, not only at individual agencies but among agencies, depending on the agency’s computing environment. For instance, having deviations such as passwords with a minimal number of characters, combined with allowing multiple users to connect to the workstation over the network and enabling wireless communication on the workstation, increases the risk that unauthorized users could gain access to workstations and sensitive government information. However, many of the agencies in our review did not describe a process for assessing the combined risk of the deviations they had in place because deviations were submitted for approval on an individual basis, were submitted as part of a configuration that included other settings beyond FDCC, or, particularly at agencies where deviation approval was left up to components, the agency did not track the deviations at the component level. Although OMB required agencies to approve deviations, it did not specify any guidance for agencies to use to consider the risks of having these deviations prior to approval. Until OMB specifies guidance for agencies to use to assess the risks of having deviations prior to approving them, including the combined risk of deviations in place across the agency, workstations may remain particularly vulnerable to cyber threats. Challenges also exist in effectively and consistently monitoring the implementation of FDCC in order to ensure the settings have been implemented properly and are continuing to function as intended. Specifically, the frequency and scope with which agencies scan workstations for compliance may not be sufficient to ensure the settings are working properly, and the results could potentially be incomplete or inconsistent. While some agencies scanned workstations on a weekly or bi-weekly basis, other agencies performed scans only when new patches or system updates had been installed or performed scanning only on a quarterly or annual basis. The infrequent monitoring on the part of some agencies could be due to the SCAP tool used: agency officials without an enterprisewide tool noted that frequent monitoring was impractical because regularly scanning each workstation required them to individually scan up to tens of thousands of workstations. In addition, while some agencies scanned every workstation on their network, other agencies only performed scans on test workstations, which could be insufficient if agency workstation configurations do not match the tested workstations. Scans of workstations on agency networks may also be incomplete in cases where user populations work remotely or have contractor-owned workstations. Agencies that use a SCAP tool to scan all workstations connected to their network may miss workstations belonging to these populations, which might not be connected to the network depending on the time of the scan. Consequently, agencies may be relying on incomplete information on whether the settings are working as intended. While OMB guidance indicates that agencies should monitor compliance using SCAP, the guidance does not specify the frequency or scope in which monitoring should be performed. Until OMB improves its guidance on monitoring compliance using SCAP to include information on the frequency and scope with which agencies should perform monitoring, agencies may not be scanning with sufficient rigor to ensure the settings have been successfully implemented and are working properly. Agencies did not always have sufficient tools to monitor implementation and compliance with FDCC. In particular, issues with the current NIST- validated SCAP tools include the following: Some tools generate errors when scanning for particular settings. Certain settings have to be checked manually because the tools do not scan for all settings. Some tools record false positives, particularly if the agency’s parameter for a particular setting is stricter than the FDCC parameter. It takes time for vendors to update their SCAP tools after NIST changes SCAP content to address problems, with the result that the tools perform scans based on incorrect content. Agency officials we interviewed confirmed there were issues with the SCAP tools, and many agencies and their components found it easier to use some combination of NIST-validated SCAP tools, group policy objects, or other configuration management software to monitor their configurations. In addition, several agencies indicated they had acquired or were in the process of acquiring a different SCAP tool that would provide better functionality and capabilities in order to meet their needs. NIST officials confirmed they were aware of the issues with SCAP tools and stated they are taking steps to address them. For instance, NIST intends to release new requirements that SCAP tools must meet as well as change validation requirements so that vendors will be required to have their tools tested and validated against the new requirements within 1 year of the requirements being released. NIST requested comments on a draft of this document through January 2010, but hasn’t released a final version. Once NIST releases the new requirements for SCAP tools and these tools are validated against these requirements, agencies should have more sufficient tools for monitoring implementation of FDCC. Although agencies have anecdotally reported a variety of benefits from efforts to implement FDCC, OMB and agencies face challenges in accurately assessing the impact and measuring the benefits of the initiative. This is because neither OMB nor the agencies have developed specific metrics to measure the effectiveness and program impact of the initiative. Specifically, they have not required or collected measures or metrics that address how effectively the initiative is mitigating security risks or reducing costs, two of its stated goals. For example, an official at one agency noted several benefits of implementing FDCC—a more secure user environment because of reduced user permissions, a stable development platform that resulted in cost savings and a simplification of the software development process, and a reduction in the number of customer support help calls and service calls by technicians. However, the official admitted that he did not have specific metrics for quantitatively measuring these benefits. Implementing metrics that assess the effectiveness and program impact could give a more complete picture of the benefits of FDCC and help determine whether future versions of the settings or configurations for other operating systems or servers should be instituted. In our September 2009 report, we recommended that OMB, among other things, direct federal agencies to use balanced sets of information security measures that include effectiveness and impact, as well as compliance, and to require agencies to report on such a balanced set of measures. Without performance measures and guidance to agencies for reporting the benefits of FDCC, OMB and federal agencies will be limited in their ability to determine if the initiative is meeting its goals of improving federal information security and reducing operating costs and if the initiative should be continued or expanded. While agencies have taken steps toward implementing FDCC, work remains to be done in order to meet all the requirements established by OMB. Specifically, many agencies have applied an agency-defined subset of the configuration settings to their Windows workstations; however, none of the 24 major agencies has fully applied all the FDCC settings. Further, not all agencies have put a process in place for documenting or approving deviations from the FDCC baseline and have not yet acquired the required SCAP tool to monitor compliance with the settings. Unless agencies fulfill these requirements, OMB will not be able to ensure the effectiveness of the initiative. The FDCC initiative was an innovative approach by OMB to standardize and thereby strengthen information security at federal agencies, but lessons learned indicate ways that implementation could have been more successful. Specifically, OMB did not establish realistic time frames for completion or provide comprehensive guidance on FDCC deviations, which has impacted agencies’ ability to successfully implement the initiative. In addition, collaboration among OMB, NIST, and the agencies, as well as independent testing of FDCC implementation by external parties, may help agencies be more successful in their implementation efforts. Finally, there are several ongoing challenges facing agencies in fully complying with the requirements, including retrofitting systems and applications amid complex environments, assessing the risks associated with deviations across each agency, and monitoring workstations to ensure the settings are applied and functioning properly. As OMB establishes additional versions of FDCC settings—or configuration settings for other applications or operating systems—understanding the lessons learned from implementation as well as the ongoing challenges agencies face will be essential to the initiative’s success in ensuring public confidence in the confidentiality, integrity, and availability of government information. To improve implementation of FDCC at federal agencies, we recommend that the Director of OMB take the following six actions: When announcing new FDCC versions, such as Windows 7, and changes to existing versions, include clear, realistic, and effectively communicated deadlines for completing implementation. Clarify OMB policy regarding FDCC deviations to include: whether deviations can be permanent or should be mitigated in a timely manner; requirements for plans of actions and milestones for mitigating deviations, including resources necessary for doing so; guidance to use for assessing the risk of deviations across the agency; and how frequently and to whom deviations should be reported to assist in making decisions regarding future versions. Inform agencies of the various approaches for testing the settings and implementing the initiative in phases, which may aid successful implementation. Assess the efficacy of, and take steps to apply as appropriate, other lessons learned during the initial implementation of this initiative such as the need for (1) additional collaboration efforts, (2) independent testing, and (3) advance notice of requirements, to assist agencies in implementing this initiative. Provide guidance on using SCAP tools to include information on the frequency and scope with which agencies should perform monitoring. Develop performance measures and provide guidance to agencies for reporting the benefits of FDCC. We are also making 56 recommendations to 22 of the 24 departments and agencies in our review to improve their implementation of FDCC requirements that were not being met. Appendix III contains these recommendations. In providing e-mail comments on a draft of this report, the lead IT policy analyst from OMB’s Office of E-Government and Information Technology stated that OMB concurred with the report’s findings, conclusions, and 6 recommendations addressed to OMB. We also sent a draft of this report to the 24 agencies in our review and received written, e-mail, and/or oral responses from all 24 agencies. Of the 22 agencies to which we made recommendations, 14 (Agriculture, Defense, Environmental Protection Agency, General Services Administration, Health and Human Services, Justice, National Aeronautics and Space Administration, National Science Foundation, Nuclear Regulatory Commission, Small Business Administration, Social Security Administration, Treasury, U.S. Agency for International Development, and Veterans Affairs) generally agreed with our recommendations. One agency (Commerce) did not comment specifically on our recommendations and the remaining 7 agencies generally concurred with some of our recommendations but provided qualifying comments with others. The agencies’ comments and our responses are summarized below: In oral comments on a draft of the report, the Department of Energy’s Acting Associate Chief Information Officer for Cyber Security generally concurred with 4 of our 5 recommendations. However, he requested that our recommendations to ensure that all components acquire and deploy a NIST-validated SCAP tool, and develop, document, and implement a policy to monitor compliance using a NIST-validated tool be clarified to pertain only to those components that were required to implement FDCC. We agree that this modification clarifies the intent of our recommendations and have modified those recommendations as appropriate. Further, in commenting on our fifth recommendation to ensure that FDCC acquisition language was included in contracts, the Acting Associate Chief Information Officer for Cyber Security stated that the department will continue to evaluate our recommendation and determine an appropriate implementation approach. In written comments on a draft of the report, the Department of Homeland Security’s Chief Information Officer concurred with 3 of our 4 recommendations. He also concurred, with a caveat, with our fourth recommendation to ensure that FDCC acquisition language was included in contracts. The Chief Information Officer stated that the department already has regulations in place to ensure new acquisitions meet FDCC requirements. We agree that the department has regulations in place. However, as indicated in our report, the FDCC acquisition language had not been incorporated into all contracts. The Department of Homeland Security’s comments are reprinted in appendix VIII. In written and oral comments on a draft of the report, the Department of Housing and Urban Development’s Chief Information Officer generally concurred with 3 of our 4 recommendations. In written comments on our recommendation that the department ensure FDCC acquisition language is included in contracts, he stated that the department had a policy in place for including clauses in contracts. After subsequent discussion with department representatives, they orally concurred with our recommendation. In written comments on our recommendation that the department develop, document, and implement a policy to approve deviations to FDCC by a designated accrediting authority, the Chief Information Officer stated that the department had provided us with a copy of its policy for approving deviations in December 2009. After reviewing additional documentation provided, we agree that the department had met the requirement, modified the report as appropriate, and removed the recommendation. The Department of Housing and Urban Development’s comments are reprinted in appendix IX. In written comments on a draft of the report, the Department of the Interior’s Assistant Secretary for Policy, Management, and Budget concurred with our recommendations, subject to modifications that reduced redundancy in the recommendations and clarified that components should follow the department’s policy related to documenting and approving deviations, and acquiring and deploying NIST-validated tools to monitor compliance with FDCC. We agree that the suggested modifications clarified the intent of our recommendations, and have modified the recommendations accordingly. The Department of the Interior’s comments are reprinted in appendix X. In written and oral comments on a draft of the report, the Department of Labor’s Assistant Secretary for Administration and Management generally concurred with 1 of our 2 recommendations, subject to modification that clarified that FDCC acquisition language had been included in some contracts but not in all. After reviewing additional documentation provided, we modified the recommendation as appropriate. In written comments on our recommendation that the department complete deployment of a NIST-validated SCAP tool, the Assistant Secretary for Administration and Management stated that deployment of the tool had been completed prior to the end of our audit field work. After reviewing additional documentation provided, we agree that the department had met the requirement, modified the report as appropriate, and removed the recommendation. The Department of Labor’s comments are reprinted in appendix XI. In written and oral comments on a draft of the report, the Office of Personnel Management’s Chief Information Officer generally concurred with 3 of our 4 recommendations. In written comments on our recommendation on documenting deviations and having them approved by a designated authority, he said that the department has documented its deviations and approved them. After subsequent discussion with department representatives, they orally concurred with our recommendation. In addition, in written comments on our recommendation to develop, document, and implement a policy to approve deviations to FDCC by a designated authority, the Chief Information Officer stated that the agency has a policy in place. After reviewing documentation provided, we agree that the department had met the requirement, modified the report as appropriate, and removed the recommendation. The Office of Personnel Management’s comments are reprinted in appendix XIII. In e-mail and oral comments on a draft of the report, the Department of Transportation’s Chief Information Security Officer generally concurred with our 2 recommendations, subject to modification that clarified that the department had acquired a validated tool and was in the process of fully deploying it. After reviewing additional documentation provided, we modified table 5 in the report to include a table footnote indicating a tool had been acquired but not deployed and revised the recommendation as appropriate. In addition, in e-mail comments on our recommendation to ensure that FDCC acquisition language is included in contracts, the Chief Information Security Officer stated that the department had provided a copy of the policy guidance on contract clauses to us. After subsequent discussion with department representatives, they orally concurred with our recommendation. In addition, several agencies also provided technical comments, including one of two agencies to which we did not make recommendations. We have incorporated these comments as appropriate. The remaining agency to which we did not make recommendations stated that it did not have any comments. Furthermore, for appropriate coverage of a federal-wide information technology contract issue, the Department of Defense suggested we add a recommendation that contract language be included in the Federal Acquisition Regulation "to ensure new acquisitions include FDCC settings and products of information technology providers operate effectively using them." However, it was not within the scope of our review to evaluate whether such standard contract language was necessary or what it would entail. Nonetheless, the Department of Defense may wish to pursue this suggestion with OMB and other stakeholders for possible promulgation of a Federal Acquisition Regulation rule that would serve as a governmentwide template in solicitations or contracts for ensuring that FDCC settings are effectively incorporated and applied. 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 other interested congressional committees, secretaries of the Departments of Agriculture, Commerce, Defense, Education, Energy, Health and Human Services, Homeland Security, Housing and Urban Development, the Interior, Labor, State, Transportation, the Treasury, and Veterans Affairs; the Attorney General; the administrators of the Environmental Protection Agency, General Services Administration, National Aeronautics and Space Administration, Small Business Administration, and U.S. Agency for International Development; the commissioner of the Social Security Administration; the chairman of the Nuclear Regulatory Commission; and the directors of the National Science Foundation, Office of Management and Budget, and Office of Personnel Management. 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 regarding this report, please contact me at (202) 512-6244 or at [email protected]. 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 XVIII. Relative to the 24 major federal agencies covered by the Chief Financial Officers Act, the objectives of our review were to (1) identify the goals, objectives, and requirements for the initiative; (2) determine the status of actions federal agencies have taken, or plan to take, to implement the initiative; and (3) identify the benefits, challenges, and lessons learned in implementing this initiative. To address our first objective, we reviewed applicable policies and memorandums issued by the Office of Management and Budget (OMB) and plans, artifacts, and other documentation provided by the National Institute of Standards and Technology (NIST). We also reviewed guidance and Federal Desktop Core Configuration (FDCC) and Security Content Automation Protocol (SCAP) materials located on NIST’s Web site. In addition, we held discussions with OMB and NIST representatives to further assess the initiative’s requirements and confirm that the material posted on their Web sites that we considered was current and accurate. To address our second and third objectives, we obtained and analyzed polices, plans, artifacts, status reports, and other documentation relative to the requirements of the initiative from each of the 24 federal agencies in our review. We obtained information through interviews with officials from each of the 24 agencies, industry officials, security experts, officials from General Services Administration’s Policy Utilization Assessment Program, and members of the Chief Information Officers Council and FDCC Change Control Board. We also met with staff from all 24 Offices of the Inspector General regarding their FDCC audit work performed as part of Federal Information Security Management Act fiscal year 2008 and 2009 reporting to obtain information on their audit methodology, findings, and related documentation. Based on our review of the adequacy of work performed, we have sufficient assurance to rely on work completed by the inspectors general in the context of our audit objective related to whether the agency had documented deviations and had incorporated language related to the use of FDCC settings into its contracts. We also analyzed the information we obtained from all sources to determine the benefits, challenges, and lessons learned from implementation of FDCC. For our second objective, in order to determine the status of FDCC implementation at federal agencies, we developed a data collection instrument to obtain information on the number of workstations that had FDCC settings applied, either with no deviations or with deviations established at these agencies. To develop our data collection instrument, we reviewed the requirements of the initiative as well as the results from a previous data collection instrument used by NIST to collect status information on FDCC as of March 2008. We designed the draft collection instrument in close collaboration with subject matter experts and participated in refining subsequent drafts of the instrument. We sent the data collection instrument to the officials at the Office of Chief Information Officer at the 24 federal agencies and asked the agencies to provide status information as of June 30, 2009, and as of September 30, 2009. We e-mailed our first data collection instrument, to collect FDCC status data as of June 30, 2009, to all 24 agencies in early June 2009. When our collection ended in July 2009, we had received 19 usable responses. After examining the results from this data collection to identify inconsistencies and other indications of error, we concluded that the extent of response error and the overall low level of participation precluded the use of these data in our report. To refine the data collection instrument to collect September 2009 data, we conducted pretests with officials from 3 agencies to clarify any ambiguous or potentially biased questions. These pretests were conducted by telephone with the 3 agencies, which were chosen to represent the variety of characteristics across the 24 agencies we would survey. These characteristics included the operating system used, type of workstation, composition and size of the agency, and method used to collect status information. We sent this instrument to agency officials in mid-September 2009. We conducted follow-up contacts by e-mail and phone to encourage response and clarify individual answers. We received usable responses from 22 agencies, and ended the data collection period in November 2009. While our evaluation of the instrument data indicates that it is usable for the purposes of this report, the information may not be complete due to the inability of some agencies to provide information in the categories we requested, including some of the data supporting our estimates of contractor-owned workstations with FDCC compliance, and possibly some other estimates. We conducted this performance audit from December 2008 to March 2010 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 table below shows, for the 24 agencies from which we collected data using our data collection instrument, the percentage of applicable Windows XP and Vista workstations that have all FDCC settings implemented with no deviations, workstations with an agency baseline implemented and deviations documented, and workstations that do not have the settings implemented. To improve the department’s implementation of FDCC, we recommend that the Secretary of Agriculture take the following three actions: complete implementation of the agency’s FDCC baseline, including establishing firm milestones for completion; document deviations to FDCC and have them approved by a designated develop, document, and implement a policy to approve deviations by a designated accrediting authority. To improve the department’s implementation of FDCC, we recommend that the Secretary of Commerce take the following three actions: ensure all components have acquired and deployed a NIST-validated SCAP tool to monitor compliance with FDCC; ensure all components develop, document, and implement a policy to monitor FDCC compliance using a NIST-validated SCAP tool; and ensure that language is included in contracts to ensure new acquisitions include FDCC settings and products of information technology providers operate effectively using them. To improve the department’s implementation of FDCC, we recommend that the Secretary of Defense take the following two actions: complete implementation of the agency’s FDCC baseline, including establishing firm milestones for completion, and ensure that language is included in contracts to ensure new acquisitions include FDCC settings and products of information technology providers operate effectively using them. To improve the department’s implementation of FDCC, we recommend that the Secretary of Energy take the following five actions: complete implementation of the agency’s FDCC baseline, including establishing firm milestones for completion; document deviations to FDCC and have them approved by a designated ensure all components that are required to implement FDCC have acquired and deployed a NIST-validated SCAP tool to monitor compliance with FDCC; ensure all components that are required to implement FDCC develop, document, and implement a policy to monitor FDCC compliance using a NIST-validated SCAP tool; and ensure that language is included in contracts of those components that are required to implement FDCC to ensure new acquisitions include FDCC settings and products of information technology providers operate effectively using them. To improve the agency’s implementation of FDCC, we recommend that the Administrator of the Environmental Protection Agency take the following two actions: complete implementation of the agency’s FDCC baseline, including establishing firm milestones for completion, and develop, document, and implement a policy to approve deviations to FDCC by a designated accrediting authority. To improve the agency’s implementation of FDCC, we recommend that the Administrator of the General Services Administration take the following action: complete implementation of the agency’s FDCC baseline, including establishing firm milestones for completion. To improve the department’s implementation of FDCC, we recommend that the Secretary of Health and Human Services take the following three actions: complete implementation of the agency’s FDCC baseline, including establishing firm milestones for completion; develop, document, and implement a policy to monitor FDCC compliance using a NIST-validated SCAP tool; and ensure that language is included in contracts to ensure new acquisitions include FDCC settings and products of information technology providers operate effectively using them. To improve the department’s implementation of FDCC, we recommend that the Secretary of Homeland Security take the following four actions: complete implementation of the agency’s FDCC baseline, including establishing firm milestones for completion; develop, document, and implement a policy to approve deviations to FDCC by a designated accrediting authority; develop, document, and implement a policy to monitor FDCC compliance using a NIST-validated SCAP tool; and ensure that language is included in contracts to ensure new acquisitions include FDCC settings and products of information technology providers operate effectively using them. To improve the department’s implementation of FDCC, we recommend that the Secretary of Housing and Urban Development take the following three actions: acquire and deploy a NIST-validated SCAP tool to monitor compliance develop, document, and implement a policy to monitor FDCC compliance using a NIST-validated SCAP tool; and ensure that language is included in contracts to ensure new acquisitions include FDCC settings and products of information technology providers operate effectively using them. To improve the department’s implementation of FDCC, we recommend that the Secretary of the Interior take the following three actions: complete implementation of the agency’s FDCC baseline, including establishing firm milestones for completion; ensure all components implement the department’s existing policy to document deviations to FDCC and have those deviations approved by a designated accrediting authority; and ensure all components implement the department’s existing policy to acquire and deploy a NIST-validated SCAP tool and monitor compliance with FDCC. To improve the department’s implementation of FDCC, we recommend that the Attorney General take the following four actions: complete implementation of the agency’s FDCC baseline, including establishing firm milestones for completion; develop, document, and implement a policy to approve deviations to FDCC by a designated accrediting authority; complete deployment of a NIST-validated SCAP tool to monitor FDCC ensure that language is included in contracts to ensure new acquisitions include FDCC settings and products of information technology providers operate effectively using them. To improve the department’s implementation of FDCC, we recommend that the Secretary of Labor take the following action: complete efforts to ensure that language is included in contracts to ensure new acquisitions include FDCC settings and products of information technology providers operate effectively using them. To improve the agency’s implementation of FDCC, we recommend that the Administrator of the National Aeronautics and Space Administration take the following action: complete implementation of the agency’s FDCC baseline, including establishing firm milestones for completion. To improve the agency’s implementation of FDCC, we recommend that the Director of the National Science Foundation take the following action: complete deployment of a NIST-validated SCAP tool to monitor FDCC compliance. To improve the agency’s implementation of FDCC, we recommend that the Chairman of the Nuclear Regulatory Commission take the following two actions: develop, document, and implement a policy to approve deviations to FDCC by a designated accrediting authority, and ensure that all components include language in contracts to ensure new acquisitions include FDCC settings and products of information technology providers operate effectively using them. To improve the agency’s implementation of FDCC, we recommend that the Director of the Office of Personnel Management take the following three actions: complete implementation of the agency’s FDCC baseline, including establishing firm milestones for completion; document deviations to FDCC and have them approved by a designated ensure that language is included in contracts to ensure new acquisitions include FDCC settings and products of information technology providers operate effectively using them. To improve the agency’s implementation of FDCC, we recommend that the Administrator of the Small Business Administration take the following two actions: develop, document, and implement a policy to approve deviations to FDCC by a designated accrediting authority, and ensure that language is included in contracts to ensure new acquisitions include FDCC settings and products of information technology providers operate effectively using them. To improve the agency’s implementation of FDCC, we recommend that the Commissioner of the Social Security Administration take the following four actions: develop, document, and implement a policy to approve deviations to FDCC by a designated accrediting authority; complete deployment of a NIST-validated SCAP tool to monitor develop, document, and implement a policy to monitor FDCC compliance using a NIST-validated SCAP tool; and ensure that language is included in contracts to ensure new acquisitions include FDCC settings and products of information technology providers operate effectively using them. To improve the department’s implementation of FDCC, we recommend that the Secretary of Transportation take the following two actions: complete deployment of a NIST-validated SCAP tool to monitor compliance with FDCC, and ensure that language is included in contracts to ensure new acquisitions include FDCC settings and products of information technology providers operate effectively using them. To improve the department’s implementation of FDCC, we recommend that the Secretary of the Treasury take the following two actions: complete implementation of the agency’s FDCC baseline, including establishing firm milestones for completion, and ensure that all components include language in contracts to ensure new acquisitions include FDCC settings and products of information technology providers operate effectively using them. To improve the agency’s implementation of FDCC, we recommend that the Administrator of the U.S. Agency for International Development take the following action: ensure that language is included in contracts to ensure new acquisitions include FDCC settings and products of information technology providers operate effectively using them. To improve the department’s implementation of FDCC, we recommend that the Secretary of Veterans Affairs take the following four actions: complete implementation of the agency’s FDCC baseline, including establishing firm milestones for completion; acquire and deploy a NIST-validated SCAP tool to monitor compliance develop, document, and implement a policy to monitor FDCC compliance using a NIST-validated SCAP tool; and ensure that language is included in contracts to ensure new acquisitions include FDCC settings and products of information technology providers operate effectively using them. The following are GAO’s comments on the Department of Commerce’s letter dated February 18, 2010. 1. In its March 2007 directives, OMB stated that an objective of FDCC was to provide a baseline level of security to agencies. We used OMB’s characterization of FDCC for this report. The following are GAO’s comments on the Department of Housing and Urban Development’s letter dated February 17, 2010. 1. After reviewing additional documentation provided by department representatives, we agreed that the department had met the requirement and modified the column “have policy to approve deviations by designated authority” in table 4 from “no” to “yes.” The recommendation to this finding was removed from the report. 2. After subsequent discussion with department representatives, they orally concurred with our recommendation. The following are GAO’s comments on the Department of Labor’s letter dated February 12, 2010. 1. After reviewing additional documentation provided, we agreed that the department had met the requirement and modified the column “NIST- validated SCAP tool acquired and deployed” in table 5 from “no” to “yes.” 2. After reviewing additional documentation provided by department representatives, we agreed that the department had partially met the requirement and modified the column “language incorporated” in table 6 from “no” to “partially.” 3. The recommendation to this finding was removed (see comment 1). 4. The recommendation to this finding was modified as appropriate (see comment 2). The following are GAO’s comments on the Office of Personnel Management’s letter dated March 2, 2010. 1. After subsequent discussion with agency representatives, they orally concurred with our recommendation. 2. After reviewing additional documentation provided by agency representatives, we agreed that the agency had met the requirement and modified the column “have policy to approve deviations by designated authority” in table 4 from “no” to “yes.” The recommendation to this finding was removed from the report. In addition to the individual named above, Jeffrey Knott (Assistant Director), John Bainbridge, William Cook, Kami Corbett, Neil Doherty, Michele Fejfar, Nancy Glover, Valerie Hopkins, Lee McCracken, Zsaroq Powe, Carl Ramirez, and Shawn Ward made key contributions to this report. | The increase in security incidents and continuing weakness in security controls on information technology systems at federal agencies highlight the continuing need for improved information security. To standardize and strengthen agencies' security, the Office of Management and Budget (OMB), in collaboration with the National Institute of Standards and Technology (NIST), launched the Federal Desktop Core Configuration (FDCC) initiative in 2007. GAO was asked to (1) identify the goals, objectives, and requirements of the initiative; (2) determine the status of actions federal agencies have taken, or plan to take, to implement the initiative; and (3) identify the benefits, challenges, and lessons learned in implementing this initiative. To accomplish this, GAO reviewed policies, plans, and other documents at the 24 major executive branch agencies; reviewed OMB and NIST guidance and documentation; and interviewed officials. The goals of FDCC are to improve information security and reduce overall information technology operating costs across the federal government by, among other things, providing a baseline level of security through the implementation of a set of standard configuration settings on government-owned desktop and laptop computers (i.e., workstations). To carry out the initiative, OMB required that executive branch agencies take several actions, including: (1) submit an implementation plan to OMB; (2) apply all configuration settings to all applicable workstations by February 2008; (3) document any deviations from the prescribed settings and have them approved by an accrediting authority; (4) acquire a specified NIST-validated tool for monitoring implementation of the settings; (5) ensure that future information technology acquisitions comply with the configuration settings; and (6) submit a status report to NIST. While agencies have taken actions to implement these requirements, none of the agencies has fully implemented all configuration settings on their applicable workstations. Specifically, most plans submitted to OMB did not address all key implementation activities; none of the agencies implemented all of the prescribed configuration settings on all applicable workstations, though several implemented agency-defined subsets of the settings; several agencies did not fully document their deviations from the settings or establish a process for approving them; six agencies did not acquire and make use of the required tool for monitoring FDCC compliance; many agencies did not incorporate language into contracts to ensure that future information technology acquisitions comply with FDCC; and many agencies did not describe plans for eliminating or mitigating their deviations in their compliance reports to NIST. Until agencies ensure that they are meeting these FDCC requirements, the effectiveness of the initiative will be limited. FDCC has the potential to increase agencies' information security by requiring stricter security settings on workstations than those that may have been previously in place and standardizing agencies' management of workstations, making it easier to manage changes such as applying updates or patches. In addition, a number of lessons can be learned from the management and implementation of the FDCC initiative which, if considered, could improve the implementation of future versions of FDCC or other configuration efforts. At the same time, agencies face several ongoing challenges in fully complying with FDCC requirements, including retrofitting applications and systems in their existing environments to comply with the settings, assessing the risks associated with deviations, and monitoring workstations to ensure that the settings are applied and functioning properly. As OMB moves forward with the initiative, understanding the lessons learned as well as the ongoing challenges agencies face will be essential in order to ensure the initiative is successful in ensuring public confidence in the confidentiality, integrity, and availability of government information. |
Prior to FSMA, FDA focused on reacting to foodborne illnesses after they occurred. FSMA marked a historic turning point by requiring that FDA focus on preventing rather than reacting to foodborne illnesses. FSMA did so, in part, by requiring a number of new rules that together provide a framework for preventing foodborne illness across the food safety system. Of these rules, those on produce, human food, and animal food took aim at the entities in the earliest stages of the farm-to-fork continuum (see illustration of that continuum in fig. 2): the farms that grow and facilities that process food for human and animal consumption. Produce is an important part of a healthy diet but is susceptible to contamination from numerous sources, including agricultural water, animal manure, equipment, and agricultural workers. Because produce is often consumed raw without processing to reduce or eliminate contaminants, steps to prevent contamination are key to ensuring safe consumption. Prior to FSMA, there were no enforceable national standards for on-farm practices related to produce safety. FDA and others had taken several actions to address produce safety, including issuing guidance documents and letters to industry, but in spite of these efforts, produce-associated foodborne illnesses occurred regularly. According to FDA, from 1996 through 2010, produce accounted for 42.3 percent of all outbreak-related illnesses linked to FDA-regulated foods. The FSMA-mandated rule on produce established the first enforceable national standards for on-farm growing, harvesting, packing, and holding of domestic and imported produce. Among other things, the rule established standards related to agricultural water quality; the use of soil amendments, such as raw manure; the use of domesticated animals; intrusion by wild animals; worker training, health, and hygiene; and sanitation of equipment, tools, and buildings. The rule also established standards specific to sprouts, which are especially vulnerable to contamination because of the warm, moist, and nutrient-rich conditions needed to grow them. The rule included several exemptions. For example, it does not apply to produce that is rarely consumed raw, such as asparagus and black beans; produce that is to be consumed on farm; or produce that is to undergo commercial processing, such as refining produce into sugar or distilling it into wine, that adequately reduces contaminants of public health significance. In addition, the rule does not apply to farms that have an average annual value of produce sold during the previous 3-year period of $25,000 or less. Processing of food for human consumption is an important part of the global food industry. New and innovative food products are created daily in response to advances in science and technology as well as consumer demand. For example, ready-to-eat, refrigerated, and heat-and-serve foods are more popular than ever. Contamination of processed foods can come from a wide range of sources, including raw ingredients, processing equipment, and shipping containers. Once contamination occurs, it can spread widely because of mass production and global supply chains. For processed foods that require little to no preparation before consumption, contaminants can be especially dangerous because consumers may not take steps such as cooking to reduce or eliminate the hazard. Prior to FSMA, FDA had issued various regulations to protect against contamination of processed foods. For example, FDA required processors to meet Current Good Manufacturing Practice requirements (CGMP), which established minimum standards for processing of human food. Among other things, the standards covered food industry personnel; operations and equipment; plants, grounds, and facilities; and warehousing and distribution. However, an FDA work group reported in 2005 that it was unclear whether the CGMPs—last updated in 1986— adequately addressed new food safety challenges, including more sophisticated and increasingly automated technologies and newly recognized contaminants. In addition to requiring processors to meet CGMPs, FDA required processors of certain food products, such as seafood and juice, to have programs in place to prevent contamination through, among other things, monitoring, recordkeeping, verification of monitoring practices, and corrective actions. However, no such requirements applied comprehensively across the food processing industry. The FSMA-mandated rule on human food revised existing requirements for processors in a number of ways. Two key revisions were updated CGMPs and the establishment, for the first time, of requirements for contamination prevention programs (known as preventive control programs) across much of the industry. Among other things, under the preventive control programs required by the rule, food processors must develop and implement written plans that identify and evaluate known or reasonably foreseeable food safety hazards; specify the steps, or controls, that will be put in place to significantly minimize or prevent the hazards; specify how the controls will be monitored, verified, and corrected, as needed, to ensure that they are working; and maintain records documenting these actions. The rule included several exemptions. For example, it does not apply to seafood or juice processors (which are subject to separate preventive control regulations) or to farms. Animal food is made for a variety of species, including animals from which humans obtain food, pet animals, and laboratory animals. The safety of animal food is important not only for the health of animals, but also for the health of humans. For example, contaminated food fed to livestock can cause harm both to the livestock and to humans that consume the livestock. In addition, contaminated food fed to pets can cause harm both to the pets and to humans that come in contact with the food or with items the food has touched. For example, from 2006 to 2008, 79 people in 21 states were reported ill from handling pet food manufactured in a Pennsylvania facility that was contaminated with Salmonella. Prior to FSMA, the regulation of animal food focused on specific safety issues. For example, FDA had an animal food sampling program focused on, among other things, tracking levels of contaminants, including Salmonella and Escherichia coli, and investigating possible sources of contamination. In addition, FDA had a program aimed at protecting against Bovine Spongiform Encephalopathy (commonly known as mad cow disease) and had issued CGMPs for medicated animal feed. However, in 2010, an FDA-led work group issued a report identifying gaps in the regulation of animal food products, including the lack of federal regulations to fully address all aspects of producing safe animal food. The FSMA-mandated animal food rule was designed to fill that gap. Like the human food rule, it established two sets of requirements—one relating to CGMPs and one to preventive control programs. The animal food rule established CGMPs applicable across the animal food industry and mandated preventive control programs for animal food processors. Also, like the human food rule, the animal food rule included several exemptions. For example, it does not apply to farms. As reflected in figure 3, FDA’s implementation of FSMA’s mandate for new rules on produce, human food, and animal food spans several years. With the rules finalized in 2015, industry compliance with the rules is scheduled to come due between 2016 and 2020, with compliance dates phased in based on business size and other factors. In addition to shifting FDA’s focus to preventing rather than reacting to foodborne illnesses, FSMA also called on FDA to work with nonfederal agencies in carrying out the new law. Among other things, FSMA directed or encouraged FDA to coordinate on rule development, rule implementation, and regulator training. Rule development. In its rulemaking processes, FDA is subject to laws and executive orders that require consultation. These include the Unfunded Mandates Reform Act of 1995 (UMRA) and Executive Orders 12866 and 13563, which direct all federal agencies to provide for meaningful and timely input from state, local, and tribal officials during rule development. They also require that this consultation occur before promulgation of proposed rules. Moreover, FSMA specifically required FDA to coordinate with state departments of agriculture in publishing the proposed produce rule. Further, in recognition of the unique government-to-government relationship between the federal government and Indian tribes grounded in the Constitution, separate requirements apply to consultation with tribes. Specifically, Executive Order 13175 requires federal agencies to have an accountable process to ensure meaningful and timely input by tribal officials in developing federal policies that have tribal implications. In January 2005, HHS adopted a tribal consultation policy formalizing this requirement. Under that policy, no agency within HHS may promulgate any regulation with tribal implications unless either the federal government provides the funds necessary to pay the direct costs incurred by the tribes or the agency has consulted with the tribes throughout all stages of the process of developing the proposed regulation. Rule implementation. FSMA authorized and encouraged FDA to leverage states, localities, tribes, and territories in conducting examinations, testing, and investigations on FDA’s behalf for determining compliance with all FSMA food safety provisions, including those related to the rules on produce, human food, and animal food. For the produce rule, FSMA went further in actually requiring FDA, as appropriate, to coordinate with states and localities in enforcing and ensuring compliance with the rule. In fact, FSMA required that the final produce rule provide for coordination of enforcement activities by state and local officials. Regulator training. FSMA required FDA to administer training and education programs for state, local, tribal, and territorial food safety officials relating to the regulatory responsibilities and policies established by FSMA. The concept of an integrated food safety system has been in existence for several decades. The concept was first formally articulated by the Association of Food and Drug Officials in 1998, when the association described a vision for food safety integration across all levels of government. Also in 1998, the National Academy of Sciences issued a report calling for a more integrated food safety system. In September 1998, FDA, in cooperation with other federal and nonfederal agencies, hosted a meeting of food safety officials from all 50 states (referred to as a 50-state meeting) to examine the idea of integration. Around the same time, FDA established the National Food Safety System project to strengthen partnerships among federal and nonfederal agencies to better ensure safe food and respond to outbreaks. The project had some successes until about 2002, when the project was put on hold because of a lack of funding, according to several sources, including FDA. In November 2007, FDA renewed its focus on integration in its new Food Protection Plan. In that plan, FDA presented a strategy for protecting the U.S. food supply against intentional and unintentional contamination and recognized the importance of leveraging the resources of nonfederal agencies, among others, in doing so. As part of FDA’s effort to implement its new plan, FDA hosted its second 50-state meeting in August 2008. At that meeting, participants reflected on accomplishments made since the initial 50-state meeting 10 years earlier and concluded that despite progress in some areas, many obstacles to integration remained. Outcomes of that meeting included creation of an FDA-state collaborative mechanism, the Partnership for Food Protection (PFP), to implement recommendations made at the 2008 meeting. In April 2009, a study funded by the Robert Wood Johnson Foundation and led by George Washington University recognized progress that had been made toward integration and made several recommendations to further strengthen collaboration and partnerships, among other things. Three months later, the White House Food Safety Working Group—which was created in 2009 and stopped meeting after about 2 years—submitted a report to the President identifying food safety integration as a priority. In September 2009, FDA again embraced the concept of an integrated food safety system by publishing a vision statement for achieving integration. In June of the following year, the National Academy of Sciences issued a second report on food safety, supporting, among other things, an integrated food safety system and describing remaining steps necessary to facilitate such integration. Two months later, FDA, under the auspices of the PFP, hosted the third 50-state meeting, with subsequent 50-state meetings held in August of 2012 and 2014. Food safety integration is seen today in a number of collaborations among food safety officials across levels of governments. These include the following: State cooperative programs for milk, shellfish, and retail food safety. FDA works with nonfederal regulatory agencies to ensure the safety of milk and raw molluscan shellfish, as well as the safety of food served in retail establishments. Regulatory responsibility and authority in these areas lies primarily with state, local, tribal, and territorial governments. However, FDA provides assistance to these nonfederal governments through three cooperative programs: the Milk Safety Program, the National Shellfish Sanitation Program, and the Retail Food Protection Program. These programs are governed by memorandums of understanding that FDA entered into with the National Conference on Interstate Milk Shipments, the Interstate Shellfish Sanitation Conference, and the Conference for Food Protection, respectively, which represent the nonfederal regulatory agencies. Under these cooperative programs, FDA provides guidance, training, certification, and other technical assistance. This includes promoting the adoption, implementation, and enforcement of the FDA Grade “A” Pasteurized Milk Ordinance, the National Shellfish Sanitation Program Model Ordinance, and the FDA Model Food Code, each developed by FDA in collaboration with state and local food safety agencies. National standards for oversight of retail food, manufactured food, and animal food. FDA has developed national regulatory program standards for oversight of retail food, manufactured food, and animal food. These standards—the Voluntary National Retail Food Regulatory Program Standards, the Manufactured Food Regulatory Program Standards, and the Animal Feed Regulatory Program Standards—serve as guides for nonfederal agencies in the design and management of food safety regulatory programs, helping to foster consistency across programs and their continuous improvement. The retail program standards were first released in 1999, the manufactured food program standards in 2007, and the animal feed program standards in 2014. As of January 2016, 682 nonfederal agencies, including state, tribal, territorial, and local agencies, were enrolled in the retail standards; 42 state agencies in 40 states were implementing the manufactured food standards; and 21 state agencies in separate states were implementing the animal feed standards. Federal-state collaborative mechanisms for foodborne illness surveillance and outbreak response. FDA is involved in a number of collaborative mechanisms focused on foodborne illness surveillance and outbreak response. For example, FDA co-chairs the steering committee of the Food Emergency Response Network, which integrates the nation’s food-testing laboratories at the federal and nonfederal levels to better respond to emergencies involving biological, chemical, or radiological contamination of food. In addition, FDA coordinates the Electronic Laboratory Exchange Network, a web- based information network that allows federal and nonfederal food safety officials to compare, share, and coordinate laboratory analysis findings. FDA also collaborates with other federal and nonfederal agencies through mechanisms including the National Antimicrobial Resistance Monitoring System, which tracks whether foodborne and other bacteria are resistant to the antibiotics used to treat and prevent the spread of illness; PulseNet, which connects cases of foodborne illness to potential outbreaks; and the Foodborne Diseases Active Surveillance Network, which estimates the number of foodborne illnesses, monitors trends in incidence of specific foodborne illnesses over time, and attributes illnesses to specific foods and settings, among other things. In addition, since 2008, FDA has awarded cooperative agreements to states to develop rapid response teams aimed at, among other things, creating integrated and sustained response capabilities for food emergencies. These and other collaborations illustrate the progress that has been made toward food safety integration. However, prior to FSMA, a key limitation to full integration was the lack of a statutory mandate to integrate. In 2010, 1 year before FSMA was signed into law, the National Academy of Sciences reported that it agreed with the recommendations of the George Washington University-led study published the prior year. The study found that the most fundamental prerequisite for achieving integration was high-level political commitment to that goal and accountability for achieving it. The study noted that the absence of an integration mandate did not by itself preclude collaboration, as evidenced by the extensive collaboration that already existed, but it meant that in the end officials were not fully empowered and accountable for integrating their food safety efforts. Accordingly, the study’s first recommendation was for a congressional mandate and accountability at the federal level for building an integrated food safety system. In January 2011, FSMA was signed into law, providing such a mandate by requiring FDA to take steps that when taken, would better integrate its food safety oversight with that of states, localities, tribes, and territories. FDA took numerous steps to meet its responsibilities under UMRA and Executive Orders 12866 and 13563 to ensure meaningful and timely input from the public and stakeholders during development of the FSMA- mandated rules on produce, human food, and animal food. FDA stated that it met its requirement under FSMA to coordinate with state departments of agriculture in publishing the proposed produce rule; representatives of state agriculture departments had varying views on the quality of the coordination. FDA did not fully meet its responsibility to consult with tribes throughout all stages of development of the proposed rules. Unfunded Mandates Reform Act of 1995. Agencies are to develop a process to permit elected officers of state, local, and tribal governments (or their designees) to provide meaningful and timely input into the development of regulatory proposals containing significant intergovernmental mandates. Before promulgating any proposed or final rule that may result in the expenditure of $100 million or more (adjusted for inflation) in any 1 year by state, local, or tribal governments in the aggregate or by the private sector, agencies must prepare a written statement including, among other things, a description of the extent of the agency’s prior consultation with state, local, and tribal governments and a summary and evaluation of those governments’ comments and concerns. Executive Order 12866. Each agency shall provide the public meaningful participation in the regulatory process. Before issuing a notice of proposed rulemaking, each agency shall seek the views of those likely to be affected, including state, local, and tribal officials. Executive Order 13563. Before issuing a notice of proposed rulemaking, each agency should seek the involvement of those likely to be affected and those expected to be subject to the rulemaking (including, specifically, state, local, and tribal officials). Executive Order 13175. Each agency shall have an accountable process to ensure meaningful and timely input by tribal officials in the development of regulatory policies that have tribal implications. Agencies are to consult with tribal officials early in the process of developing proposed regulations. FDA took numerous steps to meet its responsibilities under UMRA and Executive Orders 12866 and 13563 to ensure meaningful and timely input from the public and stakeholders during development of the FSMA- mandated rules on produce, human food, and animal food. Among other things, as reflected in table 1, FDA held 13 public meetings from April 2011 through October 2015 related to these three rules. To accommodate broader audiences, FDA made 7 of these meetings accessible via live webcast and posted transcripts of 12 and recordings of 9 to its website following the meetings. FDA also opened dockets in the Federal Register requesting information to inform its rulemaking. For example, in February 2010, while FSMA was still being debated in Congress, FDA opened a docket requesting information about, among other things, coordination of produce safety practices and federal, state, local, and tribal government statutes and regulations related to produce safety. Additionally, in response to stakeholder requests, FDA extended its initial 120-day comment period for each of the three proposed rules to about 300 days for the produce and human food rules and to about 150 days for the animal food rule. By the close of these periods, FDA had received about 36,000 comments on the produce rule, more than 8,000 on the human food rule, and more than 2,400 on the animal food rule. In December 2013, FDA announced that based on extensive stakeholder input, FDA planned to make significant changes to key provisions of the produce and human food rules. In March 2014, FDA made a similar announcement regarding the animal food rule. Accordingly, in September 2014, FDA published supplemental proposed rules for each, providing an approximately 75-day comment period. In response, FDA received more than 2,400 comments on the produce rule, more than 1,300 on the human food rule, and more than 140 on the animal food rule. FDA stated that it met its requirement under FSMA to coordinate with state departments of agriculture in publishing the proposed produce rule. In the preamble to the proposed rule, FDA stated that it met the requirement and referenced in support a memorandum in the docket file. In the memorandum, FDA listed 13 meetings held from February 2010 to May 2012 and also listed 24 state departments of agriculture. FDA indicated in the memorandum that each of the listed departments was represented during at least one of the 13 meetings. FDA did not, however, provide detailed information in the memorandum regarding the specific attendees or the extent or nature of the discussions, making it difficult to assess whether the requirement was met. We contacted officials from 8 of the listed state departments of agriculture. These officials confirmed that one or more representatives from each of their departments attended at least one of the meetings referenced by FDA. All of these officials agreed that FDA met the FSMA requirement to coordinate with state departments of agriculture, but they had varying views on the quality of FDA’s coordination. Specifically, officials from 2 departments characterized the quality as very good, 3 characterized it as good, 2 characterized it as moderately good, and 1 characterized it as very poor. Officials from one of the departments that characterized the coordination as very good explained that FDA was very open to discussing states’ concerns. One of the officials that characterized the coordination as moderately good stated that FDA did not seek as much input from states as the official would have liked. The official that characterized the coordination as very poor noted that states had many outstanding concerns that had not been addressed, including the produce rule’s complexity and compliance costs. We also interviewed officials from two associations that represent state departments of agriculture. According to one of these associations, FDA was more willing to discuss its general intent for the rule than has previously been FDA’s practice, which the association said was helpful, but this did not constitute coordination. The other association said that FDA coordinated well with it, holding monthly meetings with the association since FSMA’s enactment. FDA did not fully meet its tribal consultation responsibilities. In particular, FDA did not consult with tribes throughout all stages of development of the proposed rules, as is directed under the HHS tribal consultation policy for all rules with tribal implications where the federal government does not provide the funds necessary to pay the direct compliance costs incurred by tribes. The FSMA mandate that FDA develop rules on produce and human and animal food had several tribal implications. For example, FSMA authorized and encouraged FDA to leverage tribal agencies, among other nonfederal agencies, in conducting activities to determine compliance with all FSMA food safety provisions. Other potential implications included the effect of compliance costs on the sustainability of tribal businesses, the effect of produce rule requirements on traditional farming practices, questions regarding who would be responsible for ensuring compliance on tribal lands, and the effect of water standards on tribal water rights. Given the tribal implications and the fact that the federal government did not provide the funds necessary to pay the direct compliance costs incurred by tribes, FDA should have consulted with tribes before publishing the proposed rules. Instead, the first formal consultation took place 1 month after publication of the proposed rule on animal food and 10 months after publication of the proposed rules on produce and human food. As reflected in figure 4, the proposed rules on produce and human food were published in January 2013, with an initial comment period set to end in May 2013. As of April 2013, FDA had conducted no direct outreach to tribes. On April 4, the National Congress of American Indians wrote a letter to FDA stressing the need for tribal consultation. On April 24, FDA announced that it would extend the comment period for the proposed produce and human food rules; the comment periods were ultimately extended to late November 2013. FDA’s formal efforts to consult with tribes began with a letter sent by mail in mid-August 2013 to all federally recognized tribes, notifying them of FDA’s intent to prepare an environmental impact statement for the produce rule and inviting consultation on that statement. In mid-September 2013, FDA sent another letter to all federally recognized tribes, notifying them of a 2-hour consultation webinar on the FSMA rules to be held with all interested tribes in early October 2013. FDA subsequently rescheduled the webinar for early November 2013, the month after FDA published the proposed rule on animal food. Starting in April 2014, FDA also held four in-person consultations with some tribes. According to FDA, attendees were tribes that had requested consultation or that had responded to FDA invitations to consult. FDA acknowledged that its official tribal consultation did not begin prior to promulgation of the proposed rules but noted that it held public meetings at which tribes could have provided input. However, meetings for the general public are not consistent with the government-to-government relationship and dialogue called for in Executive Order 13175 or the HHS tribal consultation policy, and at least one federal court has made that assertion. FDA also stated that tribal consultation can be initiated when either the agency or tribes identify potential tribal implications but that no tribal concerns were brought to FDA’s attention until the spring of 2013. FDA stated that once it was notified of tribal concerns, the agency began taking steps to formally consult with tribal leaders and did so before the final rules were drafted. The HHS tribal consultation policy does allow for identification of potential tribal implications by either an agency or tribes but places the onus on the agency to initiate the consultation and to ensure that it occurs in a timely manner. Moreover, early consultation is clearly emphasized in the HHS tribal consultation policy. In fact, the requirement that consultation occur “throughout all stages” of the rulemaking process was specifically added to the HHS policy when it was revised in December 2010. According to HHS, this change was made to ensure that tribal concerns are heard and that responses are given in a timely manner whenever possible. Under the HHS tribal consultation policy, each agency within HHS must establish its own tribal consultation policy, which should include an accountable process—one that among other things, measures and reports on the results and outcomes of the agency’s tribal consultation performance—to ensure meaningful and timely input by Indian tribes. A senior HHS official told us that each agency within HHS that does not have its own consultation policy, such as FDA, follows the HHS policy. However, the HHS policy establishes a minimum set of requirements and expectations—including collaboration with tribes on meeting development and reporting on consultation outcomes—and directs agencies to establish their own processes to ensure compliance with those directives and expectations, which FDA has not done. We discussed this issue with FDA officials several times from July 2015 through February 2016. On each occasion, these officials stated that they were in the process of developing a draft tribal consultation policy but did not have a timetable for finalizing the policy. On February 29, 2016, FDA released its draft tribal consultation policy and published a notice in the Federal Register inviting comments through May 31, 2016. FDA also sent the draft by mail to all federally recognized tribes and notified the tribes of a teleconference to be held on April 21 to provide an overview of the draft and to hear comments and answer questions about it. We reviewed the draft policy and noted that unlike the HHS policy, it did not explicitly provide for early consultation with tribes on all rules with tribal implications where the federal government does not provide the funds necessary to pay the direct compliance costs incurred by tribes, including before promulgation of proposed regulations. For example, whereas the HHS policy discusses consultation “throughout all stages of the process of developing the proposed regulation,” the draft FDA policy removes “proposed” from this statement. According to FDA officials, they did not intend to exclude early consultation and instead consider early consultation to be implicitly included in the phrase “throughout the process of developing the regulation.” However, without early consultation explicitly provided for—as it is in the HHS policy—there is a risk that it may not occur. According to FDA, the most frequent comment made by tribes and tribal organizations on the FSMA rules, generally, was that FDA should have done more to consult with the tribes when the proposed FSMA rules were being drafted. FDA’s draft tribal consultation policy does not explicitly ensure that this concern will be addressed in future rulemaking. Courts have found that early consultation is important because, by the time an agency has published a proposed rule, the agency has already narrowed down and largely determined the regulatory approach it plans to take. Going forward, the final rule is required to be a logical outgrowth of what the agency has previously proposed. Consultation before publication of a proposed rule allows for input at a time when it is most likely to have the greatest impact on the agency’s decision making and also allows for public comment and discourse on the results of that input. In addition, as of February 2016, FDA still did not have a timetable for finalizing its tribal consultation policy. Our body of work has shown that timetables with milestones and interim steps can be used to show progress toward implementing efforts or to make adjustments to those efforts when necessary, and that without defined tasks and milestones, it is difficult for an agency to set priorities, use resources efficiently, measure progress, and provide management a means to monitor this progress. Developing a draft tribal consultation policy and releasing it for comment are good first steps, but without setting a timetable with milestones and interim steps, it will be difficult for FDA to set priorities, use resources efficiently, measure progress, and provide management a means to monitor this progress in finalizing the policy. FDA therefore risks continued delays in establishing a process to ensure meaningful and timely tribal consultation. As a November 2009 presidential memorandum on tribal consultation states, “istory has shown that failure to include the voices of tribal officials in formulating policy affecting their communities has all too often led to undesirable and, at times, devastating and tragic results. By contrast, meaningful dialogue between Federal officials and tribal officials has greatly improved Federal policy toward Indian tribes. Consultation is a critical ingredient of a sound and productive Federal-tribal relationship.” FDA has begun to develop plans to ensure compliance with the FSMA- mandated rules on produce, human food, and animal food through coordinated implementation with nonfederal agencies. Through our discussions with officials from FDA and from associations representing nonfederal food safety officials, we identified numerous challenges that FDA is working to overcome in its development of plans for coordinated implementation. The associations we interviewed also identified a number of opportunities to improve coordinated implementation of the rules, some of which FDA has taken steps to implement. FDA has begun to develop plans to ensure compliance with the FSMA- mandated rules on produce, human food, and animal food through coordinated implementation with nonfederal agencies. To develop plans for FSMA implementation, FDA established a variety of work groups, including one on the produce rule, formed in December 2012, and one on the human and animal food rules, formed in January 2013. FDA charged these work groups with, among other things, developing strategies to coordinate implementation with nonfederal agencies. FDA also established a separate state strategy work group in May 2015 to focus on a broad range of issues related to nonfederal agency involvement in FSMA implementation. These issues include under what mechanisms FDA should provide funding to nonfederal agencies for work done to implement FSMA-mandated rules, how to coordinate FDA and nonfederal agency inspections and compliance activities under the FSMA-mandated rules, how best to share information between FDA and nonfederal agencies, and how to maintain the competency of FDA and nonfederal agency investigators. To obtain the input of nonfederal agencies, each of these FDA work groups includes at least two nonfederal representatives. According to FDA officials, these nonfederal representatives are selected based on recommendations by the PFP. FDA officials told us that these nonfederal representatives are able to share the views of their respective agencies, in addition to the views of associations to which the representatives belong. For example, several nonfederal representatives are members of the Association of Food and Drug Officials (AFDO), which is made up of state, local, and territorial food safety officials. Therefore, the nonfederal representatives are able to obtain input from AFDO and its members and convey that input to the FDA work group. FDA has also obtained input from nonfederal agencies in other ways. For example, in September 2014, FDA awarded a 5-year cooperative agreement to the National Association of State Departments of Agriculture (NASDA), which represents the commissioners, secretaries, and directors of the state agriculture departments in all 50 states and four U.S. territories. Under this cooperative agreement, NASDA is, among other things, developing a plan that will outline processes for state agriculture departments to consider as they develop regulatory programs for the produce rule, with applicability to the other FSMA-mandated rules as well. The plan will describe processes for information sharing, regulator training, funding, and dispute resolution, among other things. According to FDA officials and NASDA representatives, FDA meets with NASDA periodically to discuss and provide technical assistance on various aspects of the plan. FDA officials and NASDA representatives told us that NASDA intended to present a preliminary draft of its plan to its members in March 2016. In late 2015, when we interviewed officials in the FDA work groups developing plans for coordinated implementation of the FSMA-mandated rules on produce and human and animal food, each group expected its work to continue through roughly 2020, when the final compliance dates under the rules come due. Each had few details to share about the specific role nonfederal agencies will ultimately play in rule implementation. In broad terms, each FDA work group emphasized that FDA cannot implement the rules alone and that successful implementation will require the assistance of nonfederal agencies. Through our discussions with officials from FDA and from associations representing nonfederal food safety officials, we identified numerous challenges that FDA faces in developing plans for coordinated implementation of the FSMA-mandated rules on produce, human food, and animal food. FDA is working with nonfederal agencies to overcome these challenges. Appendix II lists the associations we interviewed. Officials from FDA and nearly all of the associations we interviewed said that nonfederal agencies generally do not have the resources to take on new responsibilities for implementing the FSMA-mandated rules. Representatives of several associations told us that nonfederal agencies are concerned that these new responsibilities represent an unfunded mandate. They said that nonfederal agencies are generally unwilling to assist FDA with implementation of the FSMA-mandated rules until dedicated federal funding is first made available. One association representative explained that since the last recession, state legislators have generally been unwilling to even discuss new responsibilities for federal initiatives, regardless of their merits, unless the federal government commits to long-term funding of any costs incurred. To address this issue, FDA, through its state strategy work group and in coordination with NASDA and other stakeholder groups, is exploring funding mechanisms to provide nonfederal agencies with resources for carrying out new responsibilities related to implementation of the FSMA- mandated rules. FDA officials told us that for the produce rule, this mechanism may be in the form of a cooperative agreement that would provide flexibility to nonfederal agencies by adjusting their funding amounts based on their level of involvement and the types of activities they undertake to implement the rule. This could include funding for start- up costs incurred in developing new regulatory structures for overseeing produce. FDA officials said that for the human and animal food rules, the initial funding mechanism may continue to be contracts, which FDA has used since the 1970s to reimburse nonfederal agencies for inspections of processed food facilities. As of December 2015, FDA had not made any final decisions regarding funding mechanisms. However, in March 2016, FDA issued a federal funding opportunity announcement making available $19 million for cooperative agreement awards to assist nonfederal agencies in implementing the produce rule. FDA officials discussed challenges related to developing inventories of businesses that will be subject to the rules on produce, human food, and animal food. According to FDA officials, such inventories are essential to coordinated implementation because they allow FDA and nonfederal agencies to allocate resources and assign inspection responsibilities, among other things. FDA’s existing business inventory data are drawn from information provided by businesses required to register with FDA. Farms, however, are not required to register. According to FDA officials, the lack of a registration requirement for farms limits the available data that it can use to inform its implementation of the produce rule. Human and animal food businesses are required to register with FDA. However, the information provided by these businesses generally does not include key data needed to inform implementation of the FSMA-mandated human and animal food rules, such as annual business sales or total number of employees, which influence business compliance dates under the rules. In addition, FDA officials said that nonfederal agencies generally do not collect inventory data in a uniform and consistent manner, which limits their ability to share and benefit from one another’s data. Moreover, FDA officials said that inventory data can be out of date because new businesses are frequently established and existing ones relocate or shut down. FDA is working to address these inventory challenges in several ways. For example, FDA is working with NASDA to develop farm inventories and is exploring potential data sources maintained by other government and private sector entities. To help promote consistency in data collection across FDA and nonfederal agencies, FDA has also worked with the PFP work group on information technology to develop a dictionary of common data elements. To help keep inventory data up to date, FDA officials told us that they are working with nonfederal agencies on ways to share one another’s data. FDA officials noted that business inventories will never be perfectly accurate or current and that they must be consistently updated and verified through in-person inspections. Representatives of most of the associations we interviewed said that nonfederal agencies’ varying legal authorities pose challenges to coordinated implementation of the FSMA-mandated rules. For example, some association officials noted that because there were no pre-FSMA national standards for on-farm practices related to produce safety and because many states base their food safety statutes and regulations on federal law, most nonfederal agencies lack authority under state law to conduct on-farm inspections related to produce. These agencies generally must seek such authority from their legislatures. Some association officials stated that for each of the new FSMA-mandated rules, some jurisdictions will have adopted them by reference through language in their state law that automatically adopts federal rules, but other jurisdictions do not have such language and must revise their agencies’ existing legal authorities. Consequently, the resulting authorities are likely to vary considerably across jurisdictions. Moreover, the process of revising legal authorities can take many years. One association representative explained that some state legislatures do not meet each year and most do not operate year-round. As already discussed, representatives of most associations said that nonfederal agencies are generally unwilling to assist FDA with FSMA implementation until dedicated federal funding is first made available and therefore may not seek new authority until that occurs. FDA is taking various steps to overcome these challenges. For example, as already discussed, FDA is exploring funding mechanisms to provide nonfederal agencies with additional resources for carrying out new responsibilities related to FSMA implementation. In addition, FDA has entered into a cooperative agreement with AFDO, the Association of State and Territorial Health Officials, and the National Conference of State Legislatures to catalogue state food safety authorities, track changes in those authorities, and gauge state legislators’ willingness to modify legal authorities in response to the new FSMA-mandated rules, among other things. Further, under its cooperative agreement with FDA, NASDA is working with AFDO to develop a model produce rule that states can adopt. The model rule is intended to help expedite the process of drafting new legal authorities and to promote consistency in those authorities across jurisdictions. FDA’s national regulatory program standards for oversight of manufactured food and animal feed will also help to foster consistency of laws because participant agencies are required to identify areas in which their legal authorities differ from federal authorities. Until the requisite nonfederal authorities are obtained, FDA officials told us that they are able to commission some nonfederal officials to conduct certain implementation activities under federal authority. Representatives from most of the associations we interviewed said that varying nonfederal agency regulatory structures also pose challenges to coordinated implementation of the FSMA-mandated rules. For example, according to our analysis, state and local governments generally carry out food safety responsibilities through separate departments of agriculture and public health. However, some states’ and localities’ food safety authority resides in another department—such as a department of consumer protection—or in a university-affiliated body. In addition, regulatory activities—including inspections—may be housed in different departments across jurisdictions or shared by more than one. For example, in Georgia, inspections of human food facilities are the responsibility of the state department of agriculture, but in West Virginia, this responsibility is shared by the state departments of agriculture and public health. According to FDA and association officials, this variation in regulatory structures makes coordinated implementation difficult because there is no one-size-fits-all approach that FDA can use with each jurisdiction. Instead, FDA must tailor its approach to the unique circumstances of each. In addition, the variation makes it more likely that implementation activities will be carried out inconsistently across jurisdictions. To address these challenges, FDA is taking various actions to promote uniformity of regulatory programs across jurisdictions. These actions include promoting FDA’s national regulatory program standards for oversight of manufactured food and animal feed. These standards serve as guides for agency managers in the design and management of food safety regulatory programs, helping to foster consistency across programs and continuous improvement of participating agencies. In addition, as is discussed in greater detail below, FDA is working to develop and administer training for regulators across jurisdictions to help promote consistent implementation of the FSMA-mandated rules. FDA officials discussed challenges related to the status of nonfederal participants in work groups focused on planning for FSMA implementation. They explained that the nonfederal participants serve in these roles on a voluntary basis, in addition to fulfilling their primary duties at their respective agencies. Therefore, these participants have limited time to devote to work group activities. Participation in work group activities is further strained by limited resources at the participants’ respective agencies. In addition, FDA officials stated that some nonfederal officials are prohibited from using their agencies’ or federal resources to travel outside their home states to attend periodic in-person meetings. FDA officials also explained that there are a number of nonfederal officials with the expertise needed by the various work groups, but many cannot participate for various reasons, such as competing demands on their time. Therefore, the same nonfederal officials are frequently asked to participate in a number of different groups, further limiting their ability to contribute to each. FDA is working to address this challenge through its state strategy work group. Specifically, the state strategy work group has conducted outreach to the PFP and associations representing food safety officials to identify additional officials that are qualified, able, and willing to participate. In addition, FDA said that the funding mechanism it is exploring to compensate nonfederal agencies for work done to implement the produce rule may also cover expenses related to participation in FDA work groups. FDA officials told us that the time and effort required to comply with the Paperwork Reduction Act (PRA) poses a challenge to FDA’s ability to collect information from nonfederal agencies on a timely basis to inform policy decisions. FDA officials said that developing coordinated implementation plans frequently requires such information. To save time, FDA has taken advantage of the Office of Management and Budget’s (OMB) fast-track clearance process, which OMB established in 2011 to expedite certain information requests. In addition, FDA officials told us that they leverage surveys conducted by associations representing nonfederal food safety officials with whom FDA has cooperative agreements. FDA officials said that viewing these survey results can help FDA avoid duplication of work and overburdening of nonfederal agencies. However, FDA officials said that because they cannot control the design and reporting mechanisms of these surveys, the information gleaned from them is often incomplete and of limited use to FDA. We have previously found that other federal agencies also reported difficulties in complying with PRA requirements. The associations we interviewed identified a number of opportunities to improve coordinated implementation of the FSMA-mandated rules, some of which FDA has taken steps to implement. Several of these opportunities are consistent with our prior work on key features and issues to consider when implementing collaborative mechanisms. Officials from several of the associations we interviewed agreed that FDA should engage in discussions with nonfederal agencies regarding the role each will play in implementing the FSMA-mandated rules. Officials from most of these associations also said that these discussions had already begun to occur. Several association officials further noted that FDA had made clear that it plans to have nonfederal agencies conduct the majority of inspections under the FSMA-mandated rules on produce, human food, and animal food, but that FDA had not provided details regarding how this would occur, particularly in light of the many challenges that must be overcome before nonfederal agencies can begin implementation activities. As we discussed earlier in this report, FDA is aware of and working to overcome the challenges to coordinated implementation of the rules. In addition, FDA officials have stated that they intend to continue their discussions with stakeholders throughout FSMA implementation to ensure that all participants understand and carry out their roles in food safety. Our prior work on interagency collaboration has found that all collaborative mechanisms, regardless of complexity and scope, benefit from clarifying roles and responsibilities. Officials from all of the associations we interviewed agreed that FDA should foster regular communication with nonfederal agencies to help ensure well-coordinated implementation. Officials from several of these associations said that FDA is in the process of doing so. For example, most association representatives commended FDA for its willingness to hold outreach sessions and send FDA officials to association meetings to share information. Several of these association representatives noted that FDA had improved its efforts to communicate with stakeholders since FSMA’s enactment. For example, FDA has initiated regular conference calls with nonfederal officials to ensure early identification and resolution of critical issues and increase communication. According to FDA officials, the agency intends to continue communicating with stakeholders throughout implementation of the FSMA-mandated rules to ensure that all participants understand and carry out their roles in food safety. Our prior work on interagency collaboration has found that frequent communication among collaborating agencies is a means to facilitate working across agency boundaries and to prevent misunderstanding. Officials from nearly all of the associations we interviewed agreed that FDA should develop a comprehensive funding mechanism to reimburse nonfederal agencies for activities undertaken to implement the FSMA- mandated rules. Officials from most of the associations said that this funding mechanism should take the form of a cooperative agreement rather than a contract. In the past, FDA has used contracts to reimburse nonfederal agencies for activities undertaken to implement pre-FSMA regulations. Some association representatives explained that contracts are generally awarded on a short-term basis to compensate for a narrow set of activities—such as per inspection—and therefore do not provide sufficient coverage for the numerous, long-term activities nonfederal agencies must undertake to implement the new FSMA-mandated rules. These activities include obtaining new legal authorities and establishing appropriate regulatory structures, where necessary, and hiring, training, and retaining new staff. Several association representatives explained that cooperative agreements would be a more appropriate funding model to cover these varied activities and assure nonfederal agencies of the continued financial support they will need for successful implementation. As we discussed earlier in this report, FDA officials are exploring funding mechanisms to provide nonfederal agencies with resources for carrying out new responsibilities related to implementation of the FSMA-mandated rules. Furthermore, in March 2016, FDA issued a federal funding opportunity announcement making available $19 million for cooperative agreement awards to assist nonfederal agencies in implementing the produce rule. Officials from most of the associations we interviewed agreed that FDA should develop a system to rapidly share information with nonfederal agencies related to industry compliance. Currently, FDA uses an information-sharing system known as the Field Accomplishments and Compliance Tracking System, through which nonfederal agencies that conduct inspections for FDA enter data through a web portal. Internally, FDA has a variety of other information systems that house data related to industry compliance; however, the various systems are not connected to one another. This means that FDA staff must frequently access and analyze data from multiple systems to answer questions about industry compliance. According to FDA officials, the agency is currently developing a new system, called the Observation Corrective Action Reporting system (OCAR), that will serve as a platform through which users can access information housed in existing FDA information systems related to industry compliance. In addition, they said OCAR will include a portal through which FDA and nonfederal regulators can access and enter information before, during, and after an inspection. According to FDA officials, regulators will be able to use OCAR before an inspection to access information regarding a business’s compliance history, past recalls, and results from samples taken during prior inspections, among other things. Regulators may also use the system to access resource materials, including training videos and fact sheets. FDA officials said that regulators will use OCAR during an inspection to enter data regarding a business’s compliance with relevant rule requirements. According to FDA, OCAR will also include an industry portal through which businesses can access their inspection reports and input information regarding corrective actions. FDA officials said that OCAR will result in numerous benefits, including improved data quality; data analysis; and information sharing between FDA, nonfederal regulators, and industry. FDA expects OCAR to be fully operational by 2019; however, numerous steps remain before that can occur. Our prior work on interagency collaboration has found that information-sharing websites, integrated electronic reporting processes and procedures, and negotiated data-sharing arrangements are valuable in enhancing and sustaining joint activities. Officials from most of the associations we interviewed agreed that FDA should establish a process to quickly answer questions from industry and regulators regarding the FSMA-mandated rules. Some association representatives explained that this would help promote consistency in the way that the rules are understood and implemented. In September 2015, FDA launched a FSMA Technical Assistance Network, through which industry, regulators, and the public may submit questions to subject matter experts at FDA regarding the FSMA-mandated rules. Currently, inquiries may be submitted to the Technical Assistance Network via on online web portal or via mail. According to FDA, by 2017—when FDA plans to begin conducting inspections under the rules—regulators will be able to contact the Technical Assistance Network during, or in preparation for, inspections and speak directly with FDA subject matter experts to get answers to their questions regarding the rules. FDA officials told us that the Technical Assistance Network will also allow FDA to identify trends in the type of questions asked, which will indicate areas in which FDA may need to develop guidance. In addition to the Technical Assistance Network, FDA officials told us that they plan to establish a Produce Safety Network, which will station FDA staff at various locations around to country to provide education and technical assistance, among other things, to industry and regulators as they implement the produce rule. Officials from all of the associations we interviewed agreed that FDA should develop a system to promptly arbitrate disputes between industry and regulators regarding rule interpretation. Several association representatives explained such a system would be important once inspections under the rules are under way to help promote consistency in the way the rules are implemented. As noted earlier, NASDA is developing a process for dispute resolution as part of the regulatory program plan it is drafting under a cooperative agreement with FDA. FDA officials stated that they agree in principle with the need for an arbitration system, but that they will not make any final decisions regarding implementation of such a system until they have reviewed NASDA’s proposal. They stated that NASDA plans to convene a work group to develop this proposal and that the work group will include FDA representatives. However, the work group has not yet been established. In the meantime, FDA officials told us that in 2015, they hired an ombudsman in their Office of Regulatory Affairs to serve as an independent arbiter of disputes between FDA, industry, and nonfederal regulators on a variety of regulatory issues, including those related to the FSMA-mandated rules. FDA has developed a plan for training regulators on the FSMA-mandated human and animal food rules and has begun to administer that plan. As of February 2016, FDA had begun to develop, but not to administer, a plan for training regulators on the FSMA-mandated produce rule. Through our discussions with FDA officials and associations representing nonfederal food safety officials, we identified several challenges that FDA is working to overcome in its development and administration of plans for regulator training. FDA has developed a plan for training regulators on the FSMA-mandated human and animal food rules and has begun to administer that plan. The plan has two components: (1) a series of optional courses aimed at familiarizing regulators with important background information and key concepts and (2) mandatory courses focused on the skills, tools, and knowledge that regulators will need to ensure industry compliance with the rules. From March 2015 to November 2015, FDA offered six 1-1/2-hour optional courses via webinar, as shown in figure 5. Rather than focusing on the specific requirements of the rules—which were not finalized until September 2015—these courses focused on a range of topics presented by FDA and industry officials aimed at familiarizing regulators with industry best practices. The courses included two on food safety culture, defined as the alignment of values and behaviors with respect to food safety, from management or owners through to frontline workers. Other courses focused on the following industry best practices. Systems thinking. A problem solving approach that views components of a system in relation to one another and to other systems, rather than in isolation. Environmental monitoring. A process used to verify the effectiveness of controls in minimizing or preventing contamination by environmental pathogens. Supply chain management. The identification and control of hazards associated with raw materials and other ingredients in the supply chain. Minimizing allergens risk. Practices to reduce the risk of allergens, including accurate product labeling and prevention of cross- contamination. Each of these courses was recorded and made available for subsequent viewing by FDA and nonfederal officials. According to FDA, the agency planned to begin providing required regulator training on the human food rule in May 2016 and on the animal food rule in June 2016. Under this required training, regulators are first to take courses developed and administered by the Food Safety Preventive Controls Alliance (FSPCA) under a grant from FDA. These FSPCA courses focus on the requirements of the human and animal food rules. They were designed with an industry audience in mind to help industry comply with the new rules. However, FDA decided that regulators would benefit from taking these courses together with industry to ensure that both groups were receiving the same information and to facilitate learning from one another. FDA made the FSPCA courses a prerequisite to subsequent courses for regulators only, which focus on the skills, tools, and knowledge that regulators would need to ensure industry compliance with the human and animal food rules. According to FDA, the regulator-only courses on the human and animal food rules are scheduled to begin in the summer of 2016 and to continue through the fall of 2018. FDA officials told us that these courses are being developed by FDA subject matter experts, some of whom will subsequently train selected FDA and nonfederal officials to serve as course instructors. Those instructors will then administer the courses at various locations around the country. FDA officials told us that they are still working to develop the regulator-only courses, identify instructors, and finalize details regarding how and where the training will be delivered. As of February 2016, FDA had begun to develop, but not to administer, a plan for training regulators on the FSMA-mandated produce rule. At that time, the draft plan included two components. First, certain regulators would be trained to conduct on-farm readiness reviews. Second, all regulators responsible for conducting regulatory inspections and ongoing compliance and enforcement activities would be trained to perform those responsibilities. According to FDA’s draft plan, regulator training for the on-farm readiness reviews is to begin with a course developed and administered by the Produce Safety Alliance (PSA). Like the FSPCA courses, the PSA course was designed with an industry audience in mind. However, FDA decided that regulators would benefit from taking the course, along with industry, to ensure that regulators and industry received the same information and to facilitate their learning from one another. As with the FSPCA courses, FDA plans to make the PSA course a prerequisite to subsequent regulator-only courses. According to FDA’s draft plan, the regulator-only courses for the on-farm readiness reviews will focus on the goals of the reviews and regulator roles and responsibilities, among other things. According to FDA, the agency is working closely with NASDA to develop this training. As of February 2016, FDA planned to conduct a pilot of these reviews in the spring of 2017, with training provided in advance to staff participating in the pilot and subsequently to remaining staff responsible for conducting these reviews. According to FDA, the pilot will be coordinated by NASDA in collaboration with FDA and state representatives. Like the training for the on-farm readiness reviews, training for regulatory inspections and ongoing compliance and enforcement activities is to begin with prerequisite courses designed for and taken together with industry. In this case, these prerequisite courses are to be administered by the PSA and the Sprout Safety Alliance (SSA). Next, FDA plans to have regulators complete regulator-only courses focused on the skills, tools, and knowledge regulators will need to conduct regulatory inspections and ongoing compliance and enforcement activities under the produce rule. As of February 2016, FDA planned to deliver the training for regulatory inspections and ongoing compliance and enforcement activities—including the PSA and SSA courses—beginning in the fall of 2016 for regulators responsible for inspecting sprouts growers, who come into compliance first, and in the fall of 2017 for remaining regulators. From the fall of 2016 through the winter of 2019, FDA also planned to develop and deliver webinars on specific areas of the produce rule, best practices, and observations from on-farm readiness reviews, among other things. Through our discussions with officials from FDA and from associations representing nonfederal food safety officials, we identified several challenges that FDA is working to overcome in developing and administering regulator training. Some of these challenges are the same as those related to developing coordinated implementation plans. Officials from FDA and several of the associations we interviewed discussed challenges related to the need for entirely new and updated training courses on the FSMA-mandated rules. As previously discussed, the FSMA-mandated rules marked a major shift in food safety regulation by, among other things, establishing the first enforceable national standards for on-farm practices related to produce, establishing the first CGMPs for the animal food industry, updating CGMPs for the human food industry, and mandating preventive control programs across the human and animal food industries. This, in turn, required the development of entirely new regulator training courses on produce standards and animal food CGMPs and preventive controls and updated courses on human food CGMPs. In addition, because the produce industry has not been subject to routine regulatory inspections to date, FDA officials and association representatives explained that the produce training courses will need to train regulators on how to interact with an industry that is unaccustomed, and potentially resistant, to government oversight. According to FDA, the agency is taking numerous steps to meet these challenges, including developing the regulator training plans that we discussed earlier, which include a focus on “farm etiquette,” describing key considerations in overseeing the produce industry. Officials from FDA and several of the associations we interviewed discussed challenges related to the thousands of regulators who must be trained. For example, one association representative explained that compliance with each rule begins to come due roughly 1 year after the final rule is published, leaving little time for regulators across the country to receive training on the rule requirements and compliance verification duties. To reach greater numbers of regulators and reduce attendees’ travel time and cost, FDA officials stated that they are considering creating training hubs around the country and offering as much online training as possible. In addition, FDA recognizes that it is not feasible to train all regulators simultaneously. Therefore, FDA officials stated that they plan to use a phased training strategy to administer regulator training in accordance with industry compliance dates. Specifically, FDA officials stated that they plan to administer training in 2016 to regulators in areas with the highest concentrations of large businesses, for which compliance is due first. FDA then plans to administer training in 2017 to regulators in areas with the highest concentrations of small businesses, for which compliance is due later. Finally, FDA plans to administer training in 2018 to regulators in areas with the highest concentrations of very small businesses, for which compliance is due last. According to FDA officials, implementing the phased training strategy that the agency plans to use is complicated by the business inventory challenges discussed earlier in this report. Without an accurate inventory of businesses covered under the rules, FDA is unable to determine when and where to target its training. Representatives of most of the associations we interviewed discussed challenges related to nonfederal agencies’ varying legal authorities. For example, as we noted earlier in this report, representatives of some associations stated that most nonfederal agencies lack authority to conduct on-farm inspections related to produce. However, having such authority is a prerequisite to hiring regulators to carry out produce inspections, and hiring regulators must occur before they can be trained. Representatives of most of the associations we interviewed discussed challenges related to nonfederal agencies’ varying regulatory structures. For example, just as most nonfederal agencies lack legal authority to conduct on-farm inspections related to produce, according to some association representatives, most nonfederal agencies have no regulatory structure for overseeing produce. Like legal authority, a regulatory infrastructure for overseeing produce is a prerequisite to hiring regulators to carry out produce inspections, and hiring regulators must occur before they can be trained. The safety and quality of the U.S. food supply are governed by a highly complex system involving more than 3,000 nonfederal agencies at the state, local, tribal, and territorial levels. FSMA mandated, among other things, that FDA take steps that once taken, would better integrate its food safety oversight with that of nonfederal agencies. Integrating food safety oversight across federal, state, local, tribal, and territorial jurisdictions is a daunting task that is complicated by numerous coordination challenges. FDA has demonstrated progress working with nonfederal agencies to address these challenges, but many hurdles remain as FDA continues its work to implement the FSMA-mandated rules on produce, human food, and animal food. FSMA’s mandated steps related to integration touch on areas including rulemaking. FDA’s rulemaking is also subject to other laws and executive orders requiring consultation with nonfederal agencies. We found that FDA took steps to work with nonfederal agencies on developing the FSMA-mandated rules on produce, human food, and animal food and developing plans for coordinated implementation of those rules. However, FDA did not consult with tribes throughout all stages of developing the proposed rules, as is directed by HHS’s tribal consultation policy for all rules with tribal implications where the federal government does not provide the funds necessary to pay the direct compliance costs incurred by tribes. In particular, FDA did not consult with tribes before publication of the proposed rules. Instead, FDA’s first formal consultation took place 1 month after it published the proposed animal food rule and 10 months after it published the proposed produce and human food rules. Under the HHS tribal consultation policy, each agency within HHS must establish a tribal consultation policy, which should include an accountable process to ensure meaningful and timely input by tribal officials. More than 11 years after establishment of the HHS tribal consultation policy, however, FDA has not established an agency-level policy. FDA has begun to develop such a policy and issued a draft in late February 2016. FDA’s draft policy, however, does not explicitly provide for early consultation with tribes on all rules with tribal implications where the federal government does not provide the funds necessary to pay the direct compliance costs incurred by tribes, including before promulgation of proposed regulations. Without early consultation, tribes are unable to provide input at a time when it is most likely to have a meaningful impact on the agency’s decision making. Moreover, FDA has not established a timetable to guide the policy’s finalization. Developing a draft policy is a good first step, but without setting a timetable, with milestones and interim steps, it will be difficult for FDA to set priorities, use resources efficiently, measure progress, and provide management a means to monitor this progress in finalizing the policy. FDA therefore risks continued delays in establishing a process to ensure meaningful and timely tribal consultation, a critical element of a sound and productive federal-tribal relationship. To help ensure meaningful and timely consultation with Indian tribes on future rulemaking, we recommend that the Secretary of Health and Human Services direct the Commissioner of the FDA to take the following two actions: make certain that FDA’s tribal consultation policy explicitly provides for early consultation with tribes on all rules with tribal implications where the federal government does not provide the funds necessary to pay the direct compliance costs incurred by tribes, including before promulgation of proposed regulations, and develop a timetable, with milestones and interim steps, for finalizing FDA’s tribal consultation policy. We provided a draft of this report for review and comment to the Secretary of Health and Human Services. HHS provided written comments, which are presented in appendix III. In its written comments, HHS agreed with our recommendations. HHS also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Health and Human Services, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-3841 or [email protected]. 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. Our review provides information regarding the Food and Drug Administration’s (FDA) coordination with nonfederal agencies in relation to the FDA Food Safety Modernization Act (FSMA)-mandated rules on produce, human food, and animal food. In particular, the review examines the extent to which FDA has (1) met its regulatory consultation requirements in developing the rules, (2) developed plans to coordinate implementation of the rules, and (3) developed and administered plans for training regulators on the rules. To address all of our objectives, we first identified and reviewed authorities governing FDA’s coordination with nonfederal agencies on the FSMA-mandated rules on produce, human food, and animal food. For each objective, these authorities included FSMA and the Federal Food, Drug, and Cosmetic Act. For our objective on regulatory consultation, these authorities also included the Unfunded Mandates Reform Act of 1995; Executive Orders 12866, 13563, 13175, and 13132; the Department of Health and Human Services’ (HHS) tribal consultation policy; FDA’s draft tribal consultation policy; and relevant presidential memorandums and case law. In addition, for our objective on regulatory consultation, we reviewed our body of work on key implementation practices, including timetables with interim tasks and milestones. Moreover, for our objective on coordinated implementation, we reviewed our prior work on key features and issues to consider when implementing collaborative mechanisms. For all objectives, we obtained and reviewed relevant documentation, including transcripts of and slide presentations from FDA public meetings related to the three rules; the text of the proposed, supplemental, and final rules, including the rule preambles; and relevant documents referenced in each of the rules. For our objective on regulatory consultation, we also reviewed notices that FDA published in the Federal Register requesting information to inform the agency’s rulemaking and records of outreach to nonfederal agencies, including tribes. In addition, for our objectives on coordinated implementation and regulator training, we reviewed relevant FDA plans and proposals, as well as cooperative agreements and grants awarded to stakeholder organizations. Furthermore, for our objective on regulator training, we reviewed curricula documents on courses delivered to date. For all objectives, we also attended relevant food safety conferences and interviewed knowledgeable FDA officials and other stakeholders, including representatives of industry; public interest groups; and other relevant groups, such as the Partnership for Food Protection. In addition, for our objective on regulatory consultation we interviewed officials from HHS and eight state departments of agriculture. Moreover, for our objective on regulator training, we conducted interviews with relevant training organizations, including the International Food Protection Training Institute, the Food Safety Preventive Controls Alliance, and the Produce Safety Alliance. Furthermore, to obtain perspectives of nonfederal officials on each of our objectives, we took three additional steps. Review of public comments on FDA rulemaking. We reviewed all public comments from state, local, tribal, and territorial governments, and from associations representing those entities, that were submitted in response to the proposed and supplemental rules on produce, human food, and animal food. We obtained these comments from regulations.gov, a website through which the public can search for and provide comments on federal rulemaking and other dockets that are open for comment and published in the Federal Register. We began by downloading from regulations.gov lists of all public comments on these rules. We then reviewed those lists to determine which comments were provided by state, local, tribal, and territorial governments and associations representing those entities. Next, we conducted a content analysis of these comments to identify themes related to coordination challenges faced and opportunities for improvement. Interviews with associations of nonfederal officials. We developed a set of closed-ended and open-ended questions based, in part, on our analysis of public comments. Next, we administered those questions to representatives of selected associations of state, local, tribal, and territorial food safety officials to obtain their views on the identified challenges and opportunities, as well as their views on steps taken by FDA related to rule development, implementation, and training. We then analyzed and summarized the association responses. In all, we interviewed representatives from 10 associations. These associations were selected based on their participation in the Council of Association Presidents; their membership in the “Big Seven” associations of state and local officials; and recommendations received during preliminary interviews that we conducted with FDA, industry or trade associations, and public interest groups. We excluded some associations whose areas of focus were outside the scope of our review. For example, several associations’ areas of focus were surveillance and outbreak response, and these associations were therefore unable to answer questions regarding the FSMA-mandated rules on produce, human food, and animal food. Appendix II lists the associations we interviewed. Site visit. We visited California—the state with the nation’s largest agricultural and food production sectors—where we conducted interviews with a range of officials from state and local agencies, and from university and industry groups, to discuss their programs on produce, human food, and animal food. We conducted this performance audit from March 2015 to May 2016 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. Appendix II: List of Associations Description An association of local, state, and federal agencies charged by law to regulate the sale and distribution of animal feeds and animal drug remedies. An association representing state, territorial, and local officials from departments of health and agriculture, whose mission is to advance uniform food and drug safety laws, regulations, and guidelines. Council of State Governments A forum for officials in all three branches of state government whose mission is to champion excellence in state government to advance the common good. An association of local health department officials, whose mission is to protect and improve the health of all people and all communities. An association of the chief animal health officials in each state, whose mission is to speak with one voice in matters of animal health science and public policy. An association representing the commissioners and directors of state departments of agriculture, whose mission is to support and protect the American agriculture industry while protecting consumers and the environment. An organization representing state legislators and their staffs, whose mission is to improve the quality and effectiveness of state legislatures; promote policy innovation and communication among state legislatures; and ensure a strong, cohesive voice for state legislatures in the federal system. An organization of American Indian and Alaska Native tribes, whose mission is to protect and enhance treaty and sovereign rights; secure traditional Native American laws, cultures, and ways of life for their descendants; promote a common understanding of the rightful place of tribes in the family of American governments; and improve the quality of life for Native communities and peoples. An association of environmental health professionals in the public and private sectors, academia, and the uniformed services, whose mission is to advance the environmental health and protection professional for the purpose of providing a healthful environment for all. U.S. Animal Health Association An association of state and federal animal health officials and allied organizations, whose mission is to serve as a national forum for communication and coordination on efforts to prevent, control, and eliminate livestock diseases. In addition to the contact named above, Anne K. Johnson (Assistant Director), Cheryl Arvidson, Timothy Bober, Kevin Bray, Ellen Fried, Megan Kizzort, Armetha Liles, Perry Lusk, Josie Ostrander, Steven Putansu, and Emmy Rhine Paule made key contributions to this report. | The safety and quality of the U.S. food supply are governed by a complex system involving more than 3,000 federal as well as nonfederal agencies at the state, local, tribal, and territorial levels. In 2011, FSMA mandated that FDA take steps that would better integrate its food safety oversight with that of nonfederal agencies. These steps relate to three new FSMA-mandated rules on produce, human food, and animal food. Among other things, FSMA required FDA to coordinate with nonfederal agencies in the areas of rule development, rule implementation, and regulator training. GAO was asked to review FDA's coordination with nonfederal agencies on food safety, particularly in relation to FSMA. This report examines—for the rules on produce, human food, and animal food—the extent to which FDA has (1) met its regulatory consultation responsibilities in developing the rules, (2) developed plans to coordinate implementation of the rules, and (3) developed and administered plans for training regulators on the rules. GAO reviewed documentation; analyzed comments from nonfederal agencies on FDA rulemaking; and interviewed officials from FDA, associations of nonfederal officials, and industry, public interest, and other groups. The Food and Drug Administration (FDA) took numerous steps to ensure meaningful and timely input from nonfederal officials during development of the FDA Food Safety Modernization Act (FSMA)-mandated rules on produce, human food, and animal food but did not fully meet its tribal consultation responsibilities. Among other things, FDA—an agency within the Department of Health and Human Services (HHS)—held 13 public meetings and offered extended comment periods on the rules. However, FDA did not consult with Indian tribes before publication of the proposed rules, as directed by the HHS tribal consultation policy. Under that policy, each HHS agency is to establish its own tribal consultation policy, which should include an accountable process to ensure meaningful and timely input by tribal officials. FDA has begun to develop such a policy and issued a draft in late February 2016. FDA's draft policy, however, does not explicitly provide for early consultation on all rules with tribal implications. Without early consultation, tribes are unable to provide input at a time when it is most likely to have a meaningful impact on FDA's decision making. Moreover, FDA has not established a timetable to guide the policy's finalization, without which FDA risks continued delays. FDA has begun to develop plans to ensure compliance with the FSMA-mandated rules through coordinated implementation with nonfederal agencies and is working to overcome related challenges. For example, according to FDA, insufficient data exist on businesses subject to the rules, making it difficult to assign inspection responsibilities, among other things. In response, FDA is taking steps, such as exploring new data sources. In addition, associations of nonfederal officials that GAO interviewed stated that nonfederal agencies have varying legal authorities and regulatory structures. For example, they stated that most nonfederal agencies lack authority to oversee produce, which is needed for coordinated implementation. In response, FDA is taking steps such as funding the National Association of State Departments of Agriculture's development of a model produce rule that states can adopt. Associations suggested that FDA consider opportunities to improve coordinated implementation, including establishing a system to share information on industry compliance and a process to answer questions from regulators on the rules. According to FDA, it is taking steps to implement these and other suggestions. For example, FDA is developing a new system to allow regulators to access information housed in existing FDA information systems before, during, and after an inspection. FDA has developed, and begun to administer, a plan for training regulators on the human and animal food rules. As of February 2016, FDA had begun to develop, but not to administer, a plan for training regulators on the produce rule. FDA is working to overcome challenges related to regulator training. For example, one challenge relates to the thousands of regulators who must be trained. FDA plans to, among other things, use a phased training strategy, administering training in 2016 to regulators in areas with the highest concentrations of large businesses, for which compliance is due first; in 2017 to regulators in areas with the highest concentrations of small businesses, for which compliance is due later; and in 2018 to regulators in areas with the highest concentrations of very small businesses, for which compliance is due last. GAO recommends that FDA (1) make certain that its tribal consultation policy explicitly provides for early tribal consultation and (2) develop a timetable for finalizing the policy. GAO provided a draft of this report to FDA. FDA agreed with these recommendations. |
With almost 700,000 civilian employees on its payroll, DOD is the second largest federal employer of civilians in the nation, after the Postal Service. The achievement of DOD’s mission is dependent in large part on the skills and expertise of its civilian workforce. DOD’s civilian workforce, among other things, develops policy, provides intelligence, manages finances, and acquires and maintains weapon systems. Because of the global war on terrorism, the role of DOD’s civilian workforce is expanding to include participation in combat support functions, thus enhancing the availability of military personnel to focus on warfighting duties for which they are uniquely qualified. Career civilian personnel possess “institutional memory,” which is particularly important in DOD because of the frequent rotation of military personnel and the short tenure of the average political appointee. Since the end of the Cold War, the civilian workforce has undergone substantial change, due primarily to downsizing, base realignments and closures, competitive sourcing initiatives, and DOD’s changing mission. For example, between fiscal years 1989 and 2002, DOD’s civilian workforce shrank from 1,075,437 to 670,166—about a 38 percent reduction. As of December 30, 2003, DOD’s civilian workforce was down to 655,545 employees. DOD performed this downsizing without proactively shaping the civilian workforce to ensure that it had the specific skills and competencies needed to accomplish future DOD missions. A consequence of this lack of attention to force shaping can be seen in the age distribution of the civilian workforce in comparison to the distribution at the start of the drawdown. Today’s workforce is older and more experienced, but 57 percent of the workforce will be eligible for early or regular retirement in the next 5 years. As shown in figure 1, as of December 30, 2003, the military services employed about 85 percent of DOD’s civilians; 15 percent were employed by other defense organizations. Air Force (152,029) Navy (180,302) DOD has undertaken several human capital reforms that will affect the future civilian workforce. In November 2003, Congress, in making authorizations for DOD, authorized the Secretary of Defense to establish a new human capital management system, the National Security Personnel System. The law granted DOD exemptions from laws governing federal civilian personnel management found in title 5 of the United States Code. Congress provided these flexibilities in response to DOD’s position that the inflexibility of federal personnel systems was one of the most important constraints to the department’s ability to attract, retain, reward, and develop a civilian workforce to meet the national security mission of the 21st century. The NSPS will give the department significant flexibility for creating a new framework of rules, regulations, and processes to govern the way that civilians are hired, compensated, promoted, and disciplined. Congress also granted DOD other new personnel flexibilities, including permanent authority to extend separation incentives (commonly referred to as “buyouts”) to induce as many as 25,000 civilians to voluntarily leave federal service. These separation incentives may be used to, among other things, reshape or reduce the department’s civilian workforce. In December 2003, the Under Secretary of Defense for Personnel and Readiness authorized the military services’ headquarters and DOD components to immediately initiate buyouts as long as affected employees leave government service during fiscal year 2004. In addition, DOD has undertaken efforts to expand the use of its civilian workforce to perform combat support functions traditionally performed by military personnel. In December 2003, the Under Secretary of Defense (Comptroller) directed the military services to convert over 20,000 military positions to civilian positions in fiscal years 2004 and 2005; more conversions are to be addressed in fiscal year 2006 and the out-years. Studies by several organizations, including GAO, have shown that successful organizations in both the public and private sectors use strategic management approaches to prepare their workforces to meet present and future mission requirements. We have found that these organizations have used strategic workforce planning as a management tool to develop a case for human capital investments and to anticipate and prepare for upcoming human capital issues that could jeopardize the accomplishment of goals. Strategic human capital planning begins with establishing a clear set of organizational intents—including a clearly defined mission, core values, goals and objectives, and strategies—and then developing an approach to support these strategic and programmatic goals. Strategic workforce planning, an integral part of human capital management, requires systematic assessments of current and future human capital needs and strategies—which encompass a broad array of initiatives to attract, retain, develop, and motivate a top-quality workforce—to fill the gaps between an agency’s current and future workforce needs. Approaches to such planning vary according to agency- specific needs and mission, but our work suggests that, irrespective of the context in which planning is done, such a process should address five key elements (see fig. 2): 1. Involvement of management and employees: Efforts that address key organizational issues, like strategic workforce planning, are most likely to succeed if, at their outset, agencies’ top program and human capital leaders set the overall direction, pace, tone, and goals of the effort, and involve employees and stakeholders in establishing a communication strategy that creates shared expectations for the outcomes of the process. 2. Workforce gap analysis: Identifying whether gaps exist between the current and future workforces needed to meet program goals is critical to ensuring proper staffing. The absence of fact-based gap analyses can undermine an agency’s efforts to identify and respond to current and emerging challenges. The analysis of the current workforce should identify how many personnel have the skills and competencies needed to meet program goals and how many are likely to remain with the agency over time, given expected losses due to retirement and other attrition. The characteristics of the future workforce should be based on the specific skills and competencies that will be needed. The workforce gap analyses can help justify budget and staff requests by linking the program goals and strategies with the budgetary and staff resources needed to accomplish them. 3. Workforce strategies to fill the gaps: Developing strategies to address any identified workforce gaps in critical skills and competencies creates the road map needed to move from the current to the future workforce. Strategies address how the workforce is acquired, developed and trained, deployed, compensated, motivated, and retained. 4. Build-up of capability to support workforce strategies: As agencies develop tailored workforce plans and the administrative, educational, and other requirements that are important to support them, it is especially important to educate managers and employees about the human capital flexibilities so that the flexibilities are implemented openly, fairly, and effectively. 5. Evaluation of and revisions to strategies: Evaluating the results of the workforce strategies and making needed revisions helps to ensure that the strategies work as intended. A key step is developing results- oriented performance measures as indicators of success in attaining human capital goals and program goals, both short- and long-term. Periodic measurement and evaluation provide data for identifying shortfalls and opportunities to revise workforce plans as necessary. These concepts are especially relevant in considering the human capital reforms that DOD has under way that will fundamentally change the way it manages its civilian workforce. Because DOD is one of the largest employers of federal civilian employees, how it approaches human capital management sends important signals about trends and expectations for federal employment across the government. More importantly, the role that DOD’s civilian workforce plays in support of our national security makes DOD’s approach to managing its people a matter of fundamental public interest. Four agencies—GAO, the Office of Management and Budget (OMB), the Office of Personnel Management (OPM), and the Office of the Under Secretary of Defense for Personnel and Readiness (OUSD/P&R)—have developed guidance for human capital management and workforce planning. Highlights of this guidance are presented in table 1. Congress has additionally recognized the importance of workforce planning and, in 2002, added to the Government Performance and Results Act a provision requiring the Chief Human Capital Officer of each agency to prepare an annual plan that provides a description of how the performance goals and objectives are to be achieved, including the operation processes, training, skills, and technology, and the human capital, information, and other resources and strategies required to meet those performance goals and objectives. Although the DOD and the components have taken steps to develop and implement strategic workforce plans, the plans lack some key planning elements. As a result, the plans are not comprehensive. DOD and most of the components we reviewed have involved top-level management, staff, and stakeholders in the development and implementation of their strategic workforce plans; however involvement has been limited in the Navy but increasing. The strategic workforce plans have also included the identification of critical skills currently needed by the workforce and those needed in the future, as well as administrative, educational, and other requirements developed to support workforce strategies. However, the plans are not comprehensive because they lack some key elements essential for successful workforce planning. For example, the strategic workforce plans lacked analyses of gaps in critical skills and competencies, human capital strategies derived from analyses that identified such gaps, and results-oriented performance measures. DOD and most of the components we reviewed have involved top-level management, staff, and stakeholders in the development and implementation of their strategic workforce plans. However, involvement has been limited but increasing in the Navy. The strategic workforce plans have also included the identification of critical skills currently needed by the workforce and those that will be needed by the workforce in the future, as well as agencywide plans and procedures to support workforce strategies. Table 2 provides an overview of the steps taken by DOD and the components toward developing and implementing strategic workforce plans in terms of the five key strategic workforce planning elements. While DOD and the components have taken steps to develop and implement civilian strategic workforce plans, their plans generally lacked some key elements essential to successful workforce planning. Specifically, none of the plans included analyses of gaps between the critical skills and competencies currently needed by the workforce and those that will be needed in the future. As a result, none of the human capital strategies contained in the strategic workforce plans were derived from analyses that identified gaps in critical workforce skills or competencies needed by DOD and the components to meet future strategic goals. Furthermore, none of the plans contained results-oriented performance measures. As a result, DOD and the components do not have comprehensive strategic workforce plans to guide their human capital efforts. Without comprehensive strategic workforce plans, DOD and the components may not know the competencies of the current and future staff, what gaps exist in skills and competencies, and what their workforce strategies should be. This is especially important as changes in national security, technology, budget constraints, and other factors alter the environment within which DOD operates. As previously discussed, the civilian strategic workforce plans we reviewed included information about the current and future critical skills. However, none of the plans included analyses of gaps between the critical skills and competencies currently needed and those needed in the future. GAO and others have reported that it is important to analyze future workforce needs to (1) assist organizations in tailoring initiatives for recruiting, developing, and retaining personnel to meet their future needs and (2) provide the rationale and justification for obtaining resources and, if necessary, additional authority to carry out those initiatives. We also stated that to build the right workforce to achieve strategic goals, it is essential that organizations determine the critical skills and competencies—a set of behaviors that encompass knowledge, skills, abilities, and personal attributes—that are critical to successful work accomplishment. To do so, the following data are needed: What is available—both current workforce characteristics and future availability. This is accomplished by assessing the current workforce— defining the number and types of competencies for employees in each occupational group; determining the skill levels for each competency; and assessing how they will evolve over time, factoring in such events as retirements. What is needed—the critical workforce characteristics needed in the future. This is accomplished by analyzing the future workforce— developing specifications for the kinds, numbers, and location of personnel it will need to address its future challenges. What is the difference between what will be available and what will be needed—that is, the gap. This is especially important as changes in national security, technology, and other factors alter the environment within which DOD and the components operate. We reported that DOD and the four military services lacked information about their future workforce needs in a March 2003 report on strategic planning efforts for civilian personnel. We pointed out that a National Academy of Public Administration study noted DOD’s increasing reliance on contractor personnel, and its need for civilian personnel expertise to protect the government’s interest and ensure effective oversight of contractors’ work. We recommended that DOD define the future civilian workforce, identifying the required characteristics (e.g., the skills and competencies, number, deployment, etc.) of personnel needed, and determine the workforce gaps that needed to be addressed through human capital initiatives. DOD did not concur with our recommendation and stated that this action was already being accomplished through information provided to OMB and OPM for the President’s Management Agenda Scorecard. However, DOD did not provide us with this information during the course of our prior review. Based on our current review of the data being supplied to OMB and OPM, we determined that the data are not sufficiently comprehensive to fully address the broader elements of workforce planning that we have endorsed to ensure that workforce data be compiled and analyzed as an integral part of the strategic workforce planning process and factored into planning for human capital initiatives. Though DOD and the components have implemented various strategies to address expected workforce imbalances, these strategies have not been derived from analyses of gaps between the critical skills and competencies currently needed by the workforce and those that will be needed in the future. Without analyzing critical skills and competency gaps, DOD and the components may not be able to design and invest in strategies that will effectively and efficiently transition to the future workforce they desire and need. Applying this principle to strategic workforce planning means that agencies consider how hiring, training, staff development, performance management, and other human capital strategies can be used to close gaps and gain the critical skills and competencies needed in the future. GAO and others have reported that it is important to analyze future workforce needs to assist organizations in tailoring initiatives for recruiting, developing, and retaining personnel to meet their future needs, and to provide the rationale and justification for obtaining and targeting resources and, if necessary, additional authority to carry out those initiatives. Although not based on formal analyses of skills and competency gaps, DOD and the components have implemented various recruitment, retention, training and professional development, and compensation strategies to address workforce imbalances. The Army is planning to hire more entry-level professional, administrative, and technical personnel through its career intern program in preparation for expected retirements of civilians in leadership positions. In addition, it is offering bonuses for engineers, scientists, and computer specialists; accelerated promotions for engineers; permanent change-of-station moves for all interns; and in some cases, advanced in-hire pay rates. According to the Army, all of these initiatives will help grow the leaders of tomorrow, accomplish the necessary transfer of institutional knowledge, and restore a more balanced age distribution to the Army’s workforce. The Navy (including the Marine Corps) has implemented a variety of recruitment, retention, and retirement strategies to address its aging civilian workforce. One particular strategy involves hiring retired military personnel, who are well-seasoned employees already familiar with the knowledge and skills necessary to maintain the Navy’s mission. The Air Force has developed a strategy centered on enhancing recruitment efforts, investing in the workforce through skill proficiency training and leadership development, and establishing incentives for force shaping. As of April 2004, the Air Force had hired 1,381 interns since fiscal year 2000. According to the Air Force, the intern program is a key element of the Air Force renewal effort. In addition, the Air Force believes that force development plays a central role in creating a workforce that is ready for the challenges of its aerospace mission to ensure the orderly transfer of institutional knowledge as well as develop new skills for the aerospace mission. According to an Air Force official, in fiscal year 2002, the Air Force invested $9 million in civilian leadership training as a direct result of its aging workforce profile. DLA has created a Corporate Intern Program that provides systematic training and on-the-job training work experience. DLA plans to hire approximately 150 interns per year through fiscal year 2007. According to a DLA official, 518 interns had been hired since 2000. DLA developed a Professional Enhancement Program to help high-potential employees in grades 12 to 15 to increase their knowledge and/or skills. While these strategies are important efforts to help shape DOD’s and the components’ future as the current workforce becomes eligible for retirement, these strategies have not been derived from analyses of gaps between the critical skills and competencies currently needed by the workforce and those that will be needed in the future. Therefore, it is unknown whether these strategies will lead to a desirable future workforce that will help attain programmatic goals. DOD and the components have not developed results-oriented performance measures to provide a basis for evaluating workforce planning effectiveness. Thus, DOD and the components cannot gauge the extent to which their human capital initiatives contribute to achieving their organizations’ missions. Performance measures, appropriately designed, can be used to gauge two types of success: (1) progress toward reaching human capital goals and (2) the contribution of human capital activities toward achieving programmatic goals. These measures can also improve the effectiveness of workforce planning strategies, the overall workforce planning process, and oversight, by identifying shortfalls in performance and other improvement opportunities, such as corrective actions that can be incorporated into the next planning cycle. Without results-oriented measures, it is difficult for an organization to assess the effectiveness of its human capital initiatives in supporting its overarching mission and goals. DOD and the components have not defined practical, meaningful measures that assess the effectiveness of human capital management. For example, DOD’s fiscal year 2003 Annual Report on civilian human resources emphasized the department’s efforts to achieve activity-oriented goals, such as employee satisfaction with DOD employment, diversity in management positions, and new hire turnover rates. While this is useful for tracking DOD’s progress, it does not gauge how well DOD’s human capital efforts helped the department achieve its programmatic goals. As a result, the link between specific human capital strategies and strategic program outcomes is not clear. The major challenge that DOD and most of the components face in their efforts to develop and implement strategic workforce plans is their need for information on current workforce competencies and the competencies they anticipate needing in the future. This problem results from DOD’s and the components’ not having developed tools to collect and/or store, and manage data on workforce competencies that are critical to successful work accomplishment. As a result, it is not clear whether they are designing and funding workforce strategies that will effectively shape the civilian workforce with the appropriate competencies needed to accomplish future DOD missions. Effective workforce planning requires that human capital staff and other managers base their workforce analyses and human capital decisions on complete, accurate, and timely personnel data. Senior department and component officials all acknowledged this shortfall, and told us that they are taking steps to address this challenge. Though these are steps in the right direction, the lack of information on current competencies and future needs is a continuing problem that several organizations, including GAO, have previously identified. In our March 2003 report on DOD strategic human capital management, we reported that DOD had begun adopting the Army’s Civilian Forecasting System and its Workforce Analysis Support System for departmentwide use. According to DOD, those systems are still being evaluated by the Strategic Integration Division in the Civilian Personnel Management Service (CPMS) at OSD and CPMS is trying to make this software easier to use. However, the systems do not collect, store, and manage data on current and future competencies. The Army is working with OPM to link its Civilian Forecasting System and Workforce Analysis Support System to OPM’s Human Resources Management database to perform competency forecasts. In April 2001, the Army commissioned a contractor to, among other things, assist in assessing its civilian workforce and to develop new concepts for workforce planning. The contractor concluded that the Army’s forecasting models are largely based on the current occupational series and grade structure and do not lend themselves to forecasting the supply of multiskilled civilians with the competencies needed in the future. The contractor recommended that the Army develop a competency-based inventory of the current workforce using, among other types of information, core and occupation-specific competencies. According to an Army official, in July 2003, the Army formed a Competency Area Review Work Group that consists of the Chief of Workforce Analyses and Forecasting in Civilian Personnel Policy, some operations research analysts, and personnel specialists to identify the civilian personnel competencies and competency measures. According to an Army official, the group is constructing a competency database that will eventually contain competencies on all employees. By the end of July 2004, the Army will have occupational forecasts linked to competencies for a subset of the Army’s workforce. In fiscal year 2005, the remaining workforce will be linked by occupation to competencies. Like the other agencies, the Navy currently does not have the means to collect, store, and manage data on workforce competencies. In August 2000, a National Academy of Public Administration study for the Navy pointed out that strategic workforce planning should include automated tools to identify the tasks and competency requirements of its civilian workforce. In February 2004, the Navy implemented an online survey instrument to collect competency data for its civilian workforce. It has also partnered with a private-sector contractor to manage the competency collection process. The safety community of the Navy was the first to initiate the pilot. The process is the same that is being used to collect competencies for Navy sailors and officers. The Marine Corps has collected data on workforce competencies. It has a system under development (the Civilian Workforce Development Application) that will be used to store and manage data on these competencies. The target date for completing construction of the application is July 2005. The Air Force has identified leadership competencies for the total force (i.e., active duty military, Air National Guard, Air Force Reserves, and civilians). It has begun to develop an analytical information system—the Total Human Resource Managers’ Information System—to capture occupational codes for the total force. But according to Air Force officials, the system will not collect, store, and manage data on workforce competencies. DLA also currently lacks competency data but has included an objective in its 2002-2007 Strategic Plan to identify gaps between the workforce competencies and the skills to meet mission requirements for all DLA positions by the end of fiscal year 2007. According to a DLA official, the agency is in the process of constructing a skills management tool. With the help of a contractor, DLA plans to roll out an automated skills inventory tool (Competency Analysis Management Tool) expected in July 2004 to capture the competencies of its current workforce. The analysis tool will be a Web-based system that employees can access and provide input regarding their proficiency levels in competencies that have been identified for the respective job families, according to a DLA official. DOD’s current efforts to establish a new personnel system and convert thousands of military positions to civilian positions, and permanent authority to offer annual cash buyouts to thousands of employees—when taken together—provide for wide-ranging changes in DOD’s civilian personnel reforms. However, it is questionable whether DOD’s implementation of these reforms will result in the maximum effectiveness and value because DOD has not developed comprehensive strategic workforce plans that identify future civilian workforce needs. Although DOD and the components have taken steps to develop and implement civilian strategic workforce plans to address future civilian workforce needs, they generally lack some key elements essential to successful workforce planning. Because DOD and the components have not addressed all of the elements of strategic workforce planning, they do not know what gaps exist in skills and competencies; what type of recruitment, retention, and training and professional development workforce strategies should be developed and implemented to meet future organizational goals; and what competencies their staff need to do their work now and in the future. More complete information on the competencies needed for the future workforce would, for example, enhance DOD’s decisions on which employees to offer cash buyouts. In addition, DOD and the components lack defined practical, meaningful measures to gauge outcomes of their workforce strategies. Without including these key elements, their civilian strategic workforce plans lack comprehensiveness and consequently, DOD’s future strategic workforce plans may not result in workforces that possess the critical skills and competencies needed. To improve the comprehensiveness of strategic workforce planning for the DOD civilian workforce, we recommend that the Secretary of Defense direct the Office of the Secretary of Defense, the military service headquarters, and the Defense Logistics Agency to build upon their strategic workforce planning efforts through the following three actions: Analyze and document the gaps between current critical skills and competencies and those needed for the future workforce. Develop workforce strategies to fill the identified skills and competency gaps. Establish results-oriented performance measures to use in evaluating workforce planning efforts. We requested comments on a draft of this report from the Department of Defense. The Office of the Under Secretary of Defense for Personnel and Readiness provided oral comments on a draft of this report. The department partially concurred with our recommendation that it analyze and document critical skills and competency gaps between its current and future workforces. Also, the department partially concurred with our recommendation that it develop workforce strategies to address identified workforce gaps in skills and competencies. The department concurred with our recommendation that it establish results-oriented performance measures to use in evaluating its workforce planning efforts. DOD also provided technical and general comments that we have incorporated where appropriate. DOD partially concurred with our recommendation that the department analyze and document critical skills and competency gaps between its current and future workforces. The department stated that in the first quarter of fiscal year 2004, it began analyses between gaps in the critical skills currently needed and those needed in the future, and that it supplements the analyses, as necessary, to meet emerging technologies and missions. We cannot verify DOD’s statement because DOD was unable to provide any specific documentation showing that it had performed gap analyses. Regarding gap analyses of competencies, DOD stated that the value of conducting a global gap analysis between current competencies and those needed for the future is unclear, particularly as applied to over 650,000 jobs in nearly 700 occupations. Our recommendation did not suggest that DOD conduct a global gap analysis of competencies for its entire civilian workforce. Rather, we recommended that DOD analyze and document the gaps between current critical skills and competencies and those needed for the future workforce. DOD partially concurred with our recommendation that the department develop workforce strategies to fill identified workforce gaps in skills and competencies. The department stated that it is actively engaged in developing strategies to fill identified skills gaps and noted that its new human capital management system, the National Security Personnel System, will provide for increased personnel flexibilities designed to address workforce challenges and help support the department’s strategic workforce planning efforts. The department also noted that it continues to use existing flexibilities such as recruitment and retention bonuses, and relocation allowances. In our report, we acknowledge that the NSPS will give the department significant flexibility for creating a new framework of rules, regulations, and processes to govern the way civilians are among other things, hired, compensated, and promoted. We also acknowledge that DOD and the components have implemented various recruitment, retention, training and professional development, and compensation strategies to address workforce imbalances. However, as we noted in our report, these strategies have not been derived from analyses of critical skills and competency gaps. Without such analyses, DOD and the components may not be able to design and invest in strategies will effectively and efficiently transition them to the future workforce they desire and need. Regarding our recommendation that the department establish results- oriented performance measures to use in evaluating its workforce planning efforts, the department concurred, noting that it is committed to focusing on results and using data in evaluating workforce planning efforts. We are sending copies of this report to the appropriate congressional committees; the Secretary of Defense; the Secretaries of the Air Force, Army, and Navy; the Commandant of the Marine Corps; and the Director of DLA. We will also make copies available to others upon request. 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 regarding this report, please contact me at (202) 512-5559 ([email protected]) or Sandra F. Bell at (202) 512-8981 ([email protected]). Major contributors to this report were Janine Cantin, Jeanett H. Reid, Jose Watkins, Alissa Czyz, and Cheryl Weissman. To determine the extent to which civilian strategic workforce plans have been developed and implemented to address future civilian workforce requirements, we obtained and reviewed Office of Management and Budget (OMB) guidance on standards for success for strategic human capital management, and the Office of Personnel Management (OPM) Human Capital Assessment and Accountability Framework. We also obtained and reviewed civilian human capital strategic plans, workforce planning documents, and workforce analysis submitted by the Department of Defense (DOD) to OMB. We assessed the reliability of data used for the workforce analysis by (1) reviewing existing information about the system and the data produced by the system; (2) interviewing agency officials knowledgeable about the data and reviewing their responses to questions on system controls; and (3) making basic comparisons of the data with OPM’s Civilian Personnel Data File’s data for obvious errors in accuracy. We determined that the data were sufficiently reliable to meet our objectives. Using the workforce planning documents, we evaluated DOD’s and the components’ strategic workforce planning efforts in terms of five strategic workforce planning elements that we identified through our prior work in review of studies by leading workforce planning organizations that included the OPM, other U.S. government agencies, the National Academy for Public Administration, and the International Personnel Management Association. We also held discussions with the following cognizant officials to obtain their views on their strategic workforce planning efforts: the Office of the Under Secretary of Defense for Personnel and Readiness; the Army, Navy, Marine Corps, and Air Force headquarters; and the Defense Logistics Agency. Additionally, we obtained and reviewed civilian employee data and personnel retirement eligibility data from the Defense Civilian Personnel Data System. To determine the challenges affecting the development and implementation of civilian strategic workforce plans, we interviewed officials and obtained, reviewed, and analyzed documentation to identify the types of challenges that might affect planning. We also assessed the extent to which the DOD components had efforts under way to develop and implement tools to collect, store, and manage data on workforce competencies. We conducted our work from April 2003 through June 2004 in accordance with generally accepted government auditing standards. Information Technology Management: Improvements Needed in Strategic Planning, Performance Measurement, and Investment Management Governmentwide. GAO-04-478T. Washington, D.C.: March 3, 2004. Human Capital: A Guide for Assessing Strategic Training and Development Efforts in the Federal Government. GAO-04-546G. Washington, D.C.: March 1, 2004. Social Security Administration: Strategic Workforce Planning Needed to Address Human Capital Challenges Facing the Disability Determination Services. GAO-04-121. Washington, D.C.: January 27, 2004. Information Technology Management: Governmentwide Strategic Planning, Performance Measurement, and Investment Management Can Be Further Improved. GAO-04-49. Washington, D.C.: January 12, 2004. Human Capital: Key Principles for Effective Strategic Workforce Planning. GAO-04-39. Washington, D.C.: December 11, 2003. Foreign Assistance: USAID Needs to Improve Its Workforce Planning and Operating Expense Accounting. GAO-03-1171T. Washington, D.C.: September 23, 2003. Human Capital: Insights for U.S. Agencies from Other Countries’ Succession Planning and Management Initiatives. GAO-03-914. Washington, D.C.: September 15, 2003. DOD Personnel: Documentation of the Army’s Civilian Workforce- Planning Model Needed to Enhance Credibility. GAO-03-1046. Washington, D.C.: August 22, 2003. Foreign Assistance: Strategic Workforce Planning Can Help USAID Address Current and Future Challenges. GAO-03-946. Washington, D.C.: August 22, 2003. Results-Oriented Cultures: Implementation Steps to Assist Mergers and Organizational Transformations. GAO-03-669. Washington, D.C.: July 2, 2003. Human Capital: A Guide for Assessing Strategic Training and Development Efforts in the Federal Government. GAO-03-893G. Washington, D.C.: July 1, 2003. Tax Administration: Workforce Planning Needs Further Development for IRS’s Taxpayer Education and Communication Unit. GAO-03-711. Washington, D.C.: May 30, 2003. Federal Procurement: Spending and Workforce Trends. GAO-03-443. Washington, D.C.: April 30, 2003. Veterans Benefits Administration: Better Collection and Analysis of Attrition Data Needed to Enhance Workforce Planning. GAO-03-491. Washington, D.C.: April 28, 2003. Human Capital: Selected Agency Actions to Integrate Human Capital Approaches to Attain Mission Results. GAO-03-446. Washington, D.C.: April 11, 2003. Results-Oriented Cultures: Creating a Clear Linkage between Individual Performance and Organizational Success. GAO-03-488. Washington, D.C.: March 14, 2003. Human Capital Management: FAA’s Reform Effort Requires a More Strategic Approach. GAO-03-156. Washington, D.C.: February 3, 2003. High-Risk Series: Strategic Human Capital Management. GAO-03-120. Washington, D.C.: January 2003. Major Management Challenges and Program Risks: Office of Personnel Management. GAO-03-115. Washington, D.C.: January 2003. Acquisition Workforce: Status of Agency Efforts to Address Future Needs. GAO-03-55. Washington, D.C.: December 18, 2002. Human Capital: Effective Use of Flexibilities Can Assist Agencies in Managing Their Workforces. GAO-03-2. Washington, D.C.: December 6, 2002. Military Personnel: Oversight Process Needed to Help Maintain Momentum of DOD’s Strategic Human Capital Planning. GAO-03-237. Washington, D.C.: December 5, 2002. Human Capital Legislative Proposals to NASA’s Fiscal Year 2003 Authorization Bill. GAO-03-264R. Washington, D.C.: November 15, 2002. Highlights of a GAO Forum: Mergers and Transformation: Lessons Learned for a Department of Homeland Security and Other Federal Agencies. GAO-03-293SP. Washington, D.C.: November 14, 2002. Highlights of a GAO Roundtable: The Chief Operating Officer Concept: A Potential Strategy to Address Federal Governance Challenges. GAO-03-192SP. Washington, D.C.: October 4, 2002. Results-Oriented Cultures: Using Balanced Expectations to Manage Senior Executive Performance. GAO-02-966. Washington, D.C.: September 27, 2002. Human Capital Flexibilities. GAO-02-1050R. Washington, D.C.: August 9, 2002. Results-Oriented Cultures: Insights for U.S. Agencies from Other Countries’ Performance Management Initiatives. GAO-02-862. Washington, D.C.: August 2, 2002. HUD Human Capital Management: Comprehensive Strategic Workforce Planning Needed. GAO-02-839. Washington, D.C.: July 24, 2002. NASA Management Challenges: Human Capital and Other Critical Areas Need to Be Addressed. GAO-02-945T. Washington, D.C.: July 18, 2002. Managing for Results: Using Strategic Human Capital Management to Drive Transformational Change. GAO-02-940T. Washington, D.C.: July 15, 2002. Post-Hearing Questions Related to Federal Human Capital Issues. GAO-02-719R. Washington, D.C.: May 10, 2002. Human Capital: Major Human Capital Challenges at SEC and Key Trade Agencies. GAO-02-662T. Washington, D.C.: April 23, 2002. Managing for Results: Building on the Momentum for Strategic Human Capital Reform. GAO-02-528T. Washington, D.C.: March 18, 2002. A Model of Strategic Human Capital Management. GAO-02-373SP. Washington, D.C.: March 15, 2002. Foreign Languages: Human Capital Approach Needed to Correct Staffing and Proficiency Shortfalls. GAO-02-375. Washington, D.C.: January 31, 2002. Human Capital: Attracting and Retaining a High-Quality Information Technology Workforce. GAO-02-113T. Washington, D.C.: October 4, 2001. Securities and Exchange Commission: Human Capital Challenges Require Management Attention. GAO-01-947. Washington, D.C.: September 17, 2001. Human Capital: Practices That Empowered and Involved Employees. GAO-01-1070. Washington, D.C.: September 14, 2001. Human Capital: Building the Information Technology Workforce to Achieve Results. GAO-01-1007T. Washington, D.C.: July 31, 2001. Human Capital: Implementing an Effective Workforce Strategy Would Help EPA to Achieve Its Strategic Goals. GAO-01-812. Washington, D.C.: July 31, 2001. Single-Family Housing: Better Strategic Human Capital Management Needed at HUD’s Homeownership Centers. GAO-01-590. Washington, D.C.: July 26, 2001. Human Capital: Taking Steps to Meet Current and Emerging Human Capital Challenges. GAO-01-965T. Washington, D.C.: July 17, 2001. Office of Personnel Management: Status of Achieving Key Outcomes and Addressing Major Management Challenges. GAO-01-884. Washington, D.C.: July 9, 2001. Managing for Results: Human Capital Management Discussions in Fiscal Year 2001 Performance Plans. GAO-01-236. Washington, D.C.: April 24, 2001. Human Capital: Major Human Capital Challenges at the Departments of Defense and State. GAO-01-565T. Washington, D.C.: March 29, 2001. Human Capital: Meeting the Governmentwide High-Risk Challenge. GAO-01-357T. Washington, D.C.: February 1, 2001. . The General Accounting Office, 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 core 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 of 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. | During its downsizing in the early 1990s, the Department of Defense (DOD) did not focus on strategically reshaping its civilian workforce. GAO was asked to address DOD's efforts to strategically plan for its future civilian workforce at the Office of the Secretary of Defense (OSD), the military services' headquarters, and the Defense Logistics Agency (DLA). Specifically, GAO determined: (1) the extent to which civilian strategic workforce plans have been developed and implemented to address future civilian workforce requirements, and (2) the major challenges affecting the development and implementation of these plans. OSD, the service headquarters, and DLA have recently taken steps to develop and implement civilian strategic workforce plans to address future civilian workforce needs, but these plans generally lack some key elements essential to successful workforce planning. As a result, OSD, the military services' headquarters, and DLA--herein referred to as DOD and the components--do not have comprehensive strategic workforce plans to guide their human capital efforts. None of the plans included analyses of the gaps between critical skills and competencies (a set of behaviors that are critical to work accomplishment) currently needed by the workforce and those that will be needed in the future. Without including gap analyses, DOD and the components may not be able to effectively design strategies to hire, develop, and retain the best possible workforce. Furthermore, none of the plans contained results-oriented performance measures that could provide the data necessary to assess the outcomes of civilian human capital initiatives. The major challenge that DOD and most of the components face in their efforts to develop and implement strategic workforce plans is their need for information on current competencies and those that will likely be needed in the future. This problem results from DOD's and the components' not having developed tools to collect and/or store, and manage data on workforce competencies. Without this information, it not clear whether they are designing and funding workforce strategies that will effectively shape their civilian workforces with the appropriate competencies needed to accomplish future DOD missions. Senior department and component officials all acknowledged this shortfall and told us that they are taking steps to address this challenge. Though these are steps in the right direction, the lack of information on current competencies and future needs is a continuing problem that several organizations, including GAO, have previously identified. |
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